How To Navigate Sustainable Investing In 2025: Useful Recommendations For Investors

Co-Author: Stuart Forbes.

The information provided reflects the views of ARK Invest Europe at the time of publication. This does not constitute investment advice.

Introduction

Sustainable finance is under pressure: from intensifying regulations on one side and rising scepticism on the other. As frameworks like SFDR, SDR and ESMA’s Guidelines on funds’ names using ESG or sustainability-related terms raise the bar, Fund Selectors are increasingly tasked with separating genuine sustainability from greenwashing.

This article explores the growing gap between policy and investor expectations, and offers practical, actionable tips to help Fund Selectors scrutinise sustainable and impact funds with confidence and clarity.

1. Sustainable Finance: Policy Shifts vs. Investor Demand

Sustainable finance now operates under intensified regulatory scrutiny. Recent years have seen an unprecedented influx of sustainable finance regulations, most notably the EU’s Sustainable Finance Disclosure Regulation (SFDR), the UK’s Sustainability Disclosure Requirements (SDR), and ESMA’s Guidelines on funds’ names using ESG or sustainability-related terms. These regulatory developments have significantly raised the bar, compelling Fund Issuers to confront heightened expectations in terms of honesty, transparency and compliance with respect to their sustainability claims.

However, with shifting political landscapes and growing scepticism around the practical value of intensified sustainability regulation, there is growing uncertainty over the permanence and future direction of these standards.

Yet, irrespective of any loss of momentum or even potential regulatory rollbacks, large stewards of capital (including many large pension funds) continue to push onwards in terms of their own commitment to sustainability and Fund Selectors with sustainability mandates (i.e., those running their own sustainable funds) must continue to adhere to their stated sustainable investment objectives. Indeed, it has been widely publicised that a number of large pension funds have dropped various Fund Issuers due the rolling back of sustainability commitments and/or retreat from international initiatives such as the Net Zero Asset Managers Initiative.¹ Fund Selectors now find themselves in the critical position of being arbiters of Fund Issuer credibility, compelled to rigorously verify that ESG-labelled funds deliver substantiated sustainability commitments, rather than hollow marketing promises.

2. Empowering Fund Selectors: Useful Tips For Fund Selectors When Researching And Scrutinising The Sustainable/Impact Funds And Capabilities Of Fund Issuers

As sustainable investing regulations continue to tighten, Fund Selectors should examine what Fund Issuers are actually delivering in practice. The tips below are designed to provide actionable guidance for Fund Selectors, and are broadly applicable across the sustainable investing landscape. Furthermore, these tips offer in-depth expertise on their specific application to passive and actively managed funds.

2.1 Verify The Availability Of Detailed Methodological Documentation

Fund Selectors must look beyond superficial ESG labels to rigorously verify the authenticity of a fund’s sustainability characteristics. This requires checking whether the fund meets the stated sustainable investment proportions, clearly identifies targeted sustainability themes and allocates to investments using a robust and transparent investment methodology. This methodology should incorporate both a top-down “Theory of Change” and bottom-up stock-specific research and scoring process that explain precisely how and why companies are surfaced, scored, selected and weighted by the fund strategy and assigned any relevant impact scores, SDG contribution scores or other sustainability scores. The foregoing methodology should ideally be publicly available on the Fund Issuer’s website for full transparency and so that the Fund Issuer may be held to account for their commitments. A lack of detailed methodological information is a major red flag², indicating Fund Issuers cannot be held accountable for the characteristics they promote.

As part of the above, , particularly when assessing funds classified as Article 9 under the SFDR, Fund Selectors should seek clarity from the Fund Issuer on the methods used by them to calculate the proportion of “sustainable investments” (e.g. the proportion of revenue/CapEx/OpEx alignment to the targeted sustainable economic activities) at both the individual portfolio company level and at the aggregated fund level.

Substance VS. Label: Verifying How The Proportion Of Sustainable Investment Is Measured

It is important to note that Fund Issuers often calculate the proportion of “sustainable investment” of their funds using an approach that considers 100% of an investment in a company to be considered a “sustainable investment” so long as that company derives some (i.e., more than zero) of its revenues, CapEx or OpEx from sustainable economic activities without supplementing that with more relevant methodologies such as Sustainable Thematic Revenue Alignment³ or EU Taxonomy Alignment.⁴

The problem with this approach is that it is open to abuse and, therefore, companies with very little revenues, CapEx or OpEx related to the sustainable theme are often included in sustainable funds despite being largely or materially irrelevant in terms of contribution to the environmental and/or social objectives of that theme. Accordingly, this has enabled Fund Issuers to construct funds marketed as “sustainable” that may include significant allocations to companies which do not contribute meaningfully to a sustainable objective.⁵ Of course, this is not in keeping with the EU’s objectives of driving capital towards investments that contribute to environmental and social objectives.

