In 2025, ESG fund outflows reached an unprecedented scale as investors pulled significant capital out of sustainability-labelled investment products. This trend — observed not only in Indonesia but across global markets — signals a complex shift in investment behavior amid macroeconomic pressures, questions about performance, regulatory uncertainty, and evolving priorities among institutional and retail clients. While Environmental, Social, and Governance (ESG) investing was once lauded as a key pathway to marrying financial returns with social impact, large-scale outflows highlight that ESG funds today face serious headwinds. This article explores what drove these redemptions, the broader implications for sustainable finance, and why the phenomenon deserves attention from policymakers and market participants alike.

What Are ESG Fund Outflows?

At its core, ESG fund outflows describe the situation where investors redeem, or withdraw, their capital from investment products that are marketed or structured around environmental, social, and governance criteria. These products can include mutual funds, exchange-traded funds (ETFs), or other pooled investment vehicles that claim to prioritize sustainability alongside financial performance. Including ESG criteria in portfolio selection has been a growing trend over the past decade, supported by rising awareness of climate risk, stakeholder activism, and policymaker encouragement. However, 2025 has seen a notable reversal of that momentum in certain markets — particularly in developed economies like the United States and Europe — as sustainable funds experienced record net redemptions.

In Indonesia, reports from early 2026 mention that investors conducted mass withdrawals from ESG-labelled funds, with the total value of redemptions estimated to reach around Rp1,409 trillion for the year. This magnitude of capital movement is striking because ESG products had previously enjoyed years of rising assets under management, driven by demand from institutions and a growing retail investor base interested in sustainability outcomes. While localized market characteristics differ, the Indonesian context mirrors broader global patterns where investor trust and allocation toward ESG products are being reconsidered. Bisnis.com editorials suggest that this withdrawal represents both a reassessment of investment priorities and a recalibration of how sustainability is factored into financial decisions. (Bisnis.com)

Macro Drivers Behind the Outflows

Several key forces have contributed to the uptick in ESG fund outflows observed in 2025:

Economic Volatility and Performance Pressures

One important driver has been the broader economic environment marked by market volatility, inflation concerns, and tightening monetary policy in key economies. When markets become uncertain, investors tend to favor liquidity and shorter-term returns over thematic allocations like ESG, which are often seen as longer-horizon investments. This dynamic was evident in global data reporting that sustainable investment vehicles saw higher outflows in early 2025, reversing previous inflows and signaling investor caution.

Moreover, some ESG funds have lagged behind traditional investment products in terms of net flows, even if their long-term performance may still be competitive. In certain regions, investors responded to the performance gap by reallocating capital to core equity or fixed-income strategies that promise more stability in times of market stress.

Regulatory Shifts And Policy Uncertainty

Another factor influencing ESG fund outflows is regulatory flux. In some major markets, changing attitudes toward sustainability mandates — especially in the United States — have created an environment where asset managers grow cautious about labeling products as “sustainable.” These regulatory uncertainties can discourage new allocations and prompt existing investors to reduce exposure, further exacerbating outflows.

In Asia and in emerging economies, where ESG labeling frameworks are still maturing, regulatory consistency around sustainability claims can impact investor confidence. Without clear standards and enforcement, sustainable funds may appear more susceptible to accusations of greenwashing, further weakening demand.

Geopolitical And Sentiment Shifts

Geopolitical events also play a role. For instance, global tensions over energy policy, trade disruptions, or macroeconomic conditions can shift investor risk calculations. In some developed markets, first-ever quarterly outflows from ESG funds were recorded in Europe, partly due to investor sentiment shifting toward growth and defense industries amid geopolitical uncertainty.

These geopolitical considerations often intersect with ESG investing in complex ways. For example, debates over energy transition strategies or the role of defense stocks in sustainable portfolios can influence how investors perceive the relevance and resilience of ESG-themed products.

Implications For The Investment Landscape

The trend of ESG fund outflows in 2025 carries significant implications for investors, regulators, and companies:

Rethinking Sustainable Investment Strategies

Outflows have prompted asset managers to revisit their ESG product strategies. Some managers are refining their investment frameworks to align more closely with financial returns while maintaining credible sustainability metrics. Others are enhancing transparency and reporting to address investor concerns about accountability and real impact. The result could be a shift toward more data-driven, objective, and measurable ESG investing models that differentiate genuinely sustainable strategies from those driven by marketing labels.

Potential Impact on Capital Allocation

Sustained outflows could influence where capital is allocated across markets. If ESG products lose favor among institutional investors, sectors that depend on sustainable finance — such as renewable energy, clean tech, or social impact enterprises — may face higher capital costs. Conversely, other sectors could benefit temporarily as investors seek safer or higher-yielding alternatives.

However, it is important to note that some ESG products continue to demonstrate strong performance or growth in certain regions, particularly where regulatory support and investor education are robust. For example, sustainable fund inflows have been reported to rebound in some quarters globally, showing that investor interest in responsible investment is far from dead, but rather undergoing reconfiguration.

Scrutiny Of ESG Ratings And Definitions

The outflows have also intensified scrutiny on how ESG performance is defined and measured. Diverse ESG rating methodologies, inconsistent reporting standards, and ambiguous sustainability criteria have historically created confusion among investors. These challenges can erode confidence in ESG products, as investors may question whether their funds truly align with stated environmental and social goals or if they simply reflect arbitrary screening criteria.

This realization has led some investment professionals to advocate for improved standardization of ESG metrics — a push that may shape future regulatory frameworks and investor expectations.

Case Study: Impact On Indonesian Market

In Indonesia, the ESG fund outflows reported in early 2026 reflect broader investor recalibration. Sustainable funds had attracted interest in previous years as part of a global push for responsible finance. However, when a large volume of capital was redeemed in 2025 — reportedly amounting to around Rp1,409 trillion — it underscored the fragility of ESG product popularity when faced with performance concerns and changing investor priorities. (Bisnis.com)

Indonesian institutional investors, including pension funds and asset managers, are now reexamining how ESG factors should be integrated with risk management and return objectives. In some cases, this has led to diversification away from strictly labelled ESG products toward broader thematic or sustainability-linked investments that offer more financial flexibility.

Additionally, financial regulators and market associations in Indonesia are increasingly focusing on strengthening ESG reporting standards and investor education to promote clearer understanding of sustainable investment benefits and risks. These initiatives aim to rebuild investor trust and encourage long-term capital flows aligned with environmental and social goals.

Looking Forward: Balancing Sustainability With Financial Priorities

The episode of ESG fund outflows in 2025 should not be interpreted solely as a rejection of sustainability investing. Rather, it underscores the need for markets to evolve, both in terms of product design and investor expectations. Sustainable finance must strike a balance between delivering measurable social and environmental impact and meeting the financial performance requirements of a diverse investor base.

As regulatory frameworks mature and standardized reporting improves, investors may gain greater confidence in the integrity of ESG products. Similarly, continued innovation — such as linking ESG metrics to performance benchmarks or developing hybrid sustainable investment vehicles — could attract new capital and mitigate outflow pressures.

Ultimately, the 2025 outflow trend is a reminder that sustainability investing, like all market segments, is subject to cyclical forces and evolving investor sentiment. The challenge for asset managers, regulators, and companies is to adapt and present ESG investing as a credible, accountable, and financially competitive strategy tailored to both ethical commitments and economic realities.