ESG is now one of the fastest-growing investment categories in the world. It is also one of the least standardised. There is no universal definition of what makes a fund “ESG,” no mandatory threshold a fund must meet to use the label, and no independent body certifying that the underlying holdings actually reflect the stated mandate.
This creates significant greenwashing risk at the fund level — separate from, and in addition to, greenwashing risk at the company level.
What Fund-Level Greenwashing Looks Like
Fund-level greenwashing typically takes one of three forms:
Label washing: A fund adds “ESG,” “sustainable,” or “responsible” to its name with minimal change to its underlying holdings. The portfolio looks nearly identical to a standard market-cap index, with token exclusions of the most controversial sectors.
Best-in-class without scrutiny: Funds select the “best” companies in each sector on ESG ratings — but if those ratings are based on self-reported data, the best-rated oil major may still be a significant ESG risk relative to alternatives.
Engagement claims without evidence: Some funds claim active stewardship — engaging companies, voting on ESG resolutions — without publishing engagement records or proxy voting history that would let investors verify those claims.
Red Flags to Check Before You Allocate
1. Holdings vs. Mandate
Pull the fund’s top 20 holdings and compare them against the stated mandate. An “ESG fund” with fossil fuel majors, fast-fashion companies, or defence contractors in its top 10 is applying the label loosely. The prospectus describes the policy; the portfolio reveals whether it’s followed.
2. Sector Weights vs. Benchmark
Compare the fund’s sector allocation to a standard index (S&P 500, MSCI World). ESG funds that apply minimal active tilts will show near-identical sector weights to the benchmark. Heavy-ESG-claim funds with 40% technology exposure and minimal renewable energy tilt are marketing more than they are managing.
3. ESG Rating Coverage of Holdings
Check whether the fund’s underlying holdings are rated by multiple ESG providers, and whether there are large divergences between providers. Holdings with high rating divergence have contested or uncertain ESG data — the fund may be buying a rating, not a sustainable company.
4. Proxy Voting Records
Funds with genuine ESG mandates should be voting against management on climate resolutions, executive pay packages misaligned with ESG targets, and governance failures. Most fund managers publish proxy voting records. Look for consistent voting in line with stated ESG values.
5. Engagement Activity
Ask (or look) for published engagement reports. Real stewardship funds document which companies they are engaging, on what issues, and what outcomes they are driving. The absence of this documentation does not mean no engagement is happening — but it should prompt scepticism.
Questions to Ask Your Fund Manager
- What is the fund’s minimum ESG threshold for inclusion, and who sets it?
- Does the fund use a single ESG rating provider or multiple? What happens when they disagree?
- Are the underlying companies’ ESG claims independently verified, or based on self-reporting?
- What is the fund’s proxy voting record on climate and governance resolutions in the last 12 months?
- Has the fund excluded any holding in the past year due to ESG deterioration? Which ones?
The Deeper Problem: Ratings Don’t Verify
Most ESG funds rely on ratings from MSCI, Sustainalytics, or similar providers. These ratings measure how well companies disclose — not whether what they disclose is accurate. A company can score well on ESG ratings while simultaneously facing regulatory enforcement, missing interim climate targets, or having greenwashing allegations investigated by regulators.
Detecting greenwashing at the fund level ultimately requires looking at the holdings individually — checking whether their sustainability commitments are backed by independently verified evidence, not just by better reporting.
Learn how to detect greenwashing systematically — and how Novare Insights applies evidence-based verification at portfolio scale.