Stockholm (NordSIP) – Sustainable investors seeking consistent and reliable implantation of their ESG goals are better off sticking with funds applying Sustainable Finance Disclosure Regulation (SFDR) Article 9 standards. This is one of findings from the 2025 edition of the ESG and Sustainability Barometer report published by advisory firm Mainstreet Partners.
Mainstreet Partners performs a quantitative and qualitative evaluation of 9,500 ETF and pooled fund strategies offered by 460 asset management companies, including a holdings-level analysis aimed at rating the sustainability profile of each portfolio while revealing any potential controversial elements. For ease of interpretation, the ESG and Sustainability rating is encapsulated in an overall score out of 5, with Article 6 products scoring an average of only 2.5.
Article 8 funds increasingly problematic
As may be expected, Article 9 funds score an average 4.4 and are steadily improving on these metrics over time. However, Mainstreet Partners found that standards for Article 8 funds are declining year-on-year, standing at an average of 3.3. The advisory firm believes the drop in quality over the last two years relates to fund providers struggling with stricter sustainability standards in the European market. Part of the decline may also be explained by an expansion of the universe under analysis to include more funds, including many that have moved up from Article 6.
The report also presents the results of a ‘Regulatory Adherence’ assessment, in which funds are scored according to their compliance with EU and UK regulatory standards. Mainstreet Partners also includes a qualitative overlay in which it considers whether managers are embracing the spirit of the regulations rather than simply complying with minimum requirements. This year’s results reveal a rise in greenwashing for Article 8 funds, whereas Article 9 funds have improved to the point where the proportion of discrepancies is almost negligible.
Some of the greenwashing exhibited by Article 8 funds relates to product naming, for instance where so-called sustainable funds only commit to minimum compliant holdings as low as 10%. There is also a growing number of breaches of EU Climate Transition Benchmark (CTB) criteria. The report concludes that almost a quarter of Article 8 funds are at risk of greenwashing exposure.
Sustainability sweet spot
In terms of asset classes and manager categories, the report finds that small to mid-cap equities are the best area in which to access genuinely sustainable investments. The highest rated managers tend to be ‘boutique’ firms like Mirova and Impax, as well as some mid-tier companies like BlueBay and Robeco. Of the larger asset managers, Schroders and Pictet score relatively well.
In addition to the evaluation of the fund universe’s overall ESG credentials and compliance with applicable regulations, Mainstreet Partner’s includes an examination of some of the sustainability-related themes targeted by some of the strategies on the market. These include biofuels and sustainable aviation fuel (SAF), in which managers are finding a rapidly growing number of growth opportunities while having to manage some of the potential negative externalities of these industries such as deforestation and land-use changes. The report also focuses on strategies targeting water scarcity, another relatively niche strategy that nevertheless offers up a range of innovative investment opportunities relating to desalination, water recovery and infrastructure projects.
