A wave of regulatory reform is reshaping the sustainable investing landscape. From SFDR Level 2 to ESMA’s guidelines on ESG fund naming, policymakers are imposing stricter standards on sustainability-related fund claims. With some asset managers unable or unwilling to make the methodology and portfolio overhauls required to meet the new standards, many offenders are being weeded out.
But that doesn’t mean the job is done. Today, fund selectors still face several persistent challenges when assessing sustainable strategies.
Products from the same asset manager can operate under inconsistent standards. Key data points backing up ESG claims are often buried, unverifiable, or unavailable. Even when a fund passes the initial screening process, a lack of in-house ESG expertise can result in minimal ongoing support and no clear plan for keeping up with regulatory change.
These aren’t minor frustrations.
They undermine trust in the broader ESG ecosystem. They expose clients to sustainability risks they didn’t knowingly sign up for. And they place selectors in a difficult position, responsible for justifying mislabelled allocations and even having to exit positions at a loss to maintain portfolio integrity.
Yet despite these issues, there are genuinely sustainable products out there. With this in mind, here are four critical checks to help separate the wheat from the chaff.
1. Demand the details
Look past the label. Focus on the detail.
If a fund markets itself as sustainable, it should provide clear, detailed, accessible documentation setting out its ESG methodology including:
1. A top-down theory of change, explaining how the fund’s investments support specific sustainable outcomes and how those outcomes are measured.
2. A bottom-up scoring process, explaining the criteria used to assess portfolio companies and justify their inclusion.
This is the baseline for assessing authenticity and holding managers accountable. If the methodology isn’t publicly available or consists only of vague, aspirational language, it’s a big red flag.
2. Check for lip service
A strong methodology is essential, but it’s not enough.
To be confident in a fund’s credibility, you need to verify that the stated ESG process is being applied in practice.
A good acid test is to select a few portfolio holdings yourself and ask the manager to explain why each one belongs in the fund. At minimum, they should provide a short report on each company, an explanation of how it was scored, and justification for its weighting in the fund.
If the manager can deliver this, it’s a strong indicator that the ESG integration is real rather than simply marketing. If they can’t, it could point to gaps in execution or a lack of in-house expertise.
3. Work out who you’re buying into
Often overlooked but arguably most important is assessing the team behind the fund.
It’s important to understand their experience in sustainable investing and be assured in their preparedness for future regulatory shifts.
Understand their ESG-specific resourcing: Do they have a dedicated team? What level of client support do they provide? What’s their take on the latest regulatory developments and how do they plan to respond?
Equally, look at the asset management company’s track record. If it has repeatedly had to change its approach or walk back previous ESG claims in response to policy changes, it may indicate a reactive rather than a pro-active approach to sustainability.
That’s a red flag. You want to work with managers who treat sustainability as a long-term responsibility, not a short-term sales opportunity.
4. Verify real accountability
Even the best ESG strategies need oversight. A fund can have a solid methodology and a strong team. But if there’s no external accountability, the risk of greenwashing remains high, leaving the ESG team to essentially mark their own homework.
Always check any ESG-labelled fund has a sustainability committee with several independent members, clear terms of reference, and examples of recent meetings. This kind of governance approach signals that the ESG process is both serious and consistent.
You should also ask how ESG risks are managed in the portfolio: What’s the process for divesting if a company breaches sustainability or governance standards? Can the manager demonstrate a clear exclusion policy with examples?
If these backstops aren’t in place, it’s another sign to walk away.
A better way forward
As the regulatory environment continues to evolve, fund selectors play a key part in upholding the high standards in sustainable investing.
By demanding detail, verifying application, scrutinising teams, and ensuring oversight, you can confidently identify funds going beyond the label and delivering true sustainability to investors.
By Kate Naumova, Associate Director, Sustainability at ARK Invest Europe
