ESMA’s Fund Naming Rules Are Forcing Europe’s ESG Reckoning

Key Takeaways

• ESG Labels Are Being Rolled Back: Nearly two-thirds of funds responding to ESMA’s guidelines removed or downgraded ESG or sustainability-related terms from their names rather than adjust portfolios.
• Policy Changes Were Widespread: More than half of affected funds updated their investment policies, most often by introducing or tightening fossil fuel-related exclusions.
• Fossil Fuel Exposure Drove Decisions: Funds with higher exposure to fossil fuel activities were significantly more likely to drop ESG terminology, underscoring how portfolio composition shaped compliance choices.
• Funds Keeping ESG Terms Are Divesting Faster: Since the guidelines were published, funds that retained ESG labels reduced fossil fuel holdings more quickly than all other fund groups.
• Supervisory Attention Is Shifting: ESMA is now monitoring the rise of alternative fund name terminology that may still imply sustainability characteristics without using regulated ESG terms.

Deep Dive

Europe’s experiment with cleaning up ESG fund labels is already having a visible effect on the market. New research by the European Securities and Markets Authority shows that its guidelines on the use of ESG and sustainability-related terms in fund names have triggered widespread rebranding, portfolio changes, and a sharper divide between funds willing to adapt and those opting to step back from ESG branding altogether.

Introduced in May 2024 and fully applicable as of May 2025, the guidelines were designed to address a growing concern among regulators that fund names were getting ahead of reality. As ESG-labelled products multiplied, so too did fears that investors were being sold a story that portfolios did not always support.

ESMA’s latest analysis suggests those concerns were not misplaced but also indicates the rules are beginning to do what they were meant to do.

Rebranding Takes Center Stage

Based on nearly 1,000 shareholder notifications from the EU’s 25 largest asset managers, covering €7.5 trillion in assets under management, ESMA found that renaming funds became the most common response to the new rules.

Almost two-thirds of the funds referenced in the notifications changed their names, most often by removing ESG or sustainability-related language altogether. More than half also updated their investment policies, typically by introducing explicit exclusions related to fossil fuel activities or tightening sustainability criteria.

In many cases, managers chose the simpler route. Rather than reshaping portfolios to meet the stricter thresholds attached to sustainability or environmental labels, funds dropped the terminology instead. ESMA notes that environmental- and sustainability-branded products accounted for the bulk of these name changes.

Fossil Fuels as the Fault Line

The study makes clear that fossil fuel exposure was a decisive factor in how funds responded. Looking beyond disclosures and into portfolio data for more than 4,000 EU funds using ESG terms, ESMA found that those with higher exposure to fossil fuel companies were far more likely to abandon ESG language in their names. Portfolio composition, in other words, largely dictated branding decisions.

That shift had an immediate mechanical effect. As ESG terminology disappeared from the names of more exposed funds, the remaining universe of ESG-labelled products became cleaner by default. Aggregate fossil fuel exposure among funds still using environmental or sustainability terms dropped sharply.

At the same time, funds that kept ESG language did not stand still. Since the publication of the guidelines, these funds reduced their fossil fuel holdings faster than all other groups, suggesting active efforts to align portfolios with the signal their names send to investors.

The ESMA also identifies a regional dynamic shaping compliance choices. Funds managed by US-headquartered firms were significantly more likely to rebrand when fossil fuel exposure made compliance costly, compared with funds run by EU-based managers. The regulator points to broader strategic pressures, including a more hostile ESG climate in parts of the United States, as a possible factor influencing those decisions.

When portfolios were already aligned with the guidelines, however, the behavior of US and EU managers largely converged.

New Labels, Old Questions

While the guidelines have pushed many funds away from explicit ESG terminology, ESMA is now watching the rise of substitute language.

Roughly half of the funds that removed ESG terms replaced them with words such as “screened,” “select,” “advanced,” or “committed.” ESMA cautions that these labels may still be intended to signal sustainability characteristics and says supervisors will keep a close eye on how naming conventions evolve.

The ESMA concludes that the guidelines are delivering their intended effect. Funds with less ambitious ESG strategies have largely stepped away from ESG branding, while those that retain ESG terms appear to be greening their portfolios more rapidly than the rest of the market.

For investors, the regulator argues, this improves the reliability of fund names as a signal rather than a marketing tool. The ESMA says it will continue monitoring fund naming trends and portfolio behavior, while working with the European Commission on future sustainable finance policy.

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