Climate Transition Funds: Regional Trends, Flows, and Growth Drivers

Key Insights:

In the first half of 2025, global assets in Climate Transition open-end funds and exchange-traded funds (ETFs) — those that focus on companies better prepared for the low-carbon transition — grew by 16% to USD 318 billion. 

The rise of Climate Transition strategies reflects a growing intent among investors to both decarbonize their portfolios and contribute to real-world emission reductions by supporting companies actively navigating the shift to a low-carbon economy. Increasingly, traditional core holdings are being replaced with strategies designed to remain resilient in a world in transition. This is consistent with investors’ net zero commitments. 

In this article, we explore the regional trends, flows, and growth drivers in Climate Transition funds for the first half of 2025, and assess these funds through the lens of transition metrics. 

Europe and the US Shift Focus Toward Climate Transition Funds 

Europe houses 86% of global climate fund assets, leading all other regions across every climate strategy type, from Low Carbon and Climate Transition to Green Bonds, Climate Solutions and Clean Energy/Tech.  

Of all these strategies, however, European investors tend to favor Climate Transition funds, which represent over half (54%) of all climate fund assets in the region, followed by Low Carbon funds (21%) (see Figure 1). 

Figure 1. Regional Breakdown of Climate Funds by Climate Category

_{Source: Morningstar Direct and Morningstar Sustainalytics. Data as of June 2025. For informational purposes only.} 

Amid 8% growth in European-domiciled climate funds in the first half of 2025, Climate Transition funds expanded by 16% to almost USD 300 billion. This was driven by market price appreciation and new entrants, with close to 120 funds being added to the category over this period, bringing combined assets of almost USD 23 billion.  

Global Climate Transition Funds Continue to Attract Inflows

In Europe, Climate Transition funds were the only category of climate fund assets to attract inflows (USD 1.6 billion) in the first half of 2025, following net subscriptions of USD 6.2 billion in 2024. 

Four of the five best-selling climate funds in Europe were Climate Transition strategies (see Figure 2), led by UBS Equities World ex CH Climate Awareness NSL (AUM USD 3.6 billion), UBS Global Equity Climate Transition Fund (AUM USD 5.5 billion), and Mercer Passive Sustainable Global Equity CCF (AUM USD 7.2 billion). 

Figure 2. YTD 2025 Flow Leaders and Laggards – European Climate Funds

Similarly, in the US, Climate Transition funds were the only category to have recorded positive net flows in the first half of 2025, garnering USD 580 million. Since 2021, these strategies have attracted a combined USD 4.4 billion. 

Three Climate Transition funds ranked among the five best-selling US climate funds in the first half of 2025 (see Figure 3): Xtrackers USA Climate Action Equity ETF (AUM USD 3 billion), Xtrackers Emerging Markets Climate Selection ETF (AUM USD 0.5 billion), and Invesco North America Climate ETF (AUM USD 2.6 billion). 

Passive funds, including those that track Paris-Aligned Benchmarks (PABs) and Climate Transition Benchmarks (CTBs), dominate the global Climate Transition funds category. In Europe specifically, these strategies have been driven by the Regulation on the EU Climate Transition Benchmarks.¹ 

Figure 4. Assets in Climate Transition Funds Sub-Categories

_{Source: Morningstar Direct and Morningstar Sustainalytics. Data as of June 2025. For informational purposes only.} 

No climate fund is aligned to a net zero pathway consistent with a 1.5-degree Celsius global warming scenario, but the vast majority (84%) are better aligned than the average peer in the global fund universe (see Figure 5). Climate Transition strategies exhibit a median Implied Temperature Rise (ITR) score of just over 2.2 degrees, second only to Clean Energy/Tech strategies (2.2 degrees). This is partly because of their typical underweight positions in heavy-emitter sectors such as coal, oil and gas, steel, and cement.

Figure 5. Distribution of Implied Temperature Rise Scores Across Climate Fund Types

_{Source: Morningstar Direct and Morningstar Sustainalytics. Data as of June 2025. For informational purposes only.}

Climate Transition funds also have one of the highest median emissions management scores (57) compared to the other assets in this universe (see Figure 6). At 59, only Green Bond funds score higher. A fund’s management score indicates how prepared its company holdings are to manage their emissions.

Figure 6. Distribution of Management Scores Across Climate Fund Types

_{Source: Morningstar Direct and Morningstar Sustainalytics. Data as of June 2025. For informational purposes only.} 

In terms of the quality of emissions management, four of the top ten performing funds concentrate mostly on Climate Transition strategies, while these strategies also have the lowest median Value at Risk (VaR) score of all climate fund assets (2.4%). The VaR metric signals the potential loss in value that an issuer may experience due to the risk posed by the transition to a low-carbon economy between now and 2050.  

To learn more about Climate Transition strategies, and how other climate asset funds performed in early 2025, read the full report, Investing in Times of Climate Change. 

References

1. European Securities and Market Authority. 2025. “Climate benchmarks and ESG disclosure.” https://www.esma.europa.eu/esmas-activities/sustainable-finance/climate-benchmarks-and-esg-disclosure.