As global interest in sustainable investing cools, Canada is quietly going against the tide.

In the first quarter of 2025, sustainable mutual funds and ETFs around the world saw record outflows of US$8.6 billion, according to Morningstar Sustainalytics. This marks a sharp reversal from the previous quarter, which saw US$18.1 billion in inflows. The U.S. led the pullback, with more than US$6 billion withdrawn in just three months, its 10th consecutive quarter of outflows. Europe and Asia followed suit, with Europe experiencing its first period of sustainable fund redemptions since 2018.

The critical question is: What’s driving this divergence? Experts say the exit of “ESG tourists,” fund providers who jumped on the sustainable investing bandwagon without real long-term commitment, has played a major role.

According to Sucheta Rajagopal, a Toronto-based responsible investment adviser, in 2022, there was a flood of new ESG funds from big players who wanted to cash in on the global boom. “There were a lot of firms and fund managers that didn’t really believe in [sustainable investing], but because it was the flavour of the moment, they launched these products . . . They were just grabbing onto it.”

These temporary entrants, “ESG tourists,” are now leaving the space, leaving behind a core of funds genuinely committed to environmental, social, and governance (ESG) principles.

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That core includes Canadian firms like NEI Investments, Desjardins, and National Bank, which together made up 58% of Canada’s sustainable fund assets in 2024. Unlike large banks or Wall Street giants, these organizations often work with independent advisers or credit unions that are better equipped and more motivated to guide clients through sustainable investment choices.

According to John Bai, chief investment officer at NEI Investments, Canada’s financial ecosystem supports sustainability through both education and structure. He believes that advisers at credit unions and non-bank firms can have more honest conversations with clients about ESG.

Training and transparency matter. According to Hortense Bioy, head of sustainable investment research at Morningstar Sustainalytics, Canada’s approach relies more on adviser guidance, in contrast to countries like France, where regulations mandate ESG exposure in investment accounts.

Still, ESG investing isn’t just about values. Financial performance remains a key driver. Paul Calluzzo, finance professor at Queen’s University, notes that fund flows are still largely influenced by returns.

Underperformance has hurt many ESG equity funds, especially those focused on renewable energy and cleantech, which have struggled since interest rate hikes in 2022. But in Canada, many investors have simply shifted to lower-risk sustainable bond funds.

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Fixed-income funds made up 87% of the sustainable inflows in Canada in the first quarter of 2025. Rajagopal says investors are especially drawn to ESG bond funds that include green or impact bonds, those that fund climate-focused projects or social infrastructure.

As the U.S. continues to grapple with political resistance to ESG and Europe sees its first signs of retreat, Canada stands out for its resilience. With the exit of short-term players, the country’s sustainable finance market may be leaner, but it’s also stronger.

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Source: Corporate Knights