In the first six months of the year, sustainable funds posted a median return of 12.5%, ahead of traditional funds’ 9.2%. Flows were positive, although tracking below prior years’.
Sustainable funds outperformed traditional funds in the first half of 2025, driven by sustainable funds’ greater exposure to investments in Europe and elsewhere globally.
Assets under management (AUM) in sustainable funds grew to a new high of $3.92 trillion as of June 30, up 11.5% from December 2024.
First-half inflows to sustainable funds totaled $16 billion, as assets added in the second quarter more than offset small outflows in the first three months of the year. However, this is tracking below prior years’ and traditional funds continue to see stronger inflows.
Sustainable funds outperformed traditional funds in the first half of 2025, according to a new “Sustainable Reality” report from the Morgan Stanley Institute for Sustainable Investing.
After underperforming in the second half of 2024, sustainable funds generated median returns of 12.5% for 1H 2025, compared to traditional funds’ 9.2%, marking the strongest period of outperformance for sustainable funds since the Institute began tracking data in 2019.
Source: Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of June 30th, 2025 and calculated August 6th, 2025.
Key drivers of the outperformance include sustainable funds’ greater allocations to global and European regions, reversing the 2H 2024 dynamic, in which weak returns in those regions led to underperformance.
While 70% of sustainable funds invest either in Europe or globally, only 41% of traditional funds do—they have more exposure to the Americas and Asia-Pacific (APAC). In the first half of this year, sustainable funds outperformed within most regions, and across all asset classes. Geographical differences in performance were particularly pronounced for fixed-income funds. Currency volatility during the period also may have had an influence, as the Sustainable Reality series shows returns in U.S. dollar terms.
Source: Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of June 30th, 2025 and calculated August 6th, 2025.
Over a longer period, sustainable funds have outperformed traditional funds. Investing a hypothetical $100 into a sustainable fund in December 2018 would equate to $154 today, while investing $100 into a traditional fund over the same period would equate to $145 today, according to an Institute analysis of Morningstar data.
Source: Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of June 30th, 2025 and calculated August 6th, 2025.
Sustainable fund assets rose 11.5% since the end of 2024 to $3.92 trillion, mostly driven by returns. However, the share of sustainable fund assets as a portion of total fund assets, at 6.7%, remains below the high of 7.2% in June 2023, as traditional funds continue to see stronger net inflows.
Source: Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of June 30th, 2025 and calculated August 6th, 2025.
In the first half of 2025, sustainable funds posted net inflows of $16 billion, or 0.5% of AUM at the end of 2024. While the first quarter had net outflows of $3.2 billion, the second quarter had net inflows of $19.3 billion. Inflows into sustainable funds continue to track lower than in recent years, with 2022 and 2023 full-year inflows each totaling more than $100 billion, and 2024’s totaling $80.6 billion. Traditional funds continue to attract stronger net inflows.
Source: Source: Morgan Stanley Institute for Sustainable Investing analysis of Morningstar data as of June 30th, 2025 and calculated August 6th, 2025.
Regional fund flows varied. On an absolute basis, Europe-domiciled sustainable funds continue to have the most inflows, with $24.7 billion in the first half of 2025, compared to $2.7 billion for Asia-domiciled funds. North America-domiciled funds saw outflows of $11.4 billion, marking 11 consecutive quarters of outflows in the region.
Read the full analysis of sustainable and traditional funds in the first half of 2025.
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