Therefore, it is essential that Fund Issuers supplement this approach with more representative measures of sustainable investment that are based on the actual economic relevance/materiality (e.g. revenues, CapEx or OpEx) that individual portfolio companies have in respect of the relevant environmental or social objectives of the fund (e.g. the proportion of a portfolio company’s revenues attributable to renewable energy solutions) and are thus able to demonstrate that the majority of the fund’s investments (when taking into account the weight of each respective portfolio company) are exposed to economic activities contributing to the relevant environmental or social objectives of the fund.

A Multi-Metric Approach To Measuring The Proportion Of Sustainable Investment

At Rize by ARK Invest, we supplement the simple measure referred to above with both Sustainable Thematic Revenue Alignment and EU Taxonomy Alignment (Revenue) for full transparency and to ensure that investors have confidence in our purist approach to constructing our sustainable/impact ETFs where we seek to maximise the contribution (measured through economic materiality) that portfolio companies (and, accordingly, the ETF as a whole) is making towards the stated environmental or social objectives. We can tell you exactly how much revenue a portfolio company derives from its relevant activity, and we can say exactly why that company has been selected by the fund.

Tip For Fund Selectors

Examine available fund documentation, sustainability reports, and credible third-party validations to gauge the depth and sincerity of a fund’s sustainability integration and what the Fund Issuer is willing to be held accountable for. Prioritise funds with clearly documented sustainability objectives supported by robust, readily publicly available methodologies (including a detailed theory of change and bottom-up scoring system) and evidence rather than vague or aspirational claims.

2.2 Ensure That Methodologies Are Followed/Applied In Practice

Fund Selectors should be able to verify not only that a detailed published methodology exists (see above), but also that it is genuinely followed in practice. This requires spot-checking a random selection (chosen by you) of portfolio holdings against the fund’s stated selection criteria, exclusion policies, and engagement processes and demanding that the relevant Fund Issuer provides you with the rationale for why each randomly selected portfolio holding has been surfaced, scored, selected and weighted, including any justification for impact/SDG scores or other sustainability metrics.

Such scrutiny provides direct, tangible evidence of authentic ESG integration and demonstrates genuine alignment with the stated sustainability objectives.

Tip For Fund Selectors:

Request the Fund Issuer to demonstrate their exact process for selecting companies, by showing you their curated stock universe and associated sustainability scoring and walking you through company-specific examples to verify genuine adherence to the stated sustainability methodology.

Request a one-page rationale from the Fund Issuer for a random selection of 5 portfolio holdings (chosen by you) in their portfolio. The Fund Issuer should be able to clearly walk through exactly how and why each security was assessed, scored and ultimately selected for inclusion in the fund. The Fund Issuer should be able to specify exactly how each portfolio company’s economic exposure is to the sustainable theme (e.g. each company’s Sustainable Thematic Revenue Alignment) and describe the security’s specific sustainability or impact contribution. The inability to do so would indicate a lack of methodological integrity and limited in-house expertise.

Finally, if a Fund Issuer is unable to provide you with the Sustainable Thematic Revenue Alignment (or other relevant sustainability data points claimed to be used by their methodology) at both the individual portfolio company level and the fund as a whole, then this should be a major red flag.

2.3 Assess Sustainable Investing Expertise And Regulatory Planning/Preparedness

Fund Issuers need to be able to demonstrate deep sustainable investing expertise and how their fund’s attributes align with a Fund Selector’s portfolio needs. Fund Selectors should a Fund Issuer’s ability to provide consistent, ongoing information, and high-quality client support, ensuring the strategy is effectively integrated within your broader investment objectives.

Given the dynamic regulatory environment, ongoing vigilance toward regulatory developments and Fund Issuer responses is essential. Regular monitoring of regulatory shifts – such as SFDR adjustments, SDR developments, and ESMA Guidelines on ESG or sustainability-related fund names – and Fund Issuers’ subsequent actions (reclassifications, rebranding, or methodological changes) enables proactive management of compliance risks and ensures sustained alignment with sustainability mandates.

Tip For Fund Selectors:

Select Fund Issuers who convincingly demonstrate deep sustainability expertise, clear alignment of product features with your portfolio needs, and a consistent track record of providing reliable, high-quality customer support. Fund Issuers falling short on these measures are less likely to deliver satisfactory long-term performance or meet investor expectations.

