European investors weigh ESG backlash as climate funds buck the trend

Investors gathered in Amsterdam for the annual Morningstar Sustainable Investing Summit, an event increasingly overshadowed by policy pushback against ESG investment. While scepticism has undoubtedly shaped the regulatory environment, capital allocation data on the energy transition suggests a more nuanced outlook.

Stewardship gridlock

The collapse of the Net Zero Banking Alliance and uncertainty over the future of the Net Zero Asset Managers initiative have left their mark across Europe. Asset managers are awaiting the results of an internal consultation following several high-profile exits from the stewardship alliance.

This caution has filtered into voting behaviour. Investor support for climate resolutions is waning, as Lindsey Stewart, director of Institutional Insight at Morningstar, highlighted in his review of the 2025 proxy season.

Regional divergence is widening, he noted: “The US–Europe support gap for ESG resolutions has grown significantly over the past years, from 50% in 2021 to 75% in 2025. It has prompted a lot of asset owners here in Europe to think about whether they have the right managers.”

For some, the retreat of peers presents an opportunity. Eric Pedersen, head of responsible investment at Nordea, commented: “The backtracking that some in the industry are perceived to have done… it’s bad for the planet, but commercially speaking for someone like us, it’s very good, because they’re opening up a bigger space that we can step into.

“We’re sticking to our purpose. We’re not running away from anything, and we get a lot of business at the moment. Mandates that five years ago more managers would have been in scope for, but where now the test is in the commitment and the capabilities we bring to the climate space.”

ESG fund labelling – a mixed picture

A more complex dynamic is also evident in fund labelling. ESMA’s new naming rules, designed to prevent greenwashing, triggered a 34% decline in the number of ESG- or sustainability-labelled funds, according to Hortense Bioy, head of sustainable investing research at Morningstar. Yet she described the shift as “not as big as expected”, noting that “asset managers are still very keen to signal that their funds have ESG characteristics. There are still a lot of investors in Europe that have climate and ESG targets.”

While “ESG” has been the most frequently dropped term, Morningstar research into 130 renamed funds shows that 70% of active and 80% of passive funds made no change to their portfolios. However, the rules have had a material impact on companies that risked breaching Paris-aligned benchmark requirements, leading to their removal from many funds. Those affected include energy giants Total and Equinor, as well as consumer groups such as Nestlé, Bioy said.

Private markets – renewables infrastructure bucks the trend

The ESG backlash has also touched private markets. Private equity, credit and venture funds have struggled in an environment of higher rates, inflation and policy setbacks, dampening performance. Yet fundraising continues to be robust.

According to PitchBook, private capital markets are expanding, with assets under management projected to reach $24 trillion by the end of the decade and potentially as high as $30 trillion by 2029. The firm notes that investors are re-evaluating their overall strategies, including their approach to sustainable investment, with a renewed focus on returns and a pullback from initiatives seen as distractions.

One sector, however, stands out. Energy transition infrastructure continues to attract capital, with fundraising above historical averages and appetite for climate-focused funds remaining strong. PitchBook data shows that 85% of capital committed since 2014 has gone to funds with some degree of investment in the energy transition space.

The defining theme of the two-day conference was a growing sense that sustainable investing is entering a new phase. Policy setbacks and shifting sentiment have reshaped the landscape, with stewardship alliances fracturing and fund labelling rules prompting strategic adjustments. Yet capital flows tell a different story: while some parts of the market are retreating, energy transition infrastructure and climate-aligned assets continue to attract strong demand.

With investors and policy makers increasingly scrutinising not just labels but the evidence behind them, data and disclosures on the effectiveness of climate investing are now crucial if confidence in transition investing is to be maintained, as Morningstar CEO Kunal Kapoor stressed during the event.