A long-held truism of ESG is being challenged, namely the idea that the strategy is best-suited to active fund management.

For 11 of the past 12 quarters, clients have redeemed cash from actively managed funds registered as “promoting” environmental, social and governance goals, otherwise known as Article 8 under European Union regulations. The data, provided by Morningstar Inc., indicates a recalibration is underway in an investing form that from the get-go was supposed to favor the active selection and de-selection of assets.

As active ESG funds “bleed money,” Morningstar’s global director of sustainability research, Hortense Bioy, says the managers overseeing such portfolios are now “licking their wounds.” Meanwhile, “passive ESG investments continue to appeal to more investors,” she said in a report published on Tuesday.

While active strategies still dominate ESG investing in absolute terms, a rapid adjustment appears to be underway with Morningstar estimating that almost 15% of the EU’s strictest ESG fund category, Article 9, is now passive. Just over 5% of such funds were passively managed in December 2022, Morningstar reported last May. A similar trend is playing out in the Article 8 market, which is much larger than Article 9 but subject to laxer disclosure rules.

Meanwhile, Morningstar’s global ESG fund management study — published last week — also shows passive strategies gaining ground. And the world’s uncontested leader in ESG products is BlackRock Inc., “thanks to its passive offering,” according to Morningstar. At the same time, actively managed funds saw a third consecutive quarter of outflows globally, the researcher said.

The biggest Article 9 product at the end of the first quarter was the Handelsbanken Global Index Criteria (Ticker: HAICA1S SS), a $10.6 billion passively managed fund whose stated goal is holding at least 90% of its portfolio in sustainable investments, according to Morningstar’s league table. The Article 9 fund with the biggest outflows last quarter was the Nordea 1 - Global Climate and Environment Fund (Ticker: NOCBIEU LX), an actively managed portfolio which saw close to $1 billion of client redemptions, Morningstar estimates.

Overall, Article 9 funds — regardless of strategy — saw roughly $4 billion of client withdrawals, while Article 8 funds netted about $15 billion in client inflows. Article 6 funds, which have the lowest ESG disclosure requirement under EU rules and aren’t deemed ESG products, drew $46 billion in new client money.

The EU’s Sustainable Finance Disclosure Regulation, which defines what can be categorized as Article 6, 8 or 9, came into force in March 2021. SFDR is currently under review following widespread criticism from market participants and national regulators alike, who have complained of confusing language and inadequate definitions. It may take years before a revised regulation is unveiled.

A separate analysis by Bloomberg Intelligence, which looks at a wider universe than Morningstar, puts the total market of SFDR-registered products at $13 trillion.