Maintain a structured approach to regulatory updates, ensuring regular dialogue with Fund Issuers about their preparedness and responses to evolving ESG standards.

Ask each Fund Issuer to present to you on the latest regulatory developments and what specific actions they are taking to ensure compliance and how this may or may not impact the investment selection process and portfolio. This approach will help you effectively assess each Fund Issuer’s preparedness and capability to adhere to regulatory obligations.

Request that the Fund Issuer provides concrete assurances that their funds will not need renaming to comply with ESMA’s Guidelines on ESG or sustainability-related fund names, and to demonstrate compliance rather than simply promising it.

As part of this, check whether the relevant Fund Issuer recategorised or removed the SFDR classifications (i.e. Article 8 or 9) for any of its funds in 2022 or removed any “ESG” or “sustainability”-related terms from its fund names in 2024-2025. A historical pattern of downgrades represents a significant red flag, indicating potentially serious weaknesses in strategic planning, regulatory compliance, and operational risk management, raising concerns about future adherence to regulations and credibility in sustainable investment commitments.  

2.4 Evaluate ESG Governance

Robust ESG governance is crucial, revealing if a Fund Issuer’s sustainability commitment is genuine or mere marketing. Fund Selectors should utilise a formal oversight bodies/committees that are sufficiently independent (including independent members) from day-to-day portfolio management and marketing teams with clear and formal Terms of Reference governing activities and recorded minutes of all meetings that are capable of being independently audited. These elements are vital because they establish accountability, helping to distinguish authentic ESG integration from potential greenwashing.

Furthermore, Fund Selectors should assess a Fund Issuer’s ability to manage emerging ESG risks in their portfolios, for instance, if they can divest from companies with governance issues or those involved in major controversies. This capability is essential for maintain adherence to a fund’s ESG/sustainability objective.⁶ As noted in Section 1 above, passive, index-replicating funds/ETFs utilising indices owned and controlled by third party index providers are forced to continue replicating the composition of the relevant third party index irrespective of any emerging ESG risk posed by individual companies (i.e. divestment is not permitted even if a company is found to be in breach of multiple international norms violations or embroiled in severe controversies).

Tip For Fund Selectors:

Evaluate the robustness of a Fund Issuer’s sustainability governance and oversight practices. Specifically, verify whether there is an oversight body or committee formally appointed to oversee ESG and sustainability processes, supported by clear Terms of Reference and recorded minutes of meetings. Crucially, check that any such oversight bodies/committees include at least two independent members and ask to see the Terms of Reference and a sample of the most recent minutes of relevant meetings.

Additionally, assess whether the Fund Issuer has the capability and flexibility to remove companies involved in controversies or governance issues. Engagement without a paired ability to divest is toothless and does not result in the removal of portfolio companies that pose a material ESG or sustainability risk to the fund’s portfolio.

Where possible, request the Fund Issuer’s full exclusion list and rationale, to understand the criteria applied and how exclusions are enforced in practice.

2.5 Impact funds – Extra Scrutiny Required

For impact or SDG-labelled funds explicitly aiming to contribute to sustainable objectives, Fund Selectors should ensure the Fund Issuer has clearly defined and published a detailed Theory of Change alongside a forward-looking impact assessment methodology. This methodology should explicitly address the economic and impact potential of each investment, clearly justify why each company was selected, and detail why certain companies were prioritised over others within the same sector. Fund Selectors should also verify that Fund Issuers commit explicitly to providing backward-looking reporting on clearly defined Key Performance Indicators (KPIs) to demonstrate the actual sustainability impacts generated by the fund. They should clarify whether any backward-looking impact assessment and reporting is connected with the forward-looking impact assessment that determines how companies are surfaced, selected, scored and weighted by the fund. They should also be transparent with respect to the degree to which that assessment work is conducted in-house or partially or fully outsourced.

If a Fund Issuer who is actively managing a so called “impact” fund and selecting investments based on a forward-looking impact assessment but has fully outsourced the backward-looking impact assessment and reporting to a third party, then you have to question why (i.e. what is underpinning the Fund Issuer’s forward-looking impact investment strategy if a third party is being used to produce the backward-looking impact report?).

Tip For Fund Selectors:

Prioritise impact funds with transparent, forward-looking impact methodologies and scoring that can be evidenced based on a random selection of companies. Ensure that you receive clear explanations as to how forward-looking impact assessments dovetail with backward-looking impact reporting against any stated KPIs.