Institutional investors around the world are preparing to deepen their commitments to sustainable investing, with more than four out of five planning to increase the share of assets directed to ESG and sustainability-linked funds over the next two years. The findings come from Morgan Stanley’s new global study “Sustainable Signals, Institutional Investors 2025,” and point to a market increasingly shaped by performance-driven confidence, stronger track records, and rising expectations around climate risk. The survey, which gathered responses from more than 950 institutional investors across North America, Europe and Asia Pacific, found that enthusiasm for sustainable investment is now broad-based, consistent, and increasingly tied to financial outcomes rather than values alone.

Growing Confidence in Performance is Fueling New Capital Flows

One of the most striking results from the study is the strength of investor conviction in sustainable investment performance. Among asset owners, 86 percent expect to allocate a larger portion of their portfolio to sustainable funds, up from 79 percent last year. Asset managers show similar momentum, with nearly four in five anticipating a higher proportion of their AUM dedicated to sustainable offerings. North American institutions stood out as the most likely to ramp up allocations, with 90 percent expecting increases, surpassing both Europe and Asia Pacific. This marks a significant shift given the region’s politically polarized ESG discourse, suggesting that institutional investors remain focused on financial fundamentals. Performance was cited as the leading motivation. Roughly one in five asset owners identified strong results from ESG strategies as the top driver of their increased allocations, closely followed by those who saw sustainable investing as a maturing discipline with a more robust track record than in previous years.

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Sustainable Strategies Increasingly Influence Mandate Decisions

As allocations grow, sustainable investing has become a meaningful competitive differentiator within the asset management industry. Nine in ten asset owners said that the availability of high-quality sustainable investment options is a key factor in retaining or selecting asset managers. A similar proportion of asset managers reported that their ESG capabilities strongly influence whether they win or maintain client mandates. The study also found that sustainable investing expectations are becoming hard requirements. Nearly nine in ten asset owners said that they require external managers to have a formal sustainable investment policy or strategy in place. The result suggests that ESG integration is no longer a niche capability but a threshold competency in the institutional marketplace.

Where Investors See the Most Opportunity?

The survey highlights a clear prioritization of climate-related themes. Renewable energy remained the most frequently selected investment focus, followed by energy efficiency. Notably, climate adaptation and resilience surged in importance, rising from sixth place last year to third this year. This shift reflects mounting concern about the financial impacts of physical climate risks. More than three-quarters of respondents said they expect climate-driven physical risks to have a major influence on asset pricing in the next five years. Over one-third anticipate broad market-wide impacts, while another 42 percent expect significant effects concentrated in specific regions or asset types. The recognition of these risks is already shaping investment models. More than half of institutions globally now incorporate climate resilience directly into their risk-return calculations for physical assets such as real estate and infrastructure. North American investors again led the trend, with 65 percent factoring climate resilience into core evaluations.

Rising Concerns About Data, Regulation and Political Uncertainty

Despite optimism about sustainable investment opportunities, investors also reported intensifying concerns about barriers that could impede progress. Data quality and consistency once again ranked as the top challenge, but the share of investors describing it as a very significant concern jumped sharply to 47 percent from 32 percent last year. Uncertain regulatory environments and shifting political signals emerged as growing pain points. Forty-three percent cited fluctuating regulatory guidance as a very significant concern, and 37 percent highlighted political uncertainty as a major issue, both substantial increases from last year’s survey. These concerns reflect a rapidly evolving landscape of global disclosure rules, transition plans, and polarized political debates around ESG.

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A Market Moving Toward Maturity Despite External Pressures

Taken together, the survey paints a picture of a sustainable investment market entering a more mature phase. Investors are increasingly motivated by financial performance, more stringent risk assessment, and a growing body of evidence linking climate-related factors with long-term value creation. Jessica Alsford, Chief Sustainability Officer at Morgan Stanley, noted that the results underscore a shared recognition among global investors that climate risks are escalating and that portfolios must evolve accordingly. Sustainable investing is becoming more sophisticated and more central to portfolio construction, even as external pressures complicate implementation. The overall message from the survey is clear. Capital is continuing to move toward sustainable strategies, propelled by performance confidence and rising awareness of climate risk. While policy uncertainty and data limitations remain obstacles, the direction of travel for global institutional investors is unmistakably toward deeper sustainability integration and more climate-aware portfolio design.

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