Asset managers are scrambling to rebrand their sustainable investment funds as stepped-up regulatory crackdowns on greenwashing risk deepening fragmentation in the industry, experts warned at the Morningstar Sustainable Investing Summit in Amsterdam.
Hortense Bioy, global director of sustainability research at Morningstar, suggested that terms like “sustainable” and “ESG” may soon disappear from fund names to avoid greenwashing allegations. This shift could reshape the two trillion seven-hundred billion dollars global sustainable mutual fund industry.
“We will see a surge in rebranding activity in the fourth and first quarters as managers work to comply with local regulations,” Bioy told delegates. “The most commonly used terms, such as ‘sustainable’ and ‘ESG,’ are likely to be dropped the most in this category.”
Fragmented regulatory landscape
The rebranding wave is driven by uncertainty over the evolving sustainability requirements, as the UK and the EU pursue different regulatory paths. The EU’s Sustainable Finance Disclosure Regulation (SFDR) and the UK’s Sustainability Disclosure Requirements (SDR) have created a fragmented landscape, complicating matters for asset managers and investors alike.
Under SFDR, funds in the EU are classified as “Sustainable,” “Transition,” or “ESG Mixed,” with a strong emphasis on transparency and greenwashing prevention. Meanwhile, the UK’s SDR uses a different system, classifying funds as “Sustainable Focus,” “Sustainable Improvers,” or “Sustainable Impact.” From May 2024, UK funds will also be subject to an anti-greenwashing rule, requiring companies to substantiate their sustainability claims.
‘Challenging time’
Bioy warned of a potentially confusing transition, with a likely divide between funds labelled as sustainable and those that incorporate ESG without such labelling.
“It’s going to be interesting to see how this unfolds as regulators offer more guidance,” Bioy said. “This will be a challenging time for the industry but also an opportunity to build greater trust and transparency in sustainable investment.”
“We’re seeing more rebranding this year than last, as managers aim to stay ahead of the regulatory changes,” she added. “Some are even removing sustainability terms outside the UK, though their core strategies remain unchanged.”
The rapid growth of sustainability funds has attracted criticism, with some arguing that fund managers are capitalising on the demand for green products without necessarily delivering meaningful environmental or social impact.
Asset owners still see future for ESG investment
Other speakers at the conference emphasised that the ESG debate has reached a turning point. Catalina Secreteanu, managing director of ESG Solutions at Morningstar, pointed out that ESG factors are currently incorporated in just 35 percent of globally invested assets. She underscored the need for “system-level stewardship” and called for policy reforms that encourage companies and investors to adopt more sustainable practices.
Asset owners however made clear they still see a future for ESG. A director from a UK pension fund noted that government intervention is crucial for achieving “net zero” carbon emissions. The global head of ESG at an international asset manager argued that asset owners should align their mandates more closely with sustainability goals.
A sustainability expert advising asset owners took a harder line, suggesting that mandatory transition plans are needed to drive genuine change. “It’s time to stop playing Mr Nice Guy,” he said.