01 May 2025

Overview of ESG Funds in Critical Minerals Financing

ESG funds are investment vehicles that integrate sustainability criteria into their portfolios, prioritising companies demonstrating strong performance in these three areas. Over the past decade, ESG-themed funds have grown rapidly, reaching a global total of $3.2 trillion in assets by the end of 2024 (more than tripling in five years). Europe dominates this market – around 84% of sustainable fund assets (nearly $2.7 trillion) are EU-domiciled, spread across 5,500+ funds. These funds channel capital towards companies and projects with positive ESG profiles, increasingly including those in the critical minerals supply chain needed for clean energy technologies.

In the context of the energy transition, ESG funds play a pivotal role by directing capital into projects that support the development of critical minerals essential for renewable energy technologies. The rise of ESG investing has created a significant alternative funding mechanism for critical minerals projects, alongside traditional mining finance.

Traditional financing for new mines and processing facilities can be challenging to obtain. Early-stage projects often carry high risks and long timelines, deterring conventional banks or investors. This is especially true for "new" or less-established commodities (e.g., lithium or rare earths) where future demand (tied to EV uptake or clean tech policies) was uncertain a decade ago. As a result, many junior miners historically resorted to high-cost debt or struggled with funding gaps.

ESG funds have stepped in to bridge these funding gaps. As the energy transition has become a global priority, investors are now keen to support the raw materials underpinning clean technology. Mining companies that can demonstrate strong environmental and social practices are increasingly attracting capital from sustainability-focused funds. For instance, in 2019, the World Bank (with partners like the German government and major mining firms) launched the Climate Smart Mining Facility – the first fund dedicated to making mining for critical minerals more sustainable. Similarly, sustainability-linked loans and bonds have appeared in the mining sector (e.g., a >$1 billion ESG-linked facility for aluminium producer Rusal tied to improved environmental practices). These instruments incentivise miners to hit ESG targets (such as cutting carbon emissions or improving community conditions) in exchange for favourable financing.

Importantly, ESG investment is not limited to debt. A recent trend is ESG equity funding for mining projects. Where once banks might only offer green loans (still leaving equity needs unmet), now specialised sustainable equity funds are providing substantial equity capital for critical mineral developments. This means ESG funds can cover all parts of the financing package – debt and equity – for new projects. Mining companies actively seek out ESG fund investments both for the funding and as validation of their sustainability credentials. Those adopting cleaner technologies or higher ESG standards also become eligible for government support in many cases.

Ismet Soyocak

ESG & Critical Minerals Lead

Recent Developments and Trends (2015–2025)

In the last 10 years, ESG investing has surged, fuelled by climate goals and investor demand for sustainable assets. By 2023, there were roughly $2.5–3 trillion in sustainable mutual funds/ETFs globally, and ESG assets (broadly defined) are on track to reach $40 trillion by 2030. This boom has directly benefited the critical minerals sector:

• Launch of Thematic Funds: Major asset managers have introduced ESG-themed funds targeting the green transition. For example, in 2021 VanEck launched a Green Metals ETF (ticker: GMET), and BlackRock introduced Climate Action funds, explicitly to give investors exposure to the metals needed for clean energy. The VanEck fund only includes companies deriving ≥50% of revenues from "green metals" (lithium, cobalt, copper, rare earths, etc.), indicating a clear focus on the critical minerals supply chain. Such funds provide public equity capital to miners and refiners that meet ESG criteria, effectively channelling stock market investment into critical mineral development.

• Private Equity and Venture Capital Focus: Large private funds have shifted toward battery metals and critical resources. Notably, European-based funds are leading in size, aligning with the EU’s climate priorities. For instance, KKR’s Global Climate Fund is targeting $7 billion (the largest in the sector, focused on sustainable investments in Europe). In North America, Orion Mine Finance has raised dedicated mining funds (e.g., $3 billion+ size) aimed at lithium, nickel, and other battery metal projects. Another example is InfraVia Capital’s €2 billion Critical Metals Fund in Europe to secure resources for the clean energy transition. Medium-sized specialty funds like the EBA Strategic Battery Materials Fund (~$536 million) and Spicewood Mineral Partners II ($500 million) have emerged to invest in niche battery supply chain opportunities.

• European Leadership and Policy Support: Europe’s policy environment (EU Sustainable Finance rules, Green Deal, Critical Raw Materials Act) has made it the epicentre of ESG fund activity. European sustainable funds not only comprise the bulk of assets but also saw robust growth (over 22% AUM growth in 2023 vs ~14% for conventional funds). The EU’s push for local supply chains (via the Critical Raw Materials Act and subsidies for battery materials) is attracting investors to European mining and refining projects. In 2024, while global mining private investments dipped, the EU saw an 88% jump in deal value for metals/mining projects, reflecting this policy-driven momentum. Investors view Europe as a stable, ESG-compliant jurisdiction for critical minerals, and are backing domestic projects to reduce reliance on imports. With ~73% of all sustainable funds by count based in Europe, EU fund managers are deeply involved in financing the raw materials for batteries, EVs, and renewables.

