How advisers can navigate ESG fund closures
As the ESG and sustainable investment market undergoes greater consolidation, three commentators explore how financial advisers can navigate fund closures and renaming.
Morningstar’s Global Sustainable Fund Flows report saw six Australian and New Zealand sustainable fund closures in the March quarter of 2025, indicating “tough conditions” for fund houses in general as margin pressures creep up.
“The pattern of closures also follows that from the prior year, when 19 funds closed in 2024, and is in stark contrast to 2023, when only three funds closed,” the report wrote.
Part of this is due to ASIC’s crackdown on greenwashing which has prompted fund managers to reconsider their ranges or how they are labelled.
Sustainable fund closures, along with any type of unexpected fund closure, can tangibly impact advisers who have clients’ funds invested in the strategy.
“Any fund closure has real impact for advisers who’ve recommended these funds, and clients who hold them,” James O’Reilly, financial adviser at Northeast Wealth, told Money Management.
“Beyond the immediate need for advisers to revisit portfolios and find suitable alternatives, closures can leave clients questioning the due diligence behind the original recommendation.”
To address client concerns, O’Reilly said it is critical for advisers to proactively engage with affected clients to candidly outline the reasons for the closure, what the next steps are, and why this may be less likely to happen across other positions within their portfolios.
Specialist adviser and Ethos Australia director, Nathan Fradley, noted fund closures in the sustainable and ESG investment space have led advisers to be more cautious about what fund managers they choose to work with and favour established providers.
“Advisers are often hesitant to work with brands they don’t know very well because they’re worried that the fund won’t be around at some point or that it won’t do what it says it’s going to do,” he explained.
“I think a lot of the more moderate portfolios and everyday advisers – the bulk of the adviser base who wants an [ESG] option available – have always been a little bit more conservative in where they choose because of this.”
Following an influx of new sustainable products launched in recent years, both advisers have observed greater consolidation and maturation of the market, with underperforming funds not taking off as well as expected.
O’Reilly unpacked: “Consolidation does appear to be underway, which isn’t surprising given the tremendous expansion of sustainable product offerings we’ve observed, in particular over the past five years.
“I broadly view this as a positive step – we’re likely entering the next important phase for sustainable investing where underperforming funds drop off and stronger performers thrive.”
Similarly, Fradley said fund managers that previously viewed ESG as a “hot topic” are now seeking to consolidate their funds amid broader industry challenges, such as pricing pressures and greenwashing fears.
“It’s not the hot topic. It’s now matured and because of that, when [managers are] looking at the economics of the funds they have in general, they’re looking at what’s their specialty and how do they position themselves? They’re thinking: ‘It’s not a hot topic. Let’s realign ourselves, we’ll consolidate funds’,” he said.
Joy Yacoub, head of distribution at Pella Funds Management, said the responsible investing specialist has also observed fund closures in the market due to the battling pressures of managing such a fund.
“Following the boom in responsible investment funds over the last decade, we are starting to see funds closing because it has proven difficult to maintain strict responsible investing principles while also delivering strong investment outcomes,” she commented.
“In fact, in global markets, the number of responsible investment fund closures has outnumbered new launches, which highlights just how difficult it is to genuinely achieve both. It isn’t easy, but client expectations haven’t changed, they still want strong responsible investing combined with competitive returns.”
Beyond closures, fund renaming has become another prominent feature of the ESG and sustainable investing space, according to O’Reilly, often as a result of tightening regulation.
For example, findings from Morningstar showed over 250 sustainable funds globally changed their names or dropped key ESG terms during 2024.
In the event of a fund being renamed, both commentators encouraged advisers to look under the hood of the fund to assess if it still aligns with the client’s investment values and goals.
“Any name change should prompt advisers to investigate the reasons behind it, and most importantly whether the fund’s underlying strategy and mandate still align with their client’s values and expectations,” O’Reilly added.
Advisers may also need to seek out external research to further investigate the fund, Fradley noted. He explained: “Like they would with most funds, advisers are going to have to rely on a bit more external research or tools to understand what’s happening behind the scenes. The challenge for advisers is they can’t rely on what the fund is saying as a title.”
AUTHOR
Jasmine Siljic
Recommended for you
Advisers need to closely scrutinise how much volatility exists in private assets during their portfolio construction and how this is demonstrated by the providers, according to commentators.
Private equity firm Bain Capital has shared how it believes the wealth management industry can be transformed, potentially shedding light on how it could evolve Insignia Financial should an acquisition proceed.
Prime Minister Anthony Albanese has confirmed who will succeed Stephen Jones to serve as the Assistant Treasurer and Financial Services Minister.
In response to adviser feedback, AMP’s North platform has announced further enhancements to streamline the way advisers manage and action client requests on-platform.
