ESG Investing for Individuals, Explained: What the Ratings Mean and What Changed in 2025
ESG ratings correlate at just 0.61 across agencies. Global sustainable funds saw $84bn in outflows in 2025. Here is what individuals can verify.
ESG investing directs money toward companies or funds assessed on environmental, social, and governance criteria, alongside conventional financial analysis. For an individual investor, the practical questions are what an ESG rating actually measures, how much agencies agree with one another, and what a fund’s name or label legally commits it to. Global sustainable fund assets reached USD 3.9 trillion by the end of 2025, even as the sector recorded USD 84 billion in net outflows for the year — its first annual net redemptions since Morningstar began tracking the category in 2018, reversing 2024’s USD 38 billion in inflows, according to Morningstar’s Global Sustainable Fund Flows report for the fourth quarter of 2025.
ESG ratings from different agencies often disagree
A rating from one ESG data provider is not interchangeable with a rating from another. “Aggregate Confusion: The Divergence of ESG Ratings,” a study by MIT Sloan researchers Florian Berg, Julian Koelbel, and Roberto Rigobon published in the Review of Finance, found that ESG ratings from five major agencies — KLD, Sustainalytics, Vigeo-Eiris, Asset4, and RobecoSAM — correlated at an average of just 0.61. Credit ratings from Moody’s and Standard & Poor’s, by comparison, correlate at 0.99. The MIT team attributed the divergence to three sources: differences in which underlying metrics agencies use to measure a given issue, such as labor turnover rates versus labor litigation counts (50.1% of the divergence); differences in which ESG factors are included in scope at all (36.7%); and differences in how much weight agencies assign to each factor (13.2%). The researchers describe the result as “noisy” information for anyone using a single rating to make a decision — meaning the same company can score well from one provider and poorly from another, for defensible but different reasons.
What changed for EU fund names in 2025
The European Securities and Markets Authority (ESMA) published final guidelines in May 2024 governing when a fund can use ESG or sustainability-related terms in its name, with a compliance deadline of May 21, 2025. Under the guidelines, a fund using terms such as “ESG” or “sustainable” in its name must allocate at least 80% of its holdings to investments meeting defined ESG or sustainability criteria; funds using sustainability-specific language face a further requirement that at least 50% of the portfolio qualify as “sustainable investments.” Funds in scope must also exclude companies involved in controversial weapons and tobacco cultivation or production, companies that violate the UN Global Compact Principles or OECD Guidelines for Multinational Enterprises, and, for environmentally focused funds, companies deriving revenue above set thresholds from fossil-fuel-related activities.
An ESMA impact review, covering nearly 1,000 shareholder notifications from the 25 largest EU asset managers overseeing €7.5 trillion in assets, found that 64% of funds in scope changed their names — most commonly by removing ESG terminology rather than adding it — and 56% updated their investment policies to strengthen their sustainability focus. Funds that retained ESG-related names reduced their exposure to fossil-fuel holdings by more than the broader fund universe, which ESMA cited as evidence the guidelines improved the accuracy of fund naming rather than just prompting cosmetic changes.
Why 2025 saw the first annual outflows on record
Morningstar’s full-year report attributes the 2025 reversal to several overlapping factors. Political pressure in the US — including what the report describes as an incoming administration’s “explicit anti-ESG stance and shift toward deregulation” — dampened demand, contributing to the third consecutive year of US sustainable fund outflows (USD 21 billion). In Europe, which recorded its first annual net outflow since 2018 at USD 62 billion, large UK institutional investors shifted allocations from pooled ESG funds into bespoke segregated mandates, a structural reallocation rather than a rejection of ESG criteria itself. Performance was also weaker: only 26% of ESG indexes outperformed their conventional counterparts in 2025, down from 45% in 2024. Morningstar notes a gap between retail sentiment and institutional flows: surveys cited in the report found 88% of individual investors support sustainable investing in principle, even as institutional capital moved out of the category over the year.
What an individual investor can check before buying
Given the rating divergence and naming-rule changes described above, a few concrete checks are available before treating a fund’s ESG credentials at face value: for EU-domiciled funds, whether the fund’s name complies with the ESMA guidelines’ 80%/50% thresholds and exclusion criteria, which took effect May 21, 2025; for any fund, which underlying rating provider supplies its ESG data and what that provider’s methodology covers, since a single rating reflects one agency’s scope and weighting choices rather than a universal standard; and, per the WINSS companion guide to green bonds and sustainable finance, whether an EU fund is classified Article 8 or Article 9 under the Sustainable Finance Disclosure Regulation, since that classification carries distinct, legally defined disclosure obligations that a fund’s marketing name alone does not.
The OECD’s view on ESG investing standardization
The OECD’s Business and Finance Outlook has published dedicated analysis on this exact problem: its “ESG Investing” work and related “Policy guidance on market practices to strengthen ESG investing and finance a climate transition” examine the same ratings-divergence and standardization issues raised by the MIT Sloan study above, from a cross-country policy perspective rather than a single-market one, and make the case for greater consistency in market practices across jurisdictions.
What remains unresolved
Morningstar’s report does not identify whether 2025’s outflows mark a lasting shift in sustainable investing demand or a cyclical response to a specific set of 2025 conditions — US political pressure, UK institutional reallocation, and weaker relative index performance. The gap between high stated individual investor support (88%) and net institutional outflows over the same year is noted in the report without a single confirmed explanation for the divergence.
Sources: Morningstar’s Global Sustainable Fund Flows report, “Aggregate Confusion: The Divergence of ESG Ratings,”, European Securities and Markets Authority, “ESG Investing”, “Policy guidance on market practices to strengthen ESG investing and finance a climate transition”
Featured image: photo by Jakub Zerdzicki on Pexels (free Pexels license).
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I specialize in sustainability education, curriculum co-creation, and early-stage project strategy. At WINSS, I craft articles on sustainability, transformative AI, and related topics. When I’m not writing, you’ll find me chasing the perfect sushi roll, exploring cities around the globe, or unwinding with my dog Puffy — the world’s most loyal sidekick.
