European Central Bank working paper finds ESG and green fund labels often misalign with climate outcomes

The European Central Bank published a working paper assessing whether sustainability-related investment funds are materially more climate-friendly than conventional funds, focusing on financed activities, portfolio carbon footprint and investment in firms with science-based climate targets. The paper finds that the greenest fund categories tend to invest more in low-carbon sectors and less in fossil fuels, but their portfolio carbon footprints are broadly comparable to conventional funds, pointing to inconsistencies between ESG labels and environmental outcomes. The analysis identifies ESG and green funds using Morningstar strategy classifications, the Sustainable Finance Disclosure Regulation (SFDR) Article 8/9 categorisation and name-based marketing terms, drawing on a combined dataset of fund attributes (Morningstar), portfolio holdings (Refinitiv Lipper) and firm emissions (Urgentem) over 2016–2021. It reports strong alignment between Morningstar “Green Tech/Low Carbon” strategies and SFDR (91% fall under Article 8 or 9), while self-marketed “Green” funds align far less tightly, with 28% classified as Article 6. Although Morningstar Low-Carbon and SFDR Article 8 funds show more meaningful emission reductions over time by holding less polluting firms within sectors, no ESG fund category consistently allocates more capital to firms with ambitious science-based targets. Overall, the results suggest ESG funds currently play a limited role in financing the transition to net zero and highlight greenwashing risks, particularly where sustainability claims are driven by fund naming. The paper points to the case for stronger safeguards against misleading sustainability claims in fund names and for clearer, more accountable sustainability metrics.