ESG investment is falling. Should you change your investment strategy?

Data suggests the amount invested in ESG (environmental, social and governance) funds fell in the first quarter of 2025. While the news might spark concerns about your portfolio, sticking to your long-term plan often makes sense. Read on to find out why.

ESG investing involves assessing other factors alongside financial ones when deciding how to invest. Depending on your goals, you might consider how operations contribute to climate change or if a company’s supply chain could contain human rights abuses. As an investor, you’d still consider areas like potential returns and investment risk.

An ESG fund would pool your money with that of other investors. The money would then be invested in a range of assets and businesses that align with the fund’s criteria. As a result, an ESG fund could be a useful way to reflect your values when investing without having to make regular investment decisions.

Policy changes and regulations could be reasons for ESG investing falling

According to a May 2025 article from Morningstar, ESG funds experienced their worst quarter on record in terms of the amount being invested at the start of 2025.

In the first three months of the year, the figures show the sector registered net outflows of $8.6 billion (£6.4 billion). This is in sharp contrast to the $18.1 billion (£13.5 billion) inflows that were recorded in the final quarter of 2024. 

So, why did this reversal happen? There isn’t a simple answer, but there are two key factors that are likely to have played a role.

First, Donald Trump, president of the US, has deprioritised climate goals and is, instead, focusing on defence and economic growth. Other policy measures may also affect how companies promote their ESG credentials. For example, an executive order targeting diversity, equity, and inclusion (DEI) could present legal risks.

Second, both the UK and EU are set to introduce requirements on fund names to provide greater clarity over what terms like “sustainable” or “responsible” mean for investors. This has led to some funds rebranding.

Indeed, Morningstar reports that an estimated 225 European funds with ESG-related terms in their names rebranded in the first quarter of 2025, including removing ESG terms completely.

3 reasons why the data shouldn’t change your investment strategy

Seeing data that shows ESG investing is falling, may be a cause for concern if you consider ESG issues when making financial decisions.

So, should you change your strategy now? While the answer will depend on your goals and circumstances, the short answer is often “no”.

Here are three reasons to stick to your long-term ESG investment strategy.

1. Investing with a long-term goal makes sense for most investors

You may feel uneasy when it seems like everyone else is doing something different to you, including when you’re investing.

However, letting news sway your decisions could mean your investment portfolio no longer reflects your long-term goals or other important factors that were considered when creating a strategy, such as your risk profile.

If you want to review your investments, take a long-term view rather than making knee-jerk decisions based on data that might only show part of the bigger picture.

2. All investments carry some risk

Some investors withdrawing their money from ESG funds may be doing so because they fear there’s now a greater risk that they’ll lose their money. However, all investments carry some risk and reacting to negative emotions could mean you’re more likely to miss out on potential returns.

Of course, no investment can offer guaranteed returns. So, it’s important to ensure the level of risk you take is appropriate for you.

3. Your values still matter

There are plenty of reasons why an investor might decide they want to incorporate ESG issues into their investment decisions. However, for many, reflecting their values in their finances is key.

An ESG investment strategy may involve investing in companies that share your beliefs and avoiding those that operate in a way that doesn’t align with your values. If this is important to you, other people moving away from ESG funds shouldn’t change your strategy – your values still matter.

Contact us to talk about ESG investing

Whether ESG issues are already part of your wider investment strategy or not, we’re here to answer your questions. We could work with you to create a balanced investment portfolio that considers your values, risk profile, and financial goals. Please get in touch to arrange a meeting.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.