Sustainable investing is facing “a critical credibility moment”, said Stuart Forbes, head of ARK Invest Europe.
As environmental, social and governance (ESG) investing faces growing scrutiny and regulatory tightening, the role of fund selectors has become more critical than ever.
According to ARK, these professionals are no longer just intermediaries but in the frontline of sustainable finance.
“With the shifting policy landscape and increasing investor scepticism, fund selectors now serve as the gatekeepers of truth,” Forbes said. “They must look beyond marketing to ensure that funds genuinely contribute to sustainable outcomes.”
Although the conversation around ESG investing is improving and finally emphasising the possibility for value creation (as Legal & General Investment Management chief investment officer Sonja Laud recently noted), greenwashing remains a risk.
Kate Naumova, associate director of sustainability at ARK Invest Europe, encouraged fund pickers to examine what fund issuers are “actually delivering in practice” beyond labels, urging them to adopt a more rigorous, evidence-based approach.
This is particularly relevant when picking exchange-traded funds, which rely heavily on third-party indices and have no control over what is in the portfolio, “sacrificing transparency and thematic precision”.
Below, ARK outlined five key principles to guide selectors.
Verify the availability of methodologies
The first tip is to request full transparency around fund methodologies, including how companies are scored, selected and weighted for sustainability.
Critically, selectors must understand how so-called sustainable investment proportions “genuinely link to real-world economic activities” and not be misled by confusing or irrelevant metrics. “A lack of detailed information is a major red flag,” said Forbes.
Ensure methodologies are followed in practice
Once the documentation is available, the firm advised selectors to conduct “an acid test”, for example choosing five portfolio companies at random and requesting evidence of the applied approach.
“This could include a one-page scorecard for each, detailing how each company has been surfaced, scored, selected and weighted by the fund in accordance with the stated methodology, including any impact scores,” the advice read.
Assess regulatory preparedness
Selectors should assess how well fund issuers are positioned to navigate an evolving regulatory environment.
According to Forbes, the most credible managers are those who take “a proactive and informed stance”, rather than simply reacting to rule changes, and who “haven’t diluted their sustainability claims in response to regulatory scrutiny”.
Evaluate governance integrity
Selectors should look for “robust ESG governance, including independent oversight,” as a safeguard against greenwashing and an assurance that sustainability commitments are enforced in practice.
Scrutinise impact funds
Impact-labelled funds deserve particularly close inspection. These strategies often promise measurable social or environmental benefits, but selectors must ensure that those claims are backed by both “forward-looking frameworks and backwards-looking impact reporting”.
Forbes warned that “outsourcing this reporting without integration raises questions about the strategy’s credibility”.