Starting May 21, 2025, investment funds in the EU with sustainability claims in their name must be able to prove that they are truly investing sustainably. Ahead of those new rules, more than 640 European investment funds have already changed their names.
The new guideline was created by the European Securities and Markets Authority (ESMA). It says that if a fund uses words like “sustainable,” “green,” or “ESG” (Environmental, Social, and Governance), it must be backed by actual sustainability performance, measurable targets, or clearly defined investment criteria to support those claims.
According to Morningstar data, an estimated 335 European funds with ESG-related terms in their names rebranded in the first quarter of the year 2025, including 116 that dropped ESG-related terms. Meanwhile, the number of funds swapping ESG-related terms in their names more than doubled in the past three months.
The acronym “ESG” overtook “sustainable” or “sustainability” to become the most removed term during the three-month period. It was dropped by 128 funds, 96 of which were passive strategies. “Sustainable” or “sustainability” were ditched by more than 90 funds and added by only one in the quarter, while the word “climate” saw 16 additions compared with 11 removals. You can download the full Morningstar report here.
Greenwashing and misleading sustainability claims
The new guideline is part of a broader effort by the EU to ensure transparency in the rapidly growing field of sustainable investing. The EU is trying to stop greenwashing, the practive that a company or fund falsely claims environmental benefits.
There are around 4,300 funds in the EU that still use sustainability-related words in their names. Morningstar looked at 2,500 of them and found that over 1,600 hold stocks that may breach the Paris-aligned and climate transition benchmark exclusions. This includes significant exposure to sectors like energy, industrials, and basic materials.
Reshape investment portfolios
The new ESMA rules don’t just target marketing language, they could also reshape portfolios. Financial News London estimated a year ago that fund managers may need to divest around €40 billion in assets to maintain ESG classification. This could include selling off holdings in fossil fuel producers, defense companies, or other industries excluded from EU climate benchmarks.
To stay compliant, funds will have to conduct deep audits of their holdings, align with EU sustainability benchmarks, and ensure transparency in how ESG goals are set and measured. The most affected stocks will be TotalEnergies, Tencent Holdings and Shell, predicts Morningstar.
Genuine sustainability
For retail and institutional investors alike, the regulation offers a long-awaited safeguard against misleading fund labels. By cleaning up vague or misleading ESG claims, the EU hopes to restore credibility in a market where genuine sustainable strategies can be difficult to discern.
The policy is closely linked to the EU’s Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy, two pillars of Europe’s plan to redirect capital toward environmentally and socially responsible businesses.