“Only when the tide goes out, do you discover who’s been swimming naked.”
This quote from Warren Buffett is aptly suited to describe today’s sustainable finance landscape. In the early 2020s, ESG funds moved swiftly into the mainstream, supported by ambitious policy signals from the EU, such as the European Green Deal and the wide array of acronyms it spanned. Asset managers adapted their strategies to meet the growing expectations of sustainability-minded investors, and by the end of 2023, the assets under management (AuM) of funds disclosing as per Article 8 and Article 9 of the Sustainable Finance Disclosure Regulation (SFDR) reached €6.2trn – a year-on-year increase of €1trn.
But tides inevitably turn. The first ESG boom — driven by compliance requirements, taxonomy mechanics and disclosure mandates — appears to have peaked. While the regulatory momentum is seemingly slowing and the spotlight fading, sustainable finance is entering a new phase of strategic recalibration where conviction becomes the real differentiator.
In this phase, ESG labels — a mainstay of the traditional compliance-driven model — might, going forward, make way for a sustainability performance-focused approach where ESG fund strategies focus on how sustainability impacts the business model through revenues and/or costs at the investment level rather than just compliance.
The great unmasking: Conformists vs. believers
When the SFDR was issued, many funds rushed to adopt its language without fully embedding or understanding its ethos and evolving interpretation of the abstract requirements. Article 8 was intended to reflect funds that promote environmental or social characteristics. However, it inadvertently became a quasi-label that blurred expectations, enabling the proliferation of strategies that nodded to ESG principles without necessarily transforming underlying practices.
That ambiguity is now being tested. The ESMA fund naming guidelines, which have applied for new funds as of November 2024 and will apply for existing funds as of May 2025, demand minimum ESG requirements for funds including ESG related terms in their name. For example, UCITS and AIFs wishing to use sustainability-related terms must inter alia ensure at least 80% of assets contribute to environmental or social objectives, and to explicitly exclude sectors like fossil fuels.
The rigour and challenges associated with the rules – for instance, applying identically to open- and closed-ended funds, or stipulating specific exclusion criteria to be verified for which data points are very rare – have led many funds to drop ESG terms from their names to avoid falling under the scope of the guidelines.
This mirrors the ‘downgrading’ wave of late 2022 in the lead-up to the application of the SFDR Regulatory Technical Standards, where several funds reclassified from Article 9 to Article 8. While some of these moves reflect a more cautious interpretation of regulatory guidance, others reveal the lack of depth in prior ESG claims.
Still, not all exits reflect retreat. Irrespective of ESMA’s compliance-driven fund naming guidelines, some asset managers are holding the line — maintaining Article 9 classification or reasserting ESG commitments despite diminishing incentives. These asset managers embed ESG not because they must, but because they are convinced that sustainability practices are common-sense business practices that will deliver long-term value for their clients and investors.
This belief is resonating more and more with investors. According to the 2024 PwC Global Investor Survey, 72% of investors say that how a company manages sustainability-related risks and opportunities is an important factor in decision-making.
The pressure is not only regulatory. As the ESMA deadline approaches, some institutional investors are beginning to reassess products that have removed ESG terminology, with indications that alternative strategies may be sought where rebranding appears to signal reduced ambition.
A new take on sustainable finance
If the ESG boom was defined by regulatory frameworks, then this next chapter may be shaped by something quieter but more enduring: sustainability performance-led strategies driven by a growing segment of asset managers who continue to integrate ESG principles even when not required to in order to capture upside value and limit downside risks. Their strategies favour intentionality over minimum regulatory requirements — prioritising climate resilience, biodiversity, or social inclusion as pathways to long-term value creation or at least preservation, whether or not they fit neatly within SFDR categorisation. Their ESG lens remains, even if their quasi-labels fade.
This approach is resonating with investors. According to the aforementioned PwC survey, 71% of investors agree that companies should embed ESG/sustainability directly into their corporate strategy. Yet, the recent dilution of the Corporate Sustainability Reporting Directive (CSRD) through the European Commission’s Omnibus proposal has introduced new challenges. Asset managers who were expecting a reliable influx of ESG data from companies must now look elsewhere. In place of standardised reporting, firms must turn to proprietary data tools, deeper investee engagement, or new forms of assurance to fill the gap.
This has exposed what could be described as a “regulatory mirage”: reducing reporting in theory but increasing due diligence in practice.In this landscape, only those with deep-seated conviction will continue integrating ESG meaningfully. Sustainability becomes not just a philosophy, but a litmus test.
The reckoning: Will capital follow conviction?
When regulation becomes insufficient to define ambition, values-driven sustainability emerges as a test of what truly endures. As regulatory clarity stalls, investors are now examining the substance behind the strategy and the labels. What matters is no longer what a fund is called, but what it commits to and delivers.
Transparency, too, is evolving, becoming less about procedural formality and more about earning trust. Fund managers who can articulate why their strategy matters and how it delivers, will be better placed to win trust than those who merely comply. The significant revisions to standardised disclosure mechanisms like CSRD mean that genuine ESG integration now demands more bespoke approaches, which puts pressure on asset managers not just to comply and rely on labels or sustainability-related terms, but to lead.
If investors continue to favour outcomes over optics, we may see fewer ESG-labelled funds in the future, but better and more meaningful ESG investing. In this sense, values-driven investing will not replace regulation, but it might be what finally makes it matter.
