Many ETFs advertise sustainability. EU rules and the methodology of the underlying indices help to put these claims into context.
The Sustainable Finance Disclosure Regulation (SFDR)
Regulation (EU) 2019/2088 on sustainability-related disclosures in the financial services sector (SFDR) has applied since 10 March 2021. Supplementary regulatory technical standards (Delegated Regulation (EU) 2022/1288) with standard templates have applied since 1 January 2023. The SFDR is a disclosure rule: it sets out what providers must publish about sustainability – not how sustainable a fund must be.
| Category | Short description |
|---|---|
| Article 6 | All funds: disclosure of how sustainability risks are taken into account, or why they are not relevant. |
| Article 8 | Funds that promote environmental or social characteristics; investee companies must follow good governance practices. |
| Article 9 | Funds that have sustainable investment as their objective. |
Article 8 funds are often called "light green" and Article 9 funds "dark green". These are not official terms.
What the classification is not
- Not a quality label: the provider classifies the fund itself. Requirements within Article 8 range from a few exclusions to strict selection rules.
- Not permanent: providers have reclassified funds in the past, for example from Article 9 to Article 8, when interpretation questions were clarified.
- Not a statement about returns: whether sustainable funds earn more or less than the overall market in the long run is disputed in research.
The SFDR is being reviewed and developed further at EU level; the version in force applies. In addition, ESMA has published guidelines on fund names using ESG or sustainability-related terms, which among other things set minimum proportions and exclusions for such names.
ESG index types for ETFs
For ETFs, the index determines which companies are included. Common variants:
- ESG Screened / ESG Enhanced: certain sectors or companies are removed from the parent index (e.g. controversial weapons, thermal coal, tobacco). The composition usually remains very similar to the parent index.
- SRI / best-in-class: only the companies with the best ESG ratings in each sector are included, often combined with stricter exclusions. The number of constituents falls and the deviation from the overall market rises.
- EU Climate Transition Benchmark (CTB) and Paris-aligned Benchmark (PAB): climate-related EU benchmarks under the Benchmarks Regulation. The minimum standards (Delegated Regulation (EU) 2020/1818) require, among other things, a greenhouse gas intensity at least 30 % (CTB) or 50 % (PAB) lower than the investable universe and year-on-year decarbonisation of at least 7 %; PAB indices additionally exclude companies with certain revenue shares from fossil fuels.
ESG ratings from different providers often agree only to a limited extent. The same company can score well with one provider and average with another.
What to look at in a sustainable ETF
- Read the index methodology: which exclusions apply, with which revenue thresholds, and which ratings drive the selection?
- Check the holdings: the largest positions show whether the fund matches your expectations.
- Read the pre-contractual information (SFDR annex): it states characteristics, shares of sustainable investments and the sustainability indicators considered.
- Assess the deviation from the overall market: sector and country weights can differ markedly from the parent index.
- Compare costs: ESG variants do not always have the same TER as the standard index.
indexfonds.eu currently shows no ESG scores because we have no data with a verifiable source and date. The fund and index providers' information is authoritative.