Highlights:

• ESG ETFs face declining inflows in the U.S. but remain strong in Europe.

• Performance challenges and politicization test investor conviction.

• Long-term sustainability themes still underpin sector growth.

Once a dominant trend, ESG ETFs are encountering headwinds in 2025. Political pushback in the U.S., coupled with uneven performance, has sparked debates about whether ESG investing is driven by genuine value or shifting investor sentiment.

Diverging Global Trends

European markets remain a stronghold for ESG ETFs, where regulatory frameworks such as SFDR (Sustainable Finance Disclosure Regulation) continue to boost adoption. In the U.S., however, funds like iShares ESG Aware MSCI USA ETF (ESGU) have seen slower inflows as political discourse challenges ESG mandates.

Performance and Investor Behavior

While ESG strategies gained momentum during the green energy boom, rising interest rates have weighed on clean energy valuations. Still, renewable infrastructure and carbon transition themes continue to attract capital from long-term investors who prioritize sustainability over short-term volatility.

Looking Forward

The question for ESG ETFs is not whether they disappear, but how they adapt. Investors should monitor regulatory updates and shifts in consumer behavior, as both will determine future demand. ESG may be losing its speculative shine, but its structural relevance in global markets remains undeniable.