EU Funds:

Has Regulation Impacted Climate Performance?

An assessment of EU fund climate performance amidst increasing regulation

This report assesses the European climate-related and ESG fund market in the context of the incoming European Securities and Markets Authority (ESMA) fund naming guidelines and existing Sustainable Finance Disclosure Regulation (SFDR). It finds that 60% of funds identified as using climate-related terms in their naming do not disclose under SFDR Article 9, the category designated for funds with a primary sustainability objective. The research also finds that 33% of assessed climate-related and ESG equity funds have higher levels of fossil fuel investment than green investment, and that 89% of these funds have portfolios misaligned with the International Energy Agency’s (IEA) Net Zero Emissions by 2050 Scenario.

• The research also finds that equity funds using ‘Sustainability’, ‘Environment’, ‘Transition’, and ‘ESG’ terms in their naming on average have portfolios which are misaligned with the IEA Net Zero Scenario. In fact, the average 'ESG' equity fund's portfolio is more misaligned with IEA Net Zero than funds using no ESG or climaterelated naming. The portfolios of funds using ‘Sustainability’ and ‘Environment’ naming are on average misaligned with IEA Net Zero but to a lesser extent than funds with no climate naming. Funds using 'Impact' in their naming are the only category in this assessment that on average receives a positive portfolio alignment score with IEA Net Zero.
• In recent years, the European fund market has seen a significant increase in interest in sustainable investing, leading to a surge in investment funds using ESG or climate-related terminology in their branding. Regulatory interventions have followed to ensure transparency and prevent greenwashing. The EU SFDR, which came into force in March 2021, provides a framework for consistent sustainability-related disclosures for financial products with certain sustainability goals. Three levels are defined into which funds must self-categorize:

• Funds with no sustainable characteristics fall under Article 6.
• Article 8 is aimed at funds which promote environmental or social characteristics.
• Article 9 is aimed at funds which have a primary investment objective of

• Independently, in May 2024, ESMA published proposed guidelines for funds with sustainability-related terms in their names. The guidelines are separate from SFDR and set out six categories, four of which are directly climate-related: ‘Sustainability’, ‘Environment’, ‘Impact’, and ‘Transition’. These are the categories assessed in this report. Funds are subject to category-dependent investment criteria, such as minimum sustainable investments and exclusion of certain fossil fuel companies. The term ‘ESG’ falls within ESMA’s ‘Environment’ category, however due to the term’s broad usage, this report assesses funds using ‘ESG’ as an independent fund category. ESMA categories which are not directly climate-related are not assessed here. ESMA fund naming guidance applies since 21st November 2024, from which point pre-existing funds have 6 months to comply.
• This research analyzes 17,529 EU-domiciled bond and equity funds, of which 8,760 use ESG or climate-related names or opt to disclose under SFDR Article 8 or 9. The analysis finds a notable disparity between funds using ESG or climate-related naming and those disclosing under SFDR. Despite Article 9 being designated for funds with a sustainable objective, 71% of funds using ‘Sustainable’ naming terminology do not disclose under Article 9.
• Further climate performance analysis is conducted on 3,535 EU-domiciled equity funds which either use ESG or climate-related terms in their name or opt to disclose under SFDR Article 8 or 9. Climate performance is measured through three FinanceMap metrics: fossil fuel exposure, green exposure, and net zero alignment score. The analysis finds that there is a substantial disconnect between ESG or climate-related fund naming and portfolio climate performance.
• The research finds that equity funds using ‘ESG’ in their name cumulatively invest more in fossil fuel companies (€7.7 billion) than companies identified as green (€7.2 billion) representing 2.6% and 2.4% of total ‘ESG’ fund value assessed, respectively. The ESMA fund naming guidelines will require ‘ESG’ funds to exclude fossil fuel investments in line with Article 12 of the EU Paris-Aligned Benchmarks . On average, funds in the ‘Impact’, ‘Transition’, and ‘Environment’ categories are all at least 4 times more invested in green companies than fossil fuel companies.
• The assessment of funds using different SFDR disclosure levels finds that Article 8 funds cumulatively invest more in fossil fuel companies (€43.8 billion) than green companies (€39.4 billion). Meanwhile, Article 9 funds cumulatively invested 20 times more in green (€11.2 billion) than fossil fuel companies (€581 million).

For any questions about this report, please reach out to financemap@influencemap.org.