Assets under management in funds classified as Article 8 and Article 9 under the EU’s Sustainable Finance Disclosure Regulation exceeded $10 trillion by the end of 2025, according to a new report from Morgan Stanley. The milestone was driven by a combination of continued inflows and market appreciation, even as parts of the sustainable investment universe faced investor withdrawals.

The report, titled Sustainability Fund Update: 2025 in Review, shows that AUM across Article 8 and 9 funds reached approximately $10.2 trillion, representing a 23 percent increase over the year. Article 8 funds promote environmental or social characteristics, while Article 9 funds have sustainable investment as their core objective under the current SFDR framework.

Diverging Flow Dynamics Between Article 8 and Article 9 Funds

While total AUM expanded, underlying fund flows were uneven. Combined net inflows into Article 8 and 9 funds reached roughly $420 billion in 2025. This headline figure masked a clear divergence between the two categories.

Article 8 funds attracted more than $55 billion in net inflows over the year, offsetting net outflows of approximately $23 billion from Article 9 funds. Morgan Stanley noted that investor demand appeared to favor strategies with broader sustainability characteristics rather than those positioned as fully impact focused.

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Asset Class Performance Shapes Investor Allocation

Flow patterns varied significantly by asset class. Article 8 funds recorded positive net inflows across fixed income, money market, equity, and multi-asset strategies, indicating broad-based demand. In contrast, Article 9 funds saw net inflows only in fixed income, while equity strategies experienced the largest redemptions.

Equity performance played a central role in this shift. According to the report, Article 9 equity funds underperformed broader equity markets by 601 basis points in 2025. Article 8 equity funds also lagged, but by a comparatively modest 98 basis points. The performance gap contributed to investor caution toward more narrowly defined sustainable equity strategies.

Slower Growth in New SFDR Fund Launches

The number of SFDR-classified funds continued to rise in 2025, though at a slower pace than in prior years. Morgan Stanley reported the launch of 779 new Article 8 funds during the year, down from 936 in 2024. Article 9 fund launches declined more sharply, with just 44 new products introduced in 2025, compared with 85 the previous year.

The slowdown reflects a more selective product development environment as asset managers reassess demand, regulatory clarity, and the risk of misclassification under SFDR.

Global Sustainable Funds See Net Outflows Despite AUM Growth

Beyond SFDR, the report highlighted contrasting trends in the broader global sustainable fund market. Using Morningstar’s definitions, which include General ESG and Sustainability Themed Investments, Morgan Stanley found that global sustainable funds experienced net outflows of $63 billion in 2025.

Despite these withdrawals, total AUM in global sustainable funds still grew by 17 percent, supported by market performance. Sustainable funds maintained a steady 6 percent share of overall global fund assets, suggesting resilience in the segment even as investor sentiment became more selective.

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Regulatory Change Looms Over SFDR Classifications

The report also noted growing uncertainty around the future of the Article 8 and Article 9 framework itself. The European Commission has proposed a significant revision to SFDR that would replace the current classification system with a simplified product categorization for funds making ESG claims.

The proposed changes stem from concerns that Article 8 and 9 labels have been used as de facto sustainability badges, sometimes without sufficient consistency. Any reform could materially reshape fund positioning, disclosures, and investor expectations across Europe’s sustainable finance market.

A Market Growing in Size but Increasingly Discriminating

Morgan Stanley’s findings suggest that sustainable investing continues to scale in absolute terms, particularly within the SFDR framework. At the same time, investors are becoming more discerning, favoring flexibility, performance resilience, and regulatory clarity over narrowly defined sustainability labels.

As regulatory reform and performance pressures converge, the next phase of growth in sustainable funds is likely to be shaped less by headline AUM expansion and more by credibility, transparency, and risk-adjusted returns.

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