Approximately two thirds of funds with ESG terms in their names changed their names, with many dropping ESG terms or using terms with less stringent requirements, and half updated their investment policies, following new guidelines for funds using ESG or sustainability-related terms in their name released last year by EU markets regulator the European Securities and Markets Authority (ESMA), according to a new ESMA study.

The ESMA study follows the release by the regulator in May 2024 of its finalized guidelines for the use of ESG and sustainability-related terms in investment fund names, with a deadline to comply with the new guidelines in May 2025. According to ESMA, the new guidelines were established as investor demand for ESG-focused funds has increased sharply, creating incentives for asset managers to include sustainability-related terms in fund names to attract investors, leading to an increased risk of greenwashing.

Under the new guidelines, funds using ESG, sustainability, or impact terms, or environmental terms such as “green,” “environmental,” or “climate,” are required to meet investment thresholds including having at least 80% of assets in investments used to meet the sustainability characteristics of the fund, and to follow the exclusion criteria for Paris Aligned Benchmarks (PABs). The new guidelines also introduced a “transition” category, which includes funds labeled with terms such as “improving,” “progress,” “evolution,” and “transformation.” The transition category also includes an 80% investment threshold, while applying exclusions from the EU’s rules for Climate Transition Benchmarks (CTBs), instead of the more stringent PABs, in order to enable investment in companies deriving part of their revenues from fossil fuels.

According to ESMA’s new study, which examined a sample of 924 funds, 64% of funds changed their names in the lead-up to the May 2025 compliance deadline. Among those that changed their names, 61% removed all ESG terms – although many adopted alternative terms – while 21% moved to use and ESG term with less stringent criteria under the guidelines, such as changing from “Sustainable” to “ESG.” ESMA noted that a relatively higher share of actively managed funds downgraded to less stringent criteria names instead of dropping ESG terms altogether, while passive index-tracking funds were much more likely to drop the ESG terms.

One of the key findings of the study was the emergence of new terminology for fund names following the release of the guidelines, with around half of the funds that dropped ESG names replacing them with terms such as “Scored,” “Screened,” “Select,” “Advanced,” or “Committed.”

In its discussion paper, ESMA said:

“The emergence of alternative terminology could be problematic for supervisors if these terms are intended to signal ESG-related features (e.g. through positive screening using ESG ratings). ESMA will monitor evolving sustainability-related terminology in fund names.”

The study also found that more than half of the sample (56%) updated their investment policies following the release of the guidelines, with 475 funds adding explicit references to exclusions, 179 funds updating minimum investment thresholds – most frequently to reference ESMA’s 80% guidance – and with other policy changes in areas such as screening methodologies for identifying and ranking sustainable investments, as well as the calculation of their share within the funds’ total investments. Consistent with the findings of companies changing names, most of the observed changes to investment policies were made by active funds, according to the study.

The study found that many funds changed both their names and their investment policies following the release of ESMA’s guidelines, with around one third of those that changed names also deciding to update their investment policies.

In the paper, ESMA said:

“These results indicate that the ESMA Guidelines have driven convergence in the use of ESG terms by improving the alignment of fund names with their respective investment strategies. The Guidelines have also enhanced investor protection by reducing greenwashing risks: funds with less ambitious ESG strategies have removed ESG terms from their names, and funds retaining ESG terminology appear to be greening their portfolio relatively faster than other funds.”

Click here to access the ESMA study.