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A strategic appraisal of climate index investing

Alternative Assets
Europa
ESG

6/23/2025

Investing in a ‘brave’ new world

Lukas Ahnert

Index Strategy & Analytics, Index Investing

Murray Birt

Senior ESG Strategist

Frederike Bauer

Frederike Bauer

Product Specialist

Jay Joshi

Research Analyst

The world is in the grass of the green bokeh background
A strategic appraisal of climate index investing

IN A NUTSHELL

  • ESG investing in general and climate investing in particular have not had an easy time. Following years of increasing sophistication in data sets and indexing solutions, growing codification into investment policies and resulting inflows into ESG investment solutions, new geopolitical realties and strong equity market performance have dampened some investors’ enthusiasm for ESG and climate-orientated solutions.
  • However, despite slower growth in ESG fund flows and, in some instances outflows, global sustainable fund assets still hit an all-time high of USD 3.2 trillion at the end of 2024, an 8% increase from the previous year and more than 4x the size in 2018.
  • Europe remains the leading sustainable funds’ market, with 84% of assets. One technical factor driving recent outflows is a reclassification of ESG terms in European fund names due to European regulations.
  • While the performance of ESG and climate strategies has held up well overall, financial risk drivers have become more nuanced. Our report demonstrates why and how investors should undertake closer monitoring and robust due diligence when allocating to ESG strategies.
  • On the decarbonisation front, portfolio and real-world emissions have increasingly decoupled such that portfolios are showing much higher decarbonisation rates than in the real economy.
  • The regulatory standards for CTB and PAB are therefore a starting point for investors, but it is likely that we will see investors expanding upon these minimum requirements. One area which is gaining traction among forward-looking investors is influencing change through stewardship.
  • This report therefore explores developments in climate investing from different angles, including fund flows, performance, and regulatory changes. We show how climate investing, but also ESG investing more broadly, has become more of an active decision.

1 / The sustainable investing landscape

 

Our September 2023 report  stated that “Climate indexes have come of age”. This observation could not have been any more timely. The annual net flows into sustainable funds saw a solid growth in the years between 2019 and 2021, faster than the global fund universe. In fact, during the Covid-19 pandemic year (2020), sustainable funds, across active and passive vehicles, accounted for almost half of all the net flows into the global fund universe.

2022 was a difficult year for the markets overall, characterised by significant draw-downs and net outflows in global funds. Notwithstanding the headwinds, 2022 was a year of net inflows into global sustainable funds, although about 75% lower than the peak of 2021. While the net flows into sustainable funds remained positive in 2023 and 2024, their pace has declined. The first quarter of 2025 saw the first quarter of European net outflows (USD 1.2bn) since 2018. 

Despite a total USD 8.6bn of outflows in Q1 2025, global sustainable fund assets are USD 3.16 trn, a small decline since the all-time high of USD 3.2 trn at the end of 2024. Last year witnessed a reported 8% increase from the previous year and more than quadruple the size in 2018. Europe remains the leading market, housing 84% of the assets. The U.S. share fell to 11% in 2024, down from 15% in 2018. The market share of sustainable funds in the rest-of-world increased to 2.3% in 2024, up from a negligible 0.7% in 2018. As a result, Europe continues to remain the mainstay of the global sustainable funds, with Europe accounting for more than four euros of every five euros of investment in sustainability funds. In fact, every third fund out of four sustainable funds is based in Europe. 

A strategic appraisal of climate index investing
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