“Ethical investing” has become one of the most powerful trends in modern finance. Environmental, Social, and Governance (ESG) funds, also marketed as “sustainable,” “green,” or “ethical” funds, promise investors the ability to grow wealth while supporting a better world. Instead of funding polluters or exploitative industries, investors can align money with their values.
Yet beneath the glossy marketing lies a troubling truth: many ethical funds aren’t truly ethical at all. Hidden within their portfolios are fossil fuel giants, arms manufacturers, gambling companies, or corporations with dubious labor practices. The gap between promise and practice is often wide — and investors are the ones misled.
This article unpacks how and why some ethical funds fail to live up to their name, the tricks used to greenwash portfolios, and what investors can do to identify genuine responsible investing.
The Rise of Ethical and ESG Funds
In the last decade, interest in ethical investing has exploded.
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Global assets in ESG funds surpassed trillions of dollars by the early 2020s.
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Surveys show younger investors, in particular, want to align money with climate action, diversity, and fair labor.
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Asset managers quickly seized the opportunity, rebranding existing funds as “ethical” or launching new ESG products to capture inflows.
Marketing emphasizes “do well by doing good” — suggesting investors can enjoy solid returns while saving the planet. But reality often diverges.
Where Ethical Funds Go Wrong
1. Greenwashing Through Labels
Some funds simply rebrand existing products as “sustainable” without changing core holdings. A fund heavily invested in oil majors or mining firms suddenly becomes an “ethical equity fund” after tweaking marketing language.
2. Weak Screening Criteria
Ethical funds often use vague or loose screening standards. For example:
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Excluding only direct producers of tobacco while investing in suppliers or distributors.
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Screening for “clean energy initiatives” but still holding fossil fuel companies because they’ve pledged to transition by 2050.
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Allowing arms manufacturers if less than a certain percentage of revenue comes from “controversial” weapons.
3. Box-Ticking ESG Scores
Funds rely on ESG ratings from agencies that score companies using complex methodologies. But these scores often prioritize disclosure over real impact. A polluter with glossy sustainability reports may score higher than a small, genuinely green company with less disclosure capacity.
4. Conflicts of Interest
Asset managers earn lucrative fees by offering “ethical” funds. The temptation is strong to stretch definitions, keep performance attractive with profitable but unethical holdings, and rely on investors not digging deep.
5. Overlap With Conventional Funds
Studies have shown large overlaps between the top holdings of ESG-labeled funds and traditional index funds. The same oil, tech, and banking giants appear, raising questions about how “ethical” these portfolios really are.
Case Study: The “Green” Fund With Oil Stocks
Consider a widely marketed “sustainable equity fund.” Its glossy brochures feature wind turbines, solar panels, and clean oceans. Yet a peek into its top holdings shows:
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Energy Multinational X – deriving 80% of profits from oil drilling, but included because it invests in renewables.
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Bank Y – heavily financing coal projects in Asia, but praised for having a diversity initiative.
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Tech Giant Z – with ongoing controversies over worker exploitation in its supply chain.
To investors, the fund looks ethical. In practice, it funds many of the same industries ethical investing was meant to avoid.
The Investor Impact
For investors, these misrepresentations create several harms:
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Betrayed Values – Investors seeking to avoid unethical industries may unwittingly fund them.
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Distorted Performance – Ethical funds padded with conventional holdings may simply mirror standard benchmarks, offering little differentiation.
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Erosion of Trust – Discovering hypocrisy damages faith in the entire ESG movement.
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Missed Opportunities – Capital that could have gone to genuine ethical ventures instead props up established giants.
Why This Keeps Happening
Profit Motive
The surge of money into ESG funds is irresistible for asset managers. Rebranding funds is faster and cheaper than creating genuinely ethical portfolios.
Lack of Standards
No global definition of “ethical” exists. What one fund excludes, another may include. This ambiguity lets fund houses set their own rules.
Complexity of Supply Chains
Modern corporations operate in global webs. A company may sell clean technology but rely on child labor in parts of its supply chain. Funds exploit this complexity to justify inclusion.
Ratings Agencies
ESG ratings differ wildly between agencies. A company rated “highly ethical” by one may be rated “poor” by another. Funds cherry-pick ratings that suit their narrative.
The Regulatory Response
Some regulators have begun tightening rules:
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Europe: The EU introduced the Sustainable Finance Disclosure Regulation (SFDR), requiring funds to classify products and disclose ESG claims.
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U.S.: The SEC has started cracking down on misleading ESG marketing.
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Asia: Regulators in markets like Japan and Singapore are creating frameworks for ESG fund labeling.
Yet enforcement remains patchy. Asset managers still enjoy wide leeway in defining what qualifies as “ethical.”
How Investors Can Spot Truly Ethical Funds
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Check Holdings, Not Labels
Don’t trust the name. Read the fund’s top 10 holdings. If oil majors, arms firms, or gambling companies appear, the fund isn’t truly ethical. -
Understand Screening Criteria
Ask: Does the fund exclude fossil fuels entirely, or only partially? Does it screen for supply chain practices, not just end products? -
Look for Impact Funds
Distinguish between “ESG funds” (which may just tilt portfolios toward good scores) and genuine “impact funds” that target measurable social or environmental outcomes. -
Compare Across Funds
Check overlap with conventional index funds. Heavy overlap signals greenwashing. -
Assess Transparency
Genuine ethical funds publish detailed reports, not just marketing gloss.
The Ethical Dilemma
The ethical fund scandal raises a deeper question: should investing be about maximizing returns alone, or about aligning capital with values? If funds dilute the meaning of ethics, they undermine not just investor trust but also the broader social movement demanding accountability from corporations.
When “ethical” becomes a marketing tool rather than a principle, it risks hollowing out the very purpose of responsible investing.
Lessons for the Future
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Investors Must Be Skeptical: Labels are not guarantees.
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Standards Must Evolve: Regulators and rating agencies must converge on stricter definitions.
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Transparency is Key: Without plain-language disclosure of holdings and screening methods, investors cannot judge authenticity.
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Capital Allocation Has Consequences: Money directed toward genuine ethical ventures can reshape industries; misallocated funds simply entrench the status quo.
Conclusion
Ethical funds promise investors a way to do good while doing well. But many fall short, hiding conventional or controversial holdings behind green labels. This gap between image and reality is one of the financial industry’s greatest modern betrayals.
Until stronger standards, enforcement, and transparency prevail, investors must protect themselves through vigilance and skepticism. Otherwise, the phrase “ethical fund” risks becoming one of the most misleading labels in finance.
