Europe, the world's biggest market, launched a ‌record low 13 funds in the second quarter, Morningstar data showed, down nearly two-thirds from 35 launches a year earlier. With 64 funds closing, it meant nearly five funds closed for every launch, the widest gap since at least the first quarter of 2023.

Three U.S.-based funds were launched during the quarter, against 22 closures, and 16 launched in Asia ex-Japan, all from China. Canada, ​Australia and New Zealand posted their second straight launch-free quarters.

Sustainable fund product development has been in retreat since 2022 amid a U.S. political backlash against ​investing with an eye to environmental and social issues, waning demand after weaker returns and as new rules in Europe make it harder ⁠to define a fund as sustainable.

Asset managers making sustainability claims have also faced greater scrutiny, with DWS last year fined €25 million by German prosecutors over what authorities said ​were misleading statements, known as "greenwashing".

"Regulatory uncertainty, greenwashing concerns and the political backdrop continue to influence both fund flows and product development," said Monika Calay, director of UK manager ​research at Morningstar.

Since tougher European Union rules were imposed in January 2023, 956 ethical and sustainability funds have been pulled from the market compared with 691 launches over the same time period, according to Morningstar.

"You definitely see fewer funds coming to the market with a sustainability label on now," said Nicola Day, head of the Bristol office for James Hambro & Partners. "People are very ​cautious from the sales side."

The Investment Association, a British fund industry trade body, said it was currently tracking 103 open-ended funds with a sustainability label as approved ​by the British regulator, which finalised its own rules in 2023. By contrast, the UK retail fund market contains more than 4,000 funds.

Edward Heaven, chief of staff and head of ‌sustainable investments at ⁠Montanaro Asset Management, said many investors who missed the early gains had been burnt as rising interest rates hit favoured sectors such as renewable energy.

In the five years to July 2026, the broad MSCI ACWI index returned roughly 65% against almost 56% for the socially responsible MSCI ACWI SRI index, LSEG data showed.

"Much of this trend towards subdued demand for sustainable products has been driven by performance concerns," said Stuart Clark, portfolio manager at Quilter, citing lack of exposure to fossil energy and ​defence.

FLOWS

Investors who are seeking sustainable funds are ​being more selective, the Morningstar data ⁠suggested, with funds taking in a net $3.7 billion in the second quarter, mostly to passive strategies and fixed income. Total assets were $3.73 trillion.

Passive sustainable funds attracted around $11 billion in Europe while active funds lost $7.8 billion. Sustainable fixed income funds gathered just over $14 ​billion, whereas sustainable equity funds shed around $9 billion.

Similar patterns emerged in the United States, where sustainable funds returned to net ​inflows for the first ⁠time after 14 consecutive quarters of outflows, driven largely by passive products.

Morgan Stanley analysts said funds with a sustainable objective under EU disclosure rules outperformed conventional equity funds in the second quarter by 177 basis points, boosted by their tech holdings, but still lagged the MSCI ACWI index.

While clients were keen to invest in the world's transition to ⁠a low-carbon ​economy, how they chose to invest was "definitely more nuanced", said Stuart White, executive director at Impax Asset ​Management, citing demand for fixed income.

Given the political backdrop, many firms were increasingly framing their funds' sustainability goals around resilience, energy security and risk management, said Andy Ford, head of responsible investment at St ​James's Place.

"The big shift is that we're getting away from sustainability being about trying to save the world."