Introduction

The sustainable fund market has grown rapidly, prompting increased regulatory scrutiny over greenwashing risks and fund labelling. The report assesses the impact of evolving EU and UK regulations on fund naming and categorisation, draws on ICMA’s research, and offers recommendations for developing a consistent and credible sustainable investment landscape.

The sustainable fund market: A largely European phenomenon

Global sustainable fund assets reached approximately USD3.3 trillion, with Europe representing 84% of the market. Nearly 60% of euro-denominated public fund assets are invested in Article 8 and 9 funds. Since 2022, fund flows have slowed, with the US market experiencing outflows, closures, and ESG backlash.

In 2024, 351 European sustainable funds closed, a 40% increase from 2023. Morningstar expects 30–50% of EU ESG funds may change names by mid-2025. However, investor demand remains, with over 78% of surveyed asset owners and managers planning increased allocations to sustainable funds.

Integrity and greenwashing risks for sustainable funds

Greenwashing risks have been categorised as misalignments between fund names, investment strategies, and disclosures. ICMA and IOSCO highlight issues such as vague methodologies and premature marketing. Despite growing regulatory focus, evidence of large-scale greenwashing is limited. ESMA’s 2024 report noted that only four national regulators had taken enforcement actions, with most opting for corrective guidance.

Regulatory initiatives on fund naming and categorisation

The EU SFDR introduced Article 6, 8, and 9 categories as disclosure tools, though they became informal fund labels. Market uptake has been hindered by inconsistent definitions and data requirements.

The UK’s FCA implemented Sustainability Disclosure Requirements in 2023, including four voluntary labels and mandatory naming restrictions for unlabelled retail products. These require at least 70% of assets aligned with sustainability objectives and impose rules on stewardship and governance.

ESMA’s Guidelines, effective for existing funds from May 2025, establish thresholds and exclusions for funds using ESG-related names. At least 80% of investments must meet sustainability criteria, and funds must apply specific benchmark exclusions based on their thematic focus.

The impending reorganisation and rebranding of the sustainable fund market

New regulatory requirements are expected to lead to significant rebranding and restructuring. Over 1,600 EU funds may need to rename or divest to comply with ESMA’s Guidelines, though Morningstar notes most breaches involve fewer than five holdings.

UK funds must drop ESG-related terms unless they qualify for FCA labels. ICMA research shows limited adoption of transition-themed funds and discrepancies between regulatory categories and actual market practices. ESMA’s Q&A clarified that green bond exclusions apply at the use-of-proceeds level, not entity level, reducing potential disruption.

Priorities for a common roadmap

The EU Taxonomy should not be the sole benchmark for defining sustainable investments due to its limited coverage, data issues, and EU-centric scope. Alternative tools such as other taxonomies, ESG ratings, sustainability-linked revenue or CapEx metrics, and transition plans should be recognised.

To support transition finance, regulators must accommodate investments with intermediate or non-linear sustainability outcomes. This includes projects in fossil fuel and hard-to-abate sectors, backed by credible transition trajectories and aligned with climate goals.

Conclusion

The sustainable fund market is undergoing a structural transformation driven by EU and UK regulation. Rebranding and fund exits are expected. While regulatory efforts have introduced useful categorisations, market practices remain inconsistent. The report calls for proportionate, flexible approaches to defining sustainable investments and integrating transition finance to avoid restricting capital flows and discouraging innovation.