• Global and Emerging Market Focus: Outside Europe, ESG funds and initiatives are also catalysing projects. In Australia, the government’s green bank, the Clean Energy Finance Corporation (CEFC), has co-financed lithium mines to integrate them into the clean energy supply chain. CEFC’s $15 million investment in Pilbara Minerals’ Pilgangoora lithium project in 2017 – as part of a $100 million bond issue – is an early example of bridging finance for a mine that traditional banks viewed as too risky at the time. In Africa, attention is turning to sustainable development of vast untapped reserves of cobalt, lithium, and rare earths. New private funds are targeting African projects (for instance, a dedicated Sustainable Resources Fund of $400 million was set up to invest in African critical mineral assets). Multilateral lenders (Afreximbank, African Development Bank, etc.) and regional funds are also aligning investments with ESG principles to ensure resource projects contribute to local development and meet environmental standards.

Overall, the past decade’s trend is clear: ESG-oriented capital is increasingly available for critical minerals. Despite some headwinds (e.g. regulatory scrutiny over “greenwashing” and anti-ESG sentiment in the U.S. leading to slower growth of ESG funds in North America), the secular shift is towards more funds and more money being funnelled into enabling the green transition. In 2024, sustainable funds still outpaced conventional peers in growth and saw net inflows of $38 billion globally, indicating investor appetite remains strong for climate-aligned investments.

“Now” of ESG Funds: 2025, A Period of Reassessment

The first quarter of 2025 marked a significant shift in ESG investment trends. Global sustainable funds experienced a record outflow of $8.6 billion, reversing the $18.1 billion in inflows from the previous quarter. This downturn was influenced by several factors:

Political Climate:

• The first quarter of 2025 witnessed a significant shift in the political landscape impacting ESG investments. The re-election of U.S. President Donald Trump marked a return to policies that deprioritise climate and social initiatives. This political shift has led to increased legal risks for companies, particularly concerning diversity, equity, and inclusion (DEI) efforts, and has prompted asset managers to reassess their ESG strategies.

• In Europe, the political climate has also influenced ESG fund flows. Geopolitical tensions, including Europe’s rearmament following Russia's 2022 invasion of Ukraine, have sparked debates about the inclusion of defence stocks in ESG portfolios. This has led to a reevaluation of ESG criteria and investment strategies.

Regulatory Changes:

• Regulatory developments have further complicated the ESG investment landscape. In the European Union, ESG investments saw $1.2 billion in net withdrawals—the first since at least 2018. This was partly due to the European Securities and Markets Authority (ESMA) implementing stricter anti-greenwashing rules, prompting 335 funds to change their names, with 116 removing ESG references. Additionally, 94 European funds were liquidated or merged.

• In the United Kingdom, the Financial Conduct Authority (FCA) has indefinitely halted its plans to extend the Sustainability Disclosure Requirements (SDR) to wealth managers. This decision has left many wealth managers uncertain, particularly after investing significant resources to prepare for the now-delayed guidelines.

Looking Ahead: ESG's Enduring Relevance

Despite these challenges, we believe that the ESG market has shown strong resilience under these stormy conditions. At first glance, it seems that inflows into ESG funds have stalled, but there is no systemic bleeding. Sustainable fixed-income funds, for instance, attracted $14 billion in inflows during Q1 2025, underscoring continued investor interest in specific areas of ESG investing. And at this “first” net outflow in the EU since 2018, the total AUM volume of global ESG funds decreased to USD 3.16 trillion from USD 3.18 trillion, a mere 0.7% shrinkage. Despite a turbulent geopolitical and regulatory backdrop, including political rollbacks in the United States and temporary regulatory softening in Europe, several fundamental factors are sustaining investor confidence in ESG funds.

It is true that over 640 European funds have stripped or swapped ESG-related terms from their names in the past fifteen months. However, it was mostly racing to comply with the EU’s new anti-greenwashing rules. Words like “ESG” and “sustainability” are vanishing from prospectuses, replaced by terms like “screened,” “transition,” or “leaders.” This rebranding might eventually be for good, eliminating greenwashing (intended or unintended) and providing a much clearer framework, pathway, and communication platform among the parties in the future to accelerate the green transition of the entire value chain.

In the fundamental sense, ESG investing is no longer seen as niche or values-driven. It is now widely recognised as an essential part of managing financial and physical risk, especially regarding climate change. Extreme weather events, water scarcity, emission hotspots, and transition risks are increasingly priced into the market, and ESG frameworks provide a structured way to navigate these risks in an irreversible way over the past two decades. Acknowledging the political uncertainty of "now", the sentimental and structural progress made in the "past", what can be said for the future is, the ESG market is going through a repositioning phase, with investors recognising the differences between temporary volatility and the longer-term shift toward sustainability. Markets naturally respond to shocks, reposition, and move on, and this seems like one of those repositioning phases rather than a systemic unwinding.