There’s no shortage of discussion when it comes to ESG whether its fund managers talking about their frameworks, advisers trying to match products with client expectations, or regulators looking to impose structure. But for all this effort, there’s still a fundamental issue at the heart of the problem: the labels we use are unclear, inconsistent, and often confusing.
And that’s a problem.
ESG & sustainability are not the same thing
What appears to be the biggest driver of confusion is the frequent failure to separate ESG from sustainability. While they’re related, they’re not interchangeable and conflating them is doing a disservice to everyone, from investors to regulators.
Here’s the simple version: ESG is about the world’s impact on a company, whereas sustainability is about the company’s impact on the world.
ESG looks at how external environmental, social and governance factors affect a company’s financial value, we call this financial materiality. Sustainability, on the other hand, is about how a company’s activities affect society and the environment, what we refer to as impact materiality.
Take a company that pollutes for example. That pollution may lead to fines, which are a cost to the company, so it’s a risk that should be picked up in ESG analysis. But that same company could still sit in an ESG-labeled index, because the analysis was purely financial. That doesn’t mean it’s a sustainable investment just that ESG factors have been incorporated.
This is a critical distinction, and the lack of clarity here is what drives so much investor confusion and accusations of greenwashing.
Labels aren’t enough – Understand what the fund does
When we talk to advisers, many express frustration at trying to match products to clients’ preferences. The confusion isn't just about the terminology; it’s also about the lack of transparency around how these frameworks are applied.
We often suggest that advisers ignore the label at first and instead ask: What is this fund actually doing? Is ESG just being used as an internal lens to evaluate risks and opportunities? Or is there a broader objective, something that explicitly considers real-world impact and objectives?
Understanding where a fund sits on that spectrum is far more informative than whether it’s calling itself “ESG,” “green,” “responsible,” or “sustainable.”
Greenwashing Isn’t always what it seems
Let’s be clear, greenwashing is a legitimate concern. But too often, what’s called greenwashing isn’t an active attempt to mislead; it’s a failure to communicate clearly. Misleading conduct is not restricted to sustainability, it can be a problem in any fund.
The most recent infringement case in Australia had nothing to do with how ‘green’ a fund was. It was about unclear disclosure around bond holdings, a basic transparency issue.
When it comes to ESG and sustainability, most greenwashing cases stem from messaging that is over-simplified, contradictory or containing overly complex detail that’s hard for the average investor to interpret.
This matters because it erodes trust. Not just for investors, but for advisers who may hesitate to recommend these strategies and for managers who might avoid offering them altogether. In fact, we’ve already seen a material pullback in promotion of sustainability-themed strategies, largely due to concerns about misinterpretation and a perceived lack of regulatory clarity.
What the Government’s doing & why it matters
The good news is that progress is underway. The Australian Government is currently working on a sustainable investment labelling regime, designed to bring greater clarity and consistency to this space.
The consultation process is considering key questions such as:
- Should labelling apply only to funds making sustainability claims, or to all funds using ESG in their decision-making?
- How should strategies like ESG integration, impact investing, and engagement be categorised and disclosed?
- Should labelling apply at the product level, the manager level, or both?
These are critical discussions. The choices made here will shape how investors understand product intent, how advisers filter and recommend options, and how fund managers disclose their strategies.
Standardisation is important but only if it covers the right scope. In most global markets, sustainability-themed funds make up a small portion of total assets, while ESG integration is far more widespread. Any framework must reflect that reality.
Clarity in labelling won’t fix everything, but it will go a long way in helping the industry move past confusion, rebuild trust, and provide a better experience for investors.
It’s not just about one strategy
Another source of confusion is the tendency to treat responsible investing as a single approach. In reality, most funds use a mix of responsible strategies: screening (both positive and negative), ESG integration, sustainability thematics, impact investing, and corporate engagement.
These aren’t mutually exclusive, in fact, they’re often blended. Almost all funds, not just ‘responsible’ ones, use ESG as a tool to some degree. The challenge is that many product labels don’t reflect this nuance.
That’s why looking past the label is essential. We need to understand what strategies are being used, how they’re implemented, and whether the fund’s stated objectives align with the tools it’s using.
What needs to change
As the government moves ahead with consultation on fund labelling, the biggest issue is scope. Are labels going to apply only to funds that make explicit sustainability claims or to all products that integrate ESG factors?
That distinction matters. Sustainability-themed funds make up a small portion of the market, often less than 5% of assets under management. But ESG integration in funds is far more common, our data suggests around 75% of local funds incorporate it in some form as part of basic due diligence. Using that boundary would be very wide. So, whether to make labels applicable to all products (the EU model) or only those making sustainability claims (the UK model) will be key to user outcomes.
Another key question is whether labels apply at the fund level or the manager level. This is especially important for large firms that run multiple strategies from plain vanilla index funds to impact portfolios, under the same brand. Without clear distinctions, it’s easy to see how confusion builds.
Finally, better categorisation will help with comparisons. We’ve seen plenty of research trying to assess whether ‘ESG funds’ outperform but if there’s no clear boundary between what counts as processes that simply integrate ESG versus funds with broader objectives, those studies are on shaky ground.
The bottom line
Labels matter. But only when they’re used consistently, transparently, and with clear definitions behind them. At the moment, the responsible investment landscape is filled with blurred lines, mixed signals and mismatched expectations.
We can’t solve this overnight, but we can take steps in the right direction. Start by distinguishing ESG from sustainability. Focus less on what a product is called and more on what it does. And push for a framework that prioritises clarity over complexity.
If we can do that, we’ll build a system that’s better for investors, advisers and the industry as a whole.
