Market tightens standards as sustainable funds fall short amid rising scrutiny

MainStreet Partners’ latest barometer paints a market undergoing a rapid and rigorous reassessment of what counts as sustainable investing, finding that a substantial share of funds labelled under Europe’s sustainability regime fall short of the quality thresholds investors and regulators are beginning to demand. According to MainStreet Partners’ 2026 ESG and Sustainability Barometer, roughly one in four Article 8 funds and three in ten Article 9 funds do not meet the minimum ESG quality scores the market now expects, and only about 14% of European and UK funds would qualify as “Sustainable” under the forthcoming SFDR 2.0 classification.

The study, which examines more than 10,600 funds run by nearly 500 asset managers, underscores how heightened enforcement and tighter disclosure standards have shifted sustainability from a marketing position to an operational requirement. Sophie Meatyard, Head of Fund Research at MainStreet Partners, said: “ESMA’s guidance on fund nomenclature, the UK’s SDR regime, and the announcement of SFDR 2.0 have overall intensified the level of analysis and raised transparency standards.” The message to managers is clear: fund names, prospectuses and investment processes must align coherently with stated sustainability goals.

Greenwashing remains a central concern. The barometer’s scoring framework shows that a notable minority of Article 8 vehicles score below the threshold for basic ESG assessment, while a larger share of Article 9 funds fail to reach the higher standard set for sustainability-assessed products. MainStreet Partners’ simulations of the SFDR 2.0 regime indicate a far more selective market: two thirds of funds would be classified as ESG Basics, fewer than one in five as Transition, and only a small minority as Sustainable.

The report documents wide variation by strategy and asset class. Among Article 9 funds, small- and mid-cap equity strategies in Europe and globally, together with certain bond strategies, rank among the strongest in ESG integration, while complex strategies such as long–short equities and specific Asian exposures register weaker scores, often because of limited or lower-quality ESG data. For Article 8 funds, large-cap equity and some thematic healthcare funds tend to show higher integration, whereas cash and money-market products lag.

A persistent thematic in the barometer is polarisation of approaches. A third of funds still rely primarily on exclusions of controversial sectors, an approach that reduces exposure to reputational or regulatory risks but does not necessarily channel capital to transition solutions. At the other end, impact and thematic strategies that explicitly target climate, biodiversity or social inclusion objectives achieve materially higher ratings. MainStreet Partners notes that passive vehicles typically favour optimisation and best-in-class screens, while active managers more often deploy qualitative analysis and targeted thematic allocations.

Industry-wide ratings have edged lower, according to the barometer, a trend the authors attribute not to a sudden decline in sustainable practices but to tougher assessment criteria, broader geographic coverage and the arrival of managers with more limited ESG capabilities. MainStreet Partners highlights several highly rated firms as exemplars of organisational commitment to sustainability, noting that top scorers combine structured investment processes with governance and cultural integration.

The barometer also draws attention to private markets, which are becoming central to institutional allocations and subject to intensifying scrutiny. MainStreet Partners applies a “Full-Cycle” evaluation to private assets, stressing the need to assess governance, the embedding of ESG criteria during deal selection, and the measurable additionality generated by ownership and value‑creation activities. The report observes strong appetite for private investments and rising client expectations that general partners demonstrate robust, structured ESG practice.

On thematic issues, the barometer shifts emphasis from mitigation to adaptation. With global greenhouse gas emissions and the remaining 1.5°C carbon budget under severe pressure, the authors argue that resilience and adaptation must move from marginal considerations to core investment priorities. Using indices such as ND‑GAIN, MainStreet Partners highlights wide variation among emerging markets in climate vulnerability and adaptive capacity, noting that active managers can identify improving markets and companies and, in some cases, capture superior cumulative returns over multi‑year horizons.

The report’s findings sit alongside evidence of evolving market dynamics captured by other outlets. An analysis carried by Trustnet highlights Mirova and Robeco among leading managers in MainStreet Partners’ 2026 rankings, while coverage in industry press has flagged the same decline in average asset manager scores as reflecting tougher standards and regional divergence in ESG expectations. Earlier MainStreet Partners research from 2025 recorded a lower incidence of greenwashing risk among Article 9 funds and slightly different percentages for Article 8 products, illustrating how shifting methodologies and expanding coverage can alter headline figures from year to year.

Taken together, the data depict a sustainability market that is maturing and becoming more selective. Regulatory developments, above all ESMA guidance, the UK SDR framework and the SFDR 2.0 proposals, are tightening the conditions for funds to claim sustainable status, increasing the premium for rigorous process, credible governance and transparent disclosure. As the year progresses, the debate is likely to shift from rule‑making to implementation and from labels to demonstrable outcomes, with investors and supervisors alike focused on whether declared commitments translate into measurable contribution to the transition and resilience objectives the market increasingly demands.