Authentic Green Finance: The New Regulatory Requirements around ESG Funds
The Inflection Point for Sustainable Investing
The growth of sustainable investing over the last decade has turned the global asset management industry on its head. Trillions of dollars of capital have poured into Environmental, Social, and Governance (ESG) funds, driven by a growing appetite for ethical, responsible and future-oriented portfolios among investors. But the explosive growth of ESG-labeled products has also raised concerns about transparency, accountability and, above all, greenwashing overstating environmental credentials without meaningful action or impact.
To address these issues, several regulatory standards have emerged recently in Europe that aim to safeguard authenticity within green finance. As ESG becomes a prominent issue on the global agenda, the new guidelines issued by the European Securities and Markets Authority (ESMA) are expected to bring about greater clarity and credibility to the classification of ESG funds and provide a safeguard for investors against false environmental sustainability claims.
The New ESG Labelling Framework: Highlights of Changes
As of May 2025, investment funds in Europe with a sustainable or ESG-related label will have stricter requirements for disclosure and portfolio composition. Under the proposed rules, a fund will only be allowed to refer to terms such as “sustainable,” “green” or “ESG” in its name if it satisfies certain criteria, including:
At least 80% of assets shall be directed towards ESG, sustainable or environmental goal aligned activities based on clear, quantifiable metrics.
Funds playing the environmentally sustainable card, explicitly won't invest in fossil fuels.
The investment strategy, sustainability goals, ESG scoring methodology and potential adverse environmental and social effects will have to be disclosed, in a clear manner.
This comes in addition to the EU Sustainable Finance Disclosure Regulation (SFDR) and the EU Taxonomy and further contributes to the integrity of ESG-related financial products.
The key takeaways for Asset Managers and Investors
These new rules will be game changing for asset managers when it comes to their fund design and how they market their products. Already, we are seeing managers being forced to review the composition of their portfolios to ensure that the sustainability claims made to investors truly stand up to scrutiny. Non-compliant funds face the prospect of rebranding, restructuring or asset reallocation to meet the 80% threshold and remove ESG-related terms from their branding.
This tightening of regulation is compounded by the extended complexity of regulatory compliance and disclosure requirements, leading to more robust integration of ESG data, internal audit processes, and third-party validation of environmental claims. Although this may initially increase operational costs, it will ultimately enhance market confidence and facilitate capital attractions towards truly sustainable investments.
These standards bring increased clarity, comparability and protectiveness, from an investor viewpoint. Institutional and retail investors would be more effectively able to identify real ESG plays from green-washed marketing, lessening the likelihood of misallocation and value dilution across their portfolios.
The Bigger Picture: Restoring Trust in ESG Investing
The tightening of ESG fund regulations is part of a broader push toward standardization and credibility in sustainable finance. Amid rising scrutiny from regulators, media, and investors alike, market players are being held to higher standards of transparency and accountability.
This shift is not just regulatory it reflects a fundamental evolution in investor expectations. Today’s capital is not only seeking returns, but also real-world impact. As ESG funds move toward more robust frameworks, green finance will no longer be a branding exercise but a measurable commitment to sustainable development.
Moreover, this transformation is likely to spread beyond Europe, setting a precedent for other jurisdictions, including North America and Asia, to adopt similar ESG fund labelling and disclosure practices.
The Journey Toward True Sustainability
Article puts forward the latest move to challenge green washing narrative by tightening up the standards for ESG funds. These reforms are intended to rebuild trust, ensure that capital both in the ESG and the financial world are directed to genuinely sustainable outcomes, and to eliminate greenwashing and provide for transparency.
For ESG investing, this marks the beginning of a new stage of maturity, where both fund managers and investors will need to adjust to a more demanding and trusted sustainable finance landscape. Over the long term, this will not just make ESG portfolios more resilient, but also help the wider shift to a low-carbon, inclusive, future-proof global economy.