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Nearly a quarter (23%) of all Article 8 funds remain at risk of greenwashing, said a new report – this is compared to just 3% of Article 9 funds being at risk.

The 2025 ESG and Sustainable Barometer report, by data provider MainStreet Partners, which analyses over 9500 investment strategies managed by more than 460 asset managers, revealed that the proportion of Article 9 funds that have a greenwashing risk has reduced over time.

However, the results showed that for fund operators there is still a minefield of risk involved with categorisation for funds and that mistakes could be easily made – and easily discovered by regulators.

“At the start of 2024, you may have been forgiven for thinking we would see less regulatory complexity than in the past three years."

The results of the report though also highlight a series of other issues that operations teams should be aware of.

The research found that 13% of funds across categories have failed MainStreet’s regulatory adherence assessment, which considers the relevant naming convention of the specific strategy together with the consistency of documentation – namely that it is clear and not misleading and uses fitting and targeted language.

“At the start of 2024, you may have been forgiven for thinking we would see less regulatory complexity than in the past three years,” said Neill Blanks, Managing Director at MainStreet and lead author of the report. “Unfortunately, that was far from the case, not least as fund naming rules came into effect on both sides of the Atlantic. Regulatory scrutiny continues to intensify, with the threat of fines being imposed for those that do not adapt, on top of the associated reputational damage.”

What’s the wider context?

The report, which evaluates key ESG and Sustainability related trends in the European and UK fund markets, also highlighted a downward trend in asset manager ratings across each Sustainable Finance Disclosure Regulation (SFDR) classification and non-EU ratings.

Greenwashing is still a major concern in the industry. “It requires careful assessment and oversight; it's become more subtle, and more nuanced than the past cases of unsubstantiated claims or empty ESG messages that happened previously,” said Anna Colombatti, Investment Chief Operating Officer and Head of Research, AXA IM Select in an interview with Fund Operator last year.

“For example, if we look at the famous scandals and cases that received fines from the SEC, such as, DWS Asset Management and Goldman Sachs Asset Management, they were not integrating ESG considerations but were still calling their funds “ESG fund XYZ”,” she said.

The MainStreet report said that the findings come at a time when “sustainability standards and expectations have increased”, as well as “a pullback of several asset managers from key initiatives like the Net Zero Asset Managers initiative (NZAM) and Climate Action 100+ (CA100+)”, alongside a “general reluctance to discuss ESG and Sustainability in the US”.

In May last year, the European Securities and Markets Authority (ESMA), the EU’s financial markets regulator and supervisor, published its final report containing guidelines on funds’ names using ESG or sustainability-related terms – which it said would stamp out issues around perceived ‘greenwashing’. 

The guidance set out requirements for fund managers using these terms in fund names. Its desired aim was to reduce greenwashing risks and to enhance investor protection from exaggerated or misleading sustainability claims, it said.

At that time, Seb Beloe, Head of Research at impact investor, WHEB Asset Management, said he felt they could have gone further. "While a threshold mechanism is an important part of the naming criteria and ESMA has made headway, in principle, reasonable fund buyers would expect every investment held in an investment fund to be aligned with the stated objectives of that investment fund.”

Taking this into consideration, in September last year, The UK’s regulatory body, the Financial Conduct Authority (FCA), has announced its plans to offer companies “temporary flexibility to comply with ‘naming and marketing’ rules under our Sustainability Disclosure Requirements (SDR) regime until 2 April 2025”.

The SDR and investment labels regime (PS23/16) were published in November 2023.

What are the wider implications?

According to the report, the proportion of funds under the Paris Aligned Benchmark (PAB) regime that are in breach of their required exclusions has remained steady at 72%. However, breaches of the Carbon Transitional Benchmark (CTB) exclusions have surged from 36% to 49%.

This rise in carbon exclusions is primarily due to the overall reduction in the number of funds in scope of the regulation, in other words, funds have opted for a name change.

Among those that violate the exclusions set by the PAB regime, the most common reasons are exposure to activities in Coal and to United Nations Global Compact (UNGC) Violators. Of the funds breaching the CTB exclusions and as per MainStreet’s methodology for assessing controversial activities the breaching holdings are linked to controversial weapons and OECD violators.

Article 9 versus 8 – what does it mean in the future?

The report said the proportion of Article 8 funds that were risk of greenwashing had increased.

“Regulation (SFDR and SDR) and updates from organisations such as the ESMA and the FCA may compel funds to follow rules with regards to how they manage, market and name funds."

“The proportion of Article 9 funds that have greenwashing risk has reduced over time. The actual number of Article 9 funds scoring [low] has not significantly changed but as our coverage has increased, new additions in this classification have tended to rate above the [pass] threshold thereby decreasing the percentage of funds with a rating below this level,” it said.

“Regulation (SFDR and SDR) and updates from organisations such as the ESMA and the FCA may compel funds to follow rules with regards to how they manage, market and name funds,” the report said. “However, there is still leeway and in a handful of cases, we believe that they fall foul of what we consider to be within the “spirit” of the regulation as well as the letter of it.”

The report added that 87% of funds pass the report’s “Regulatory Adherence” test. “Of the 13% that fail most have one of the four penalties applied, while only a handful have multiple,” it said.

“The main reason for a penalty is “relevant naming convention”. Here funds are often penalised when we do not believe that the process or commitments are suitably high enough to have terms like “Sustainable” or “Impact” in the name. For example, Article 8 funds may have “Sustainable” in the title but only commit to hold a minimum 10% of the fund in Sustainable investments.

It added that recent ESMA publications may change this as its now expected that funds should have a “meaningful” level of Sustainable Investments (?50% for Article 8 funds) to use the term.

“Recently a number of asset managers have removed sustainability related terms from the name of their funds, or they have further clarified the ESG and Sustainability processes,” it said.

These factors mean that greenwashing is still a large risk for many in the industry – both inadvertently as well as for laggards that are not doing enough.

For funds operating in Europe, it gives clear instruction – more must be done if you want to stay ahead of any possible accusations of greenwashing.

 

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