Over the past decade, the ESG fund market has seen a sharp rise in the use of environmental, social, and governance (ESG) terms in fund names. This growing reliance on ESG fund taxonomy reflects both stronger investor demand for sustainable finance and the impact of evolving regulatory frameworks. According to recent data, funds that include ESG-related terms in their names attract, on average, 8.9% more capital than non-ESG funds.
These findings come from a recent report by the European Securities and Markets Authority (ESMA), titled “Fund names: ESG-related changes and their impact on investment flows”. The report analyzes a dataset of over 71,600 European funds, including UCITS and AIFs, from 2009 to 2024.
Rise in the use of ESG fund taxonomy
The share of funds using ESG terms in their names rose from under 3% before 2015 to nearly 9% by the second quarter of 2024. Among UCITS, this figure reached 15% by mid-2024, signaling a stronger tendency to adopt ESG terminology compared to alternative investment funds (AIFs).
This growth has not been linear. A sharp increase occurred between 2019 and 2020, likely triggered by the introduction of the Sustainable Finance Disclosure Regulation (SFDR) and a broader regulatory push. However, since mid-2021, the pace has slowed due to heightened scrutiny and concerns over greenwashing raised by regulatory bodies.
ESG names deliver a tangible investment advantage
Including ESG-related language in a fund’s name has a measurable impact on capital flows. On average, the ESG fund taxonomy leads to an 8.9% cumulative increase in fund inflows during the first year, assuming all other factors remain equal.
The effect is even more pronounced for funds that use environmentally focused terms, which saw a 16% boost in capital over the same period. Interestingly, this positive trend does not extend to social or governance-related terms, nor to generic sustainability labels, which showed no statistically significant impact.
A shift toward standardized ESG terminology
Over time, the ESG terminology used in fund names has evolved from a wide variety of unique expressions toward more standardized language. After 2021, over 40% of ESG-related name additions consisted simply of the term “ESG,” indicating a clear industry convergence around uniform labeling.
ESG terms have been classified into three main categories:
| Category | Description | Recent growth trend |
|---|---|---|
| Social/Governance (S/G) | Terms indicating social or governance features, such as “social”, “governance” | Moderate growth until 2020, spike in 2022, slowdown over the past two years |
| Environmental/Impact | Terms related to the environment, such as “green”, “climate”, “impact” | Stronger growth, currently the dominant category |
| Sustainability-related | Terms derived from “sustainable”, such as “sustainability” | Initial growth followed by a decline in recent years, likely due to evolving terminology |
This trend also suggests a gradual move away from broader or vague terms like “sustainable,” in favor of clearer, more specific language that aligns with regulatory expectations.
Adding, removing, or replacing ESG terms
Between mid-2019 and mid-2021, a surge of funds added ESG terms to their names. However, from mid-2022 onward, there has been a modest uptick in the number of funds removing or replacing those terms. This likely reflects increased regulatory scrutiny and growing concerns about misleading sustainability claims.
In response, ESMA has issued new guidelines on ESG fund naming, set to take effect on May 21, 2025. These guidelines are designed to ensure that a fund’s name accurately reflects its underlying investment strategy and ESG commitments.