Nathan Griffiths: Sustainable investment trends
By Nathan Griffiths, Sustainable Finance, EY Netherlands
Over the past two weeks, two separate reports have been published which, on the face of it, paint an inconsistent picture of the outlook for sustainable investing.
The latest Morgan Stanley Sustainable Signals1 survey of global individual investors indicated that 88% of those questioned had an interest in sustainable investments, whilst 64% indicated that their interest has increased over the past two years, Meanwhile, Morningstar’s latest funds flow report2 showed significant outflows for sustainable funds in the first quarter of 2025.
What’s going on?
First the fund flows, where headlines have focused on record levels of redemptions from sustainable funds during the first quarter of 2025. The US saw its 10th consecutive quarter of withdrawals. There the message is unequivocal as the anti-ESG sentiment led by Republican politicians continues. Yet Europe also saw its first ever quarter of outflows. Whilst this was modest, at only 0.05% of total assets, conventional funds nevertheless saw inflows despite the recent market volatility.
However, the story is more nuanced. Equity funds constitute more than 60% of sustainable assets. Given the negative impact of Trump’s tariff war, it is natural that allocations switch from equity to bond funds. With the higher exposure to equities, this has a disproportionate impact on sustainability flows. Therefore, despite the negative headlines, allocation to sustainable funds in Europe at least can be said to be resilient, albeit weaker than we have previously seen.
The switch from the US to Europe
Perhaps more interesting, and what we cannot yet see, is the extent to which sustainability fund allocations have switched from the US to Europe. On all three sustainability factors, environmental, social and governance, there is a substantial retrenchment at a country level. Moreover, much of corporate America has reduced commitments to ESG factors.
Therefore, we should expect to see sustainable European funds gain traction relative to US-dominated global funds, and European country weightings within these global funds also to increase (at the expense of the US). This dynamic is reinforced by the heavy weighting in US markets to technology companies, whose leaders have aligned themselves closely with the Trump administration.
Motivations for sustainable investing
Back to the MS Sustainable Signals survey and the continued interest expressed in sustainable investments. Interestingly, 84% of North American investors, despite the ongoing outflows, still profess an interest in sustainable investing. Indeed, 60% say this has increased over the past two years. In Europe the numbers are 88% and 67% respectively. The primary difference is in motivations: the top reason expressed by North American investors is the desire to support positive real-world outcomes (alongside market returns). In Europe, the top reason expressed is the belief that sustainable investments could offer superior financial returns.
Where asset managers and private banks should really take note is in the stark differences between generations. Only 23% of baby boomers describe themselves as very interested in sustainable investments. In contrast, 69% of Millennials are very interested, whilst the proportion of Gen Z is even higher at 72%. Indeed, 99% of Gen Z respondents are very or somewhat interested in sustainable investments. Maybe this explains why the fund flow data does not match the outcome of the surveys: most wealth currently sits with older generations.
The intergenerational wealth transfer
But the different generational preferences have potentially profound implications, and not just for the long-term outlook for the investment industry. We are now in the early stages of a huge intergenerational wealth transfer. More than $ 18 trillion is expected to be passed down generations by 2030. Over the next 20 years it is expected to surpass $ 100 trillion, with more than 60% being inherited by Millennials and Gen Z. For reference, the global stock market capitalization is approximately $ 125 trillion.
Of course, given the different needs between generations – for example, buying a home or paying off student debts – only a portion of this will flow into investments. Nevertheless, it is reasonable to assume that this wealth transfer will lead to increasing allocations to sustainable investments over time. Indeed, there are numerous studies showing that younger generations have significantly higher participation rates in stock market investing than their older cohorts at the same age.
What does that mean practically? First, 96% and 92% of Gen Z and Millennial respondents indicated that the sustainable investing options would determine which platform or adviser they would use. Secondly, more targeted outcomes, particularly related to climate change, are consistently favored over broad ‘ESG funds’. All age groups believe there are investment opportunities related to the energy transition. Third, younger generations seek authenticity, meaning the risks from greenwashing are more elevated. Finally, sustainable investment options need to be delivered digitally, with real-world outcomes clearly demonstrated.
In conclusion, despite the current challenges, the ongoing interest and generational shift support sustainable investments. However, the nature of the products and how these are delivered will need to evolve to service the digital native investor.
1. Morgan Stanley Sustainable Signals individual investor, April 2025
2. Morningstar Global Sustainable Fund Flows, Q1 2025
