Key news in this edition:
- Worst quarter on record for ESG funds.
- UK regulator mandates climate risk evaluations by banks and insurers.
- Green Impact Exchange gets SEC approval.
Editorial
Since the beginning of 2025, ESG investment has faced a period of uncertainty. In the first quarter of the year, global sustainability funds saw record net outflows of USD 8.6 billion, according to Morningstar, an investment data provider. Europe, traditionally the sector’s most stable market, recorded its first outflow since tracking began in 2018. Despite total assets in global ESG funds remaining high at USD 3.16 trillion, investor confidence is clearly under pressure. Political shifts, inconsistent regulation, and weaker performance in areas like clean energy are all contributing to the unease.
At the same time, efforts to strengthen the foundations of ESG are beginning to take shape. Last month, the US approved the launch of the Green Impact Exchange – the first stock exchange in the country to focus solely on companies with clear environmental and social goals. While ESG policy in the US remains politically contested, the move points to a continuing demand for more credible standards and transparency in the market. In the UK, regulators are adopting a more assertive stance. The Prudential Regulation Authority has instructed banks and insurers to review how they manage climate-related risks, following concerns over poor data and weak long-term planning. The message is clear: climate risk is now a core financial issue, not a secondary consideration. In the UK, that focus on turning ESG goals into concrete action is also reflected in new government measures. The proposed ban on solar panels linked to forced labour – aimed at GB Energy – is a sign that ethical concerns are becoming central to the clean energy transition. The government’s consultation on voluntary carbon market principles also seeks to raise the quality and consistency of offsetting practices. Meanwhile, Brazil’s latest investment action is targeting degraded farmland, aiming to combine environmental recovery with economic development. It’s an example of how ESG commitments can be matched with tangible outcomes on the ground.
Taken together, these developments show that ESG is entering a more demanding phase. Broad promises are no longer enough and progress now depends on clear and measurable action.
Worst quarter on record for ESG funds
According to the investment data and research platform Morningstar, global funds focused on sustainability and ESG endured their worst quarter on record in the first quarter of 2025, with net outflows of USD 8.6 billion. The contributors included not only the US, but Europe as well, which is the biggest market for ESG funds in the world. This quarter was the first time Europe had a net outflow since the data platform started tracking data on sustainability funds in 2018. Withdrawal from ESG funds amounted to USD 1.2 billion in Europe, in contrast to the restated inflows in the final quarter of 2024 that was over USD 20 billion. The data platform cited the rollback in ESG commitments by the US firms in the new Trump era as a factor that undermined the sense of global alignment on sustainability goals, and therefore had an impact beyond the US. Morningstar also included the evolving regulatory agenda and ESG fund landscape in Europe, as well as performance concerns, particularly in sectors such as clean energy, as weighing on investor sentiment.
So what?
Despite the record outflows, the global ESG fund universe kept its high level of assets at USD 3.16 trillion at the end of March. However, this is not to deny the possible severe challenges for the ESG funds landscape if the current trend is to continue. “Investor appetite for ESG funds will continue to be tested in the months ahead by an evolving regulatory landscape and mounting geopolitical tensions”, said Hortense Bioy, the head of sustainable investing research at Morningstar.
[Contributor: Elif Korca]
UK regulator mandates climate risk evaluations by banks and insurers
The Bank of England’s regulatory watchdog, the Prudential Regulation Authority (‘PRA’), has identified significant shortcomings in how UK financial institutions and insurers are addressing climate-related vulnerabilities, such as extreme weather events. In an attempt to manage this issue, it has mandated banks and insurers to conduct internal reviews on their climate risk management practices, with follow-up checks expected in six months’ time.
The PRA’s directive, issued in April 2025, is a part of a wider push to ensure firms embed climate considerations more deeply into governance, risk management and forward planning. These internal reviews are expected to assess the quality of climate-related data, the robustness of risk modelling and scenario analysis, and how well firms are integrating climate risk into their business strategies. The regulator is particularly concerned that many banks still lack data on the location of borrowers’ properties, limiting their ability to assess exposure to floods, heatwaves or wildfires.
The PRA also found that firms are failing to fully grasp the financial implications of climate change, and suggested that this gap in preparedness could jeopardize the financial stability of these institutions if not addressed. This includes the risk of underestimating future losses from physical damage or transition-related shocks. In line with this, British insurers are pushing for greater public investment in flood defences, after incurring large weather-related payouts to households last year.
While many in the financial sector support the direction of travel, concerns have been raised over data limitations, implementation costs and whether the timeline is realistic—particularly for smaller firms. There is also debate about the balance between regulatory intervention and market-led solutions. Nonetheless, the PRA has made clear that it expects climate risk to be treated on par with other financial risks.
So what?
The PRA’s announcement shows that financial institutions need to be more cognisant of the long-term financial impacts of extreme weather events connected to climate change. It further suggests that governments, insurers, and financial institutions will need to work together to manage the risks by spotting vulnerabilities early and deploying sophisticated strategies to lessen the impact of climate-related risks.
[Contributor: Haddie Hamal]
New UK amendment targets ethical sourcing in green energy supply chains
After a report by The Times in February 2025, the UK government will introduce new legislation to prevent the use of solar panels linked to forced labour. The move centres on GB Energy, the new publicly owned energy company, which will be prohibited from sourcing equipment associated with unethical labour practices. Energy Secretary Ed Miliband is expected to introduce an amendment requiring GB Energy to ensure that slavery or human trafficking is not present in its operations or supply chains.
