Decline in Sustainable Fund Assets by One Trillion Euros in Q1 Due to Market Chaos and ESMA Regulation modifications
In the first quarter of 2025, sustainable investment funds across Europe are undergoing a significant transformation to align with the European Securities and Markets Authority (ESMA)’s new labelling guidelines for green funds. These guidelines aim to enhance transparency, tighten fund naming criteria, and implement preparatory compliance measures, all with the goal of reducing greenwashing and boosting investor confidence in ESG-labelled products.
Mandatory compliance deadlines are looming for both new and existing funds. By November 21, 2024, new funds must comply with ESMA’s Guidelines on ESG or sustainability-related fund names, while existing funds have until May 21, 2025, to rename if necessary. As we approach Q1 2025, many funds are in the process of transitioning to meet these mandatory requirements.
The stricter naming criteria set by ESMA require funds using ESG or sustainable terms in their names to ensure at least 80% of their investments meet sustainable investment objectives and exclude controversial sectors such as those involved in controversial weapons or other activities inconsistent with EU Climate Transition and Paris-aligned Benchmarks. This raises the bar for funds claiming green credentials.
Increased transparency and disclosure needs are also a key focus of these new guidelines. Fund managers are required to provide more detailed, reliable information on underlying assets, including applying EU sustainable finance regulations like the Sustainable Finance Disclosure Regulation (SFDR) and the Taxonomy Regulation consistently. This increases due diligence and may affect fund composition and reporting systems.
ESMA’s common supervisory action (CSA) in 2023–2025 found overall satisfactory compliance but highlighted areas needing improvement, reinforcing the importance of these labeling rules to identify and prevent greenwashing.
Looking ahead, the European Commission is expected to propose a significant overhaul of SFDR (potentially SFDR 2.0) by Q4 2025, introducing possible new product categories such as “transition” or “impact” funds, and moving from disclosure toward a label-driven regime. This ongoing regulatory evolution places a compliance premium on funds aligning early with ESMA’s rules.
Regulation continues to impact sustainability-related fund assets in Europe, as evidenced by the response to ESMA's guidelines on fund names. The decline in sustainable fund assets, particularly in Article 9 funds, reflects growing investor concerns about the repercussions of global trade wars.
In conclusion, the new labelling rules for green funds are driving a shift in the European sustainable finance landscape. By increasing transparency, tightening sustainable investment claims, and enhancing investor protection against misleading ESG marketing, these guidelines are shaping the future of sustainable investing in Europe. As the regulatory environment continues to evolve, funds that align early with these new guidelines will be well-positioned to thrive in the changing landscape.
- In light of the new labelling guidelines for green funds, environmental science, climate-change, and sustainable investment funds are now required to ensure a substantial portion, at least 80%, of their investments adhere to sustainable investment objectives, thereby raising the bar for funds claiming green credentials.
- To thrive in the evolving European sustainable finance landscape, finance and investing sectors must collaborate to understand and meet the changing regulatory requirements, such as ESMA's guidelines, which aim to increase transparency, tighten sustainable investment claims, and protect investors against misleading ESG marketing.
