Women from the coal dust covered and power line pollution exposed Masakhane settlement push their ... [+] wheel barrows for a load of free coalAFP via Getty ImagesNearly a quarter (23%) of all Article 8 funds remain at risk of greenwashing (making misleading claims about environmental compliance), ESG and sustainability data provider MainStreet Partners has found.Morningstar defines Article 8 funds as promoting environmental or social characteristics. Holdings should generally help attain the environmental or social characteristics promoted.MainStreet found that 13% of funds failed its regulatory adherence assessment. It examines the relevant naming convention of the specific strategy together with the consistency of documentation and decides whether its clear and doesnt mislead, and uses fitting and targeted language.Its 2025 ESG and Sustainable Barometer report analyses over 9,500 investment strategies managed by more than 460 asset managers. It evaluates key ESG and Sustainability related trends in the European and UK fund markets.The 2025 report highlights a clear downward trend in asset manager ratings across each Sustainable Finance Disclosure Regulation classification and non-EU ratings.Although sustainability standards and expectations have increased, several asset managers have withdrawn from key initiatives like the Net Zero Asset Managers initiative and Climate Action 100+ while US managers are increasingly reluctant to discuss ESG and Sustainability.Is Regulation The Problem For ESG?One reason is the growing complexity of regulation, despite repeated calls for simplification.At start of 2024, we hoped for simpler regulation, reflects Neill Blanks, Managing Director at MainStreet. Unfortunately, that was far from the case, particularly as fund naming rules came into effect on both sides of the Atlantic. Regulatory scrutiny continues to intensify, with the threat of fines for those that do not adapt, on top of reputation damage.However, he added, As markets continue to adapt to frameworks, we expect to see a broader range of ESG and Sustainable investment products with clear and specific key performance indicators linked to the funds ESG and Sustainable approach, allowing investors to better understand the intentions of the strategy.These should help to reduce the risk of greenwashing. For a more detailed look at greenwashing, see here.While industry best practices are still evolving regarding the marketing and definition of sustainable investments, regulation still needs to be clarified and less onerous before it strangles the sustainable investment market.The proportion of funds under the Paris Aligned Benchmark regime that are in breach of their required exclusions has remained steady at 72%. The most common violations are exposure to coal mining and environmental damage, human rights, corruption and bribery, and labour rights.Main Street declined to comment on the statistical balance between these, but said the principal breaches relate to holdings linked to controversial weapons and violations of of OECD guidelines for business.Article 8 is often regarding as light ESG investing. It seems even at a lighter level, there is still a gap between guidelines and practice.