Adding ESG-related terms to the names of ESG funds can boost inflows by 8.9% in the first year. But without clear rules, the risk of greenwashing is high. This is the conclusion from ESMA, the European Securities and Markets Authority.
According to a new study published by ESMA, including an ESG term in the name of an investment fund can increase capital inflows by nearly 9% within a year. The research analyzed more than 1,500 active UCITS funds between 2016 and 2024, focusing on changes to ESG fund names.
The report shows that ESG funds that added words like “ESG,” “green,” or “climate” to their names experienced an average net inflow increase of 2.2% over the two quarters following the change, leading to a cumulative effect of +8.9% in the first year.
This highlights the strong appeal of sustainable language across financial markets. However, it raises concerns about transparency, as changes to ESG fund names do not always reflect real shifts in portfolio composition. To prevent greenwashing, ESMA has issued new guidelines on fund naming that will take effect in 2025.
ESG funds: the new ESMA guidelines for ESG fund names
To address the risk of greenwashing, ESMA released its Guidelines on funds’ names using ESG or sustainability-related terms in May 2024, setting strict standards for using ESG-related labels in fund names:
- Minimum 80% threshold: at least 80% of a fund’s investments must align with the ESG characteristics claimed.
- Mandatory exclusions: funds must avoid investing in companies associated with controversial weapons, tobacco, or violations of UN/OECD principles.
- Additional restrictions for terms like “sustainable,” “transition,” or “impact”: these funds must exclude fossil fuel activities and ensure significant investments in sustainable assets.
ESG funds: a growing trend facing new challenges
Between 2009 and 2024, the share of European funds with ESG-related terms in their names rose from less than 3% to about 9%, largely driven by UCITS funds, which reached 15%. The period of strongest growth was between 2018 and 2021. Since 2022, however, growth has slowed, influenced by the introduction of the SFDR regulation and stricter regulatory oversight.
The most frequently used terms include ESG, sustainable, impact, climate, and transition, with environmental terms showing the strongest growth and appeal among investors. “ESG” alone now accounts for about 40% of all terms added to ESG fund names since 2021.
ESG fund names: inflows driven mainly by environmental terms
What impact does ESG naming have on capital inflows? ESMA’s analysis reveals a clear trend: adding environmental terms such as green, climate, or ESG is the only strategy that consistently drives significant inflows.
Specifically:
- Funds that added new environmental terms to their names saw cumulative inflows increase by +16% over the first year.
- Terms related to social or governance aspects did not show statistically significant effects.