International Committee Explores Trends in Sustainability Investment Products

The ESG investing landscape is evolving fast. Nicsa’s International Committee, comprising executives in the international asset and wealth management community, recently invited Federated Hermes’ Head of Product Strategy & Development, Stuart Ballard to present findings around ESG & Sustainability investments.

Recent trends reveal a nuanced picture: while demand for sustainability-aligned products remains significant, the market is undergoing major shifts driven by fund flows, regulation, and investor sentiment. Fund flow data highlights both resilience and headwinds, while upcoming regulation could reshape the market entirely.

Drawing on the latest data presented by Federated Hermes (June 2025), here are the key developments shaping ESG and sustainability product trends.

Article 8 Gains, Article 9 Stumbles

Combined assets in Article 8 and Article 9 funds reached nearly 60% of the European fund market by the end of 2024. However, investor appetite has diverged sharply:

• Article 8 funds (those promoting environmental or social characteristics) saw €51.9 billion in net inflows in Q4 2024 — their strongest quarter in net inflows since 2021 in Q424.
• Article 9 funds (with sustainable investment as an objective) faced their fifth consecutive quarter of outflows, losing €7.2 billion in Q4 2024 alone.
• Meanwhile, Article 6 funds — with no sustainability focus — dominated overall flows, pulling in €85.4 billion in the same quarter

Takeaway: investors are still allocating to sustainable strategies, but they are gravitating toward Article 8 funds, which are seen as more flexible and less constrained by regulatory definitions.

Regional and Domicile Shifts

The regional picture underscores how regulation and investor confidence shape flows:

• Europe drove ESG inflows in 2022, buoyed by the introduction of SFDR. However, by 2025 year-to-date, European ESG flows have turned negative.
• Non-European markets were largely negative for ESG funds in 2024, highlighting weaker demand outside the EU.
• By fund domicile, Luxembourg experienced heavier ESG outflows compared to Ireland or the UK. Structural factors play a role: Luxembourg hosts more UCITS equity and multi-asset funds, which saw notable net redemptions in 2023–24

Asset Class Spotlight: Fixed Income

A bright spot in recent data is fixed income ESG funds, which have consistently attracted inflows. Investors are favoring sustainable bonds amid a stabilizing macroeconomic backdrop:

• Falling inflation and expectations of modest rate cuts have boosted bond market confidence.
• Bonds are viewed as offering a balance between yield stability and sustainability alignment.

By contrast, equity ESG funds, while positive in 2023–24, have seen outflows in 2025 year-to-date. Mixed-asset ESG funds have also struggled, echoing challenges across the broader market

Product Development Pressures

• Launches are slowing (802 in 2024), while closures are rising (173 Article 8/9 funds).
• Importantly, the wave of reclassifications that peaked in late 2022 has given way to a new trend: funds are increasingly removing or modifying ESG-related terms from names rather than adding them. This reflects compliance with ESMA’s fund naming guidelines, which tightened standards to avoid “greenwashing”

SFDR 2.0 on the Horizon

The Sustainable Finance Disclosure Regulation (SFDR), introduced in 2021, has been pivotal in shaping flows and fund classifications. But unintended consequences — especially the market’s use of Articles 6, 8, and 9 as “labels” — have fueled confusion and criticism.

The European Commission is now preparing SFDR 2.0, with reforms expected to reshape the framework:

• Policymakers are weighing whether to shift toward stricter categorization or maintain a more flexible, disclosure-based approach.
• Industry feedback reveals broad consensus on the need for reform, but diverging views on how radical the changes should be.
• The timeline remains uncertain, as the EU balances calls for regulatory simplification with the ongoing push for decarbonization and ESG integration.

Bottom Line

The ESG product landscape is at a crossroads. While Article 8 funds continue to attract strong inflows and fixed income ESG strategies show resilience, challenges for Article 9 funds and shifting investor sentiment highlight the sector’s growing pains.

With SFDR reform on the horizon, asset managers will need to adapt product design, branding, and engagement strategies to align with evolving standards while continuing to meet investor demand for authentic, impact-driven sustainability solutions.

The message is clear: ESG investing is not fading, but it is evolving — and agility will be the defining advantage.

To gain more insights around trends impacting the global asset and wealth management industry, join Nicsa’s community of more than 30 committees. We thank our International Committee and Federated Hermes for shedding light on this and other important topics.

Observations contained in this work do not necessarily reflect the views of Nicsa or any member organization. Nothing herein is intended to be or should be construed as legal advice. Contact your own counsel in order to obtain advice regarding legal or regulatory matters.