“What’s in a name? That which we call a rose / By any other name would smell as sweet,” Juliet tells Romeo in William Shakespeare’s classic play. When it comes to environmentally responsible investing, the name of the fund and how it is described has influenced the noses of investors.
Between 2019 and 2024, the total value of assets in sustainable investment funds doubled to more than €2.5 trillion globally, with four-fifths based in Europe, according to the New Financial think tank. Asset managers logically jumped on the bandwagon and predictably some were accused of greenwashing, or misleading investors about their environmental credentials.
In May 2024, the European Securities and Markets Authority (Esma) tightened rules on using terms like “ESG”, “sustainable” and “climate” in investment fund names, since that is the most prominent message investors will see about a fund.
To use such a term, the minimum amount of investments aligned with environmental or social objectives went from 50% to 80%. Asset managers spend a considerable amount in administrative, legal and marketing expenses to rename a fund, but the revised guidelines were serious.
Data from MSCI, which runs several stock market indices, found that asset managers cut “ESG” (which stands for environmental, social and governance criteria) from a quarter of funds and “sustainable” from a fifth (see chart).
Similarity with SFDR realignment
Cédric Danois, senior associate at the law firm A&O Shearman in Luxembourg, sees a parallel between the recent wave of fund name changes and a previous period when funds reclassified themselves between Article 8 and Article 9 of the Sustainable Finance Disclosure Regulation (SFDR).
Under the SFDR, Article 8 funds use sustainable criteria in their investment process, Article 9 funds have a sustainable objective for their investments, while Article 6 funds make no sustainability claims. But “between 2021 and 2023 we did not have any clear definition of what sustainable investments meant,” Danois said in an interview.
Also read:Czech regulator rejects Esma’s ESG rules as Luxembourg warns of divergence
While the SFDR started taking effect in 2021, Brussels did not publish full guidelines until two years later. The regulation contained a general definition. However, “the financial market did not really know what it meant exactly in practice” until the European Commission “published clear guidance” in 2023, he said. That meant the market had to readjust and switch some investment funds between Article 8 and Article 9 classifications.
“This is exactly the same thing we are seeing in terms of fund names,” said Danois. Asset managers dropped “sustainability” from fund names in response to the new rules. “It is very important to keep in mind that the dropping of [a word or phrase in a] fund name is not necessarily linked to greenwashing, because the market is adjusting itself as the regulation is evolving,” Danois said.
And the evolution will continue, as the European Commission is already reviewing the SFDR. “It is expected that the new regime will be published by 2027/2028.”
Labels influence investors
The SFDR did not intend for Articles 8 and 9 to be used as marketing labels or stamps of approval, but the classifications ended up being used that way by many financial firms and investors.
Similarly, a fund’s name has a major impact on its sales prospects, said Denitsa Stefanova, an associate professor of finance at the University of Luxembourg.
Denitsa Stefanova from the University of Luxembourg © Photo credit: Gilles Kayser
A recent study co-authored by Stefanova investigated the disparate criteria used by ESG ratings agencies, which investors heavily rely on. “This lack of standardisation has opened up huge divergences across rating providers and that reflects on how investors perceive the sustainability profile of funds and then how they allocate their [capital] if they have preferences for green investments,” Stefanova commented.
Using scientifically filtered data, “we find things that are very curious, very different,” she said. Funds’ ESG ratings do not necessarily correspond to the academic researchers’ measure of sustainability. “So there is some mismatch.”
“Of course, we cannot claim entirely that this difference is greenwashing,” Stefanova stated. “But it is suggestive that there is a certain lack of objectivity in these ratings. And why is that? Because the ESG ratings of companies are typically built upon […] company-reported policies and there is no strictly verifiable or harmonised approach [at] the firm level.”
“For example, firms within the utility sector may appear to be very highly rated in terms of environmental performance, even though on an absolute scale we know that they are some of the greatest polluters. Why is that? Because ratings typically reflect the environmental policies that these firms engage in relative to their peer group,” Stefanova said.
Based on how utility firms decide to report their own data, a “whole industry subgroup appears to have good sustainability standing because they have a lot of policies that are reflected [and] they disclose a lot about the policies.” In other words, companies can boost their scores by being good at reporting data and providing lots of figures.
The research covered US mutual funds, meaning European funds may or may not have performed better, Stefanova noted. Yet, given their collective size, US mutual funds are likely “representative of the global fund market,” she said. The study covered 2015 to 2023, so did not account for recent regulatory changes.
The study also looked at how “capital allocations of investors are actually related to these ratings – whether investors react to them – and we know that they do,” Stefanova explained.
The researchers screened funds that Morningstar had identified with “green”, “sustainable” and similar labels. They found that investors turned to funds labelled as sustainable if they were already predisposed to sustainable investments. “Investors only care about” labels if they are interested in a sustainable development goal, and ignore them “if they’re not,” Stefanova said.
In other words, the labels make a difference for investors seeking sustainable investments, but do not draw in fresh investors into the segment. “This is quite, quite important” since the labels are subjective. “That’s why we need some harmonisation in these metrics and make them more objective or verifiable.”
Also read:One in five ESG funds rebranded after greenwashing crackdown
Difficult to quantify
Clarity may not come any time soon. Dirk Zetzsche, a professor of financial law at the University of Luxembourg, said the European Commission has paused its development of a “coherent approach to greenwashing” as part of its campaign to cut red tape.
Regulating greenwashing is about allocating the costs of ‘hard scientific evidence
Dirk Zetzsche
Professor, University of Luxembourg
“Regulating greenwashing is about allocating the costs of ‘hard scientific evidence’ across various dimensions. Most often, enterprises consider one of several sustainability dimensions and have collected data on that, yet the understanding of sustainability may also entail other dimensions,” he said about the difficulty of setting anti-greenwashing rules that firms, officials and activists are satisfied with.
“Think of a child benefitting from healthy air in the Global North due to lesser pollution. If the pollution reduction comes at a cost of greater pollution, let’s say, in Africa, the emphasis of more healthy children as a marketing tool is misleading from one perspective, but not from the other perspective,” Zetzsche said. “Which perspective matters for which dimension of sustainability is what the EU greenwashing rule project was about.”
(This story was first published in the autumn 2025 edition of the Luxembourg Times magazine)