The policy is a direct response to growing concerns over labour conditions in parts of the global solar supply chain. While China plays a dominant role in solar panel production –supplying around 40 percent of the UK’s solar panels – UK officials have clarified that the new rules will not single out any country, but will instead focus on ensuring that all equipment used by GB Energy meets independently verified ethical standards.
Industry experts say the shift will have a notable impact. Luke de Pulford, executive director of the Inter-Parliamentary Alliance on China, noted that “China has such a dominance of the production of polysilicon... we're going to have to diversify.” For the UK energy sector, this signals a turning point. Businesses may face higher costs and increased due diligence requirements, but many also see the change as a step forward for ESG practices, embedding stronger social standards into the transition to clean energy.
So what?
The UK’s decision to ban the use of solar panels linked to forced labour marks a significant step in aligning the green transition with ethical standards and will also, in some cases, bring into question the feasibility of reaching some climate targets. While the amendment applies only to GB Energy, it sets a precedent for the way public money is allocated in the renewable infrastructure space. It also sends a clear signal to companies across the energy sector – and potentially beyond – that supply chain due diligence is no longer optional. In light of this recent reporting, we may well see that other industries will follow-suit.
[Contributor: Nickolas Bruetsch]
Green Impact Exchange gets SEC approval
In April 2025, the U.S. Securities and Exchange Commission approved the launch of the Green Impact Exchange (GIX), the country’s first stock exchange dedicated exclusively to sustainability-focused companies. Founded in 2022 by former New York Stock Exchange executives, GIX aims to serve as a marketplace for businesses committed to measurable environmental and social goals. It plans to begin operations in early 2026 and will initially function as a dual-listing venue, allowing eligible companies already listed on other exchanges to cross-list—provided they meet GIX’s rigorous ESG standards.
Companies seeking to list on GIX must publicly commit to long-term sustainability targets, disclose progress through recognized ESG frameworks, and undergo regular assessments to ensure transparency and accountability.
GIX is set up as a Public Benefit Corporation and aims to be the first carbon-neutral exchange in the US, reflecting its wider goal of embedding environmental responsibility into the core of its market operations. The exchange is currently focused on onboarding its first group of listing companies and finalising operational infrastructure ahead of its launch. It also aims to build a pipeline of investors looking for reliable, standards-driven ESG disclosures.
So what?
GIX is launching at a time when ESG investing faces growing political pushback in the US. The Trump administration has scaled back corporate diversity and sustainability requirements. That said, GIX’s approval suggests there is still strong demand for credible platforms that support sustainable business practices. The exchange could become both a testing ground and a model for how sustainability is integrated into public markets. Despite the political divide, GIX shows that investor interest in responsible business remains strong, and that market-led sustainability efforts continue to gain ground.
[Contributor: Haddie Hamal]
UK government seeks feedback on voluntary carbon market standards
On 17 April 2025, the UK government opened a 12-week consultation to gather feedback on implementing six core principles aimed at enhancing the integrity of voluntary carbon and nature markets. These principles, initially introduced in November 2024, seek to provide clear guidance for organisations on the responsible use of carbon and nature credits. The consultation, led by the Department for Energy Security and Net Zero, is open until 10 July 2025.
The first principle directs organizations to prioritise reducing emissions within their own operations and supply chains before turning to credits to offset residual emissions that are hard to eliminate. The other principles focus on using high-integrity credits, transparent measurement and disclosure, forward-looking planning, accurate environmental claims, and collaboration to support the growth of trustworthy markets.
So what?
Voluntary carbon markets have come under scrutiny for allowing companies to rely too heavily on low-quality credits instead of cutting their own emissions. This initiative responds to calls from businesses, investors, and environmental groups for clearer standards in the use of carbon and nature credits.
[Contributor: Nina London]
Brazil announces investment auction for sustainable agri-projects, in an effort to raise up to USD 1.8 billion
On 29 April 2025, the government of Brazil announced that it would launch the 2nd Eco Invest Auction, a public auction organised by the Ministry of Finance and the Ministry of Environment and Climate Change to attract investments into Brazil’s agriculture and green industry sectors. The ultimate goal of this auction is to restore 1 million hectares of degraded lands across Brazil’s various biomes – including the Cerrado, Pampas, and Pantanal. Currently, 280 million hectares of land in Brazil is used for agricultural purposes, of which 82 million hectares are degraded. The government of Brazil seeks to restore up to 40 million hectares of land within the next decade. Degradation of the Amazon Rainforest will not be an area of focus for this this auction however, and will instead be addressed through separate mechanisms.
This is the 2nd investment auction for sustainable financing held by the Brazilian government under the Eco Invest Brasil programme, which was first launched in 2024. The Brazilian government aims to raise up to BRL 10 billion (c. USD 1.8 billion) in financing for its restoration programme. The auction will use a blended finance model, with part of the financing coming from Brazil’s public funds as a catalyst. Bids will have a minimum requirement of BRL 100 million (c. USD 18 million) in financing.
So what?
Brazil has been suffering from significant land and environmental degradation, owing to climate change and deforestation caused by encroaching agricultural land use. Agriculture, both for crops and livestock, is one of Brazil’s largest sectors and is a primary economic driver for the country, which is a world leading producer and exporter of crops such as coffee, soybeans, and sugar canes. As such, there is an increasing demand for agricultural land leading to land conversion and deforestation. At the same time, while Brazil is a world leading agricultural producer, it is also one of the most biodiverse nations in the world. Through the Eco Invest Brasil programme, the Brazilian government is seeking to develop its agricultural sector further while also maintaining and preserving its natural biodiversity.
[Contributor: Rami Assaf]
