A silent revolution is underway in Europe’s asset management industry. As of today, May 21, 2025, new regulations from the European Securities and Markets Authority (ESMA) are forcing investment funds to put their money—and names—where their mouths are.
From this day forward, asset managers can no longer casually use terms like “green,” “ESG,” or “sustainable” to market their products unless they meet stringent regulatory benchmarks. The goal is simple but significant: put an end to greenwashing, the practice of exaggerating environmental credentials to attract ethically-minded investors. And with nearly 20% of sustainable funds already revising their names ahead of the deadline, the industry is clearly taking the signal seriously.
A Long-Awaited Reckoning
The shift isn’t sudden. It’s the culmination of months of preparation and years of growing scrutiny. Since the explosion of interest in environmental, social, and governance (ESG) investing around 2019, thousands of new funds have flooded the market under the sustainability banner. By 2023, over 4,500 so-called sustainable funds had been launched across Europe, according to Morningstar.
However, behind the marketing buzz, many of these funds failed to meet even basic sustainability standards. Some had holdings in fossil fuels, others lacked any transparency on how they defined or measured ESG performance. The term “green” became so diluted it was nearly meaningless.
That’s what ESMA set out to fix.
“These new guidelines introduce much-needed discipline,” says Olivier Paté, sustainability product specialist at BNP Paribas Asset Management. “Investors deserve to know what they’re putting their money into. A fund shouldn’t be able to brand itself as ESG just because it has a few tech stocks and a recycling company in its portfolio.”
Drawing a Regulatory Line
Under the new ESMA rules, asset managers must now comply with two major requirements if they want to label a fund with sustainability-related terms.
First, they must adhere to a list of exclusions based on the criteria used for Paris-Aligned Benchmarks (PABs). This includes avoiding investments in companies involved in fossil fuels, weapons, tobacco, and other environmentally or ethically contentious sectors.
Second, any fund calling itself “sustainable” must have at least 50% of its assets in investments that meet the EU’s definition of “sustainable” under the Sustainable Finance Disclosure Regulation (SFDR). This ensures that the fund isn’t just avoiding bad actors, but is actively contributing to positive environmental or social goals.
This combination of exclusionary and inclusionary standards is a sharp departure from the past, when fund managers had broad discretion to define sustainability on their own terms. It also makes greenwashing significantly harder to get away with.
Name Changes—and Strategic Retreats
The immediate consequence of these rules has been a wave of fund name changes. Morningstar reports that 359 funds have already rebranded to comply, and more are expected to follow.
Some have opted for minor adjustments—removing vague descriptors like “eco-friendly” or “climate-conscious.” Others have undergone more dramatic rebranding, dropping all references to sustainability after internal reviews revealed they couldn’t meet the new thresholds.
For instance, a fund previously called “Green Future Global Equity Fund” might now simply be labeled “Future Global Equity Fund” if it still holds fossil fuel stocks or doesn’t meet the sustainable investment minimum.
These changes aren’t just cosmetic. They represent a redefinition of identity and strategy for many firms that had leaned heavily into the ESG trend.
“This is forcing asset managers to take a hard look at what they’re actually doing versus what they’re saying,” says Martina Keller, a regulatory compliance advisor based in Frankfurt. “Some will rise to the challenge and improve their portfolios. Others will pivot away from ESG altogether.”
Rebuilding Trust with Investors
At the heart of the reform is a bid to restore investor confidence. Surveys in recent years have shown growing skepticism among retail and institutional investors about the credibility of ESG claims. When virtually any fund can call itself sustainable, the label loses its value.
“Investors want to invest in line with their values, but they need transparency and consistency to do that,” says Antoine Lemoine, a Paris-based sustainable finance consultant. “What ESMA is doing is similar to what organic food certifications did for groceries. It’s putting a label that means something.”
Indeed, the EU is attempting to standardize what has long been a fragmented space. While national regulators have taken steps in the past, this is the first truly unified, pan-European framework that enforces sustainability claims in fund labeling.
Winners and Losers in the New Era
The new rules are likely to create winners and losers within the asset management industry.
Firms that have genuinely embedded ESG into their investment process—and have the data to prove it—stand to benefit. Not only will they be able to keep their sustainable branding, but they may also attract investors fleeing from rebranded or downgraded funds.
On the other hand, funds that treated ESG as a marketing gimmick are now exposed. Some may retreat from the space entirely, especially if the cost of compliance—such as portfolio restructuring and enhanced reporting—outweighs the commercial benefit.
“There’s definitely a shakeout coming,” says Keller. “But in the long run, this should elevate the entire sector. Those who remain will be stronger for it.”
Beyond the Label: A Cultural Shift
While the new rules are focused on names and labels, their implications go much deeper. They’re catalyzing a broader cultural shift within finance—one that emphasizes accountability, transparency, and impact over marketing.
Compliance won’t just mean changing a few words on a prospectus. Asset managers will need to enhance their data collection, improve ESG scoring methodologies, and adopt more rigorous due diligence processes. Communication teams will have to work closely with analysts to ensure product messaging aligns with underlying holdings.
It’s a tall order, but one that many believe is necessary for the evolution of sustainable finance.
“Ultimately, the ESMA rules are a wake-up call,” says Lemoine. “They remind the industry that ESG isn’t about branding. It’s about real-world outcomes—reducing emissions, improving labor practices, supporting innovation. If a fund can’t demonstrate that, it shouldn’t pretend to.”
Looking Ahead
As the first round of changes rolls out, eyes are now turning to how rigorously national regulators will enforce the ESMA guidelines—and whether similar initiatives will follow in other regions.
In the U.S., the Securities and Exchange Commission (SEC) has signaled a growing interest in tackling ESG fund labeling but has yet to introduce comprehensive rules. Meanwhile, other markets, including Australia and Canada, are watching Europe closely to see how investors and fund providers respond.
Back in Europe, the message is clear: the days of superficial ESG are numbered.
For investors, this may finally bring the clarity they’ve been seeking. For asset managers, it’s a challenge—but also an opportunity. Those willing to commit to transparency and impact will likely thrive in the new regulatory landscape.
And for the broader sustainability movement, ESMA’s actions could be a turning point—transforming ESG from a branding exercise into a robust, reliable investment strategy that truly serves people and the planet.