Recent fund rules have reduced greenwashing risk for EU and UK investors, but reforms to Sustainable Finance Disclosure Regulation (SFDR) need sharper teeth to increase protection, according to new analyses.
German NGOs Urgewald, Finanzwende, and Facing Finance found that the introduction of fossil fuel exclusions for funds using sustainability-related terms in their names led to divestments worth around €3.3 billion. However, around 600 of the 4,000 funds with green names responded to the rules from the European Securities and Markets Authority – which too effect in May 2025 – by changing their names, avoiding the need to sell securities worth €11.4 billion.
The analysis also found that the proposed introduction by SFDR 2.0 of a ban on investments in firms pursuing fossil fuel expansion projects in funds using the new ‘sustainable’ and ‘transition’ categories would lead to divestments worth €5 billion. The NGOs said the extension of the ban to funds categorised by SFDR 2.0 as ‘ESG basics’ would require a further divestment of €100 billion held in companies that are pursuing fossil fuel expansion projects or have not communicated a Paris-aligned coal exit date.
A separate study by MainStreet Partners found that ESMA’s naming guidelines and the introduction of similar rules under the UK’s Sustainable Disclosure Requirements (SDR) regime had improved alignment between fund names and sustainability commitments, with the prevalence of naming-related penalties falling from 7% to 4.6% over 12 months.
The firm said that greenwashing risk had stabilised, with around 25% of SFDR Article 8 funds scoring below its 3.0 (out of 5.0) threshold for ‘ESG-Assessed’, and 30% of Article 9 funds scoring below the 4.0 ‘Sustainability-Assessed’ threshold.
Under SFDR 2.0, current Article 9 funds will largely be recategorised as ‘sustainable’ while Article 8 funds will mainly fall into the ‘ESG basics’ bucket, with some classified in the new ‘transition’ category.
Mainstreet said SFDR 2.0 would lead to stricter standards and clearer expectations for sustainable funds in Europe. “While many funds may need to adjust their strategies or reposition under the new categories, the regulation ultimately offers a more coherent and credible system for defining sustainable investment,” it said.
A new position paper from the European Sustainable Investment Forum (Eurosif) said SFDR 2.0 would need to “establish clear, practical and robust criteria tailored to different asset classes” across SFDR categories to prevent greenwashing.
Recommendations included setting the threshold for ‘positive contribution’ at the technical level to reflect differences across asset classes, and defining the ‘proper justification’ required for the positive contribution criteria and outline the approaches that would not be eligible for each category.
Eurosif said it welcomed SFDR 2.0’s “clear rules” linking the use of sustainability-related names and marketing communications to compliance with SFDR criteria, which would prevent misleading claims.
The European Commission’s SFDR revision proposals were published last November and are now subject to negotiation in the European Parliament and Council.
