By Craig Mellow

ESG lives! Mostly in Europe. It's still figuring out what it wants to be when it grows up, though.

The environmental, social, and governance label remains a selling point for European investors, despite its demonization in the U.S. these days. "Adding an ESG term can significantly increase fund inflows," recent research by the European Securities and Markets Authority, or ESMA, found.

ESG assets under management have swelled steadily on the fastest warming continent to $3 trillion, 85% of the global total, according to Morningstar.

ESG means different things to different Europeans, putting it mildly, even after the European Commission's 2021 Sustainable Finance Disclosure Regulation, or SFDR. No less than 14,000 funds claim to comply with Article 8 of the EU directive, colloquially known as "light green," MSCI reports.

They have no minimum requirements and little common denominator except excluding coal and tobacco producers. "The vast majority are light ESG and may adopt very different approaches," says Pierre Garrault, senior policy advisor at the European Sustainable Investment Forum.

Defense stocks, traditionally off limits for many ESGers, are undergoing a rebranding as Europe bulks up its militaries to deter Russia and depend less on the U.S. Just over half of Article 8 funds now consider owning armaments makers, Morningstar finds. "Defense is now a social necessity, though not a sustainable investment," says Mark Wade, head of sustainability research and stewardship at Allianz Global Investors.

Longer-term investors increasingly realize that public companies run environmental and resource-related risks beyond the scope of traditional financial statements, Wade argues. A smallish example is water companies in the United Kingdom, where years of strong performance masked budding problems with pollution and customer dissatisfaction. "Something had to crack, and in 2022 it did," he says. Former hot stock Severn Trent remains 15% off the peak it reached that year.

Much bigger money could be at stake over the next few years as today's Magnificent Seven build out artificial intelligence data centers, confronting thorny issues of how to access the huge energy and water inputs involved. "When we talk to tech companies, we hope they have a good answer to these questions," Wade says.

The European Commission could make nailing ESG jelly to the wall a bit easier next month when it delivers a review of the SFDR with specific fund requirements. That could enable growth among Article 9, or "deep green" funds, which have been waiting for more specific guidance, Garrault says. "This will hopefully bring clarification for market participants and foster the development of sustainable products," he says.

The fundamental question of whether ESG investment pays off also remains without a conclusive answer, not least because the category itself is so loosely defined.

ESG "showed strong market-relative and absolute performance in the decade prior to 2022," finds Michal Bartek, a researcher at Principles for Responsible Investment. A jump in energy and defense stocks after Russia's February 2022 invasion for Ukraine changed that. Faltering oil prices and ESG managers' embrace of defense stocks may change it again.

What's clear is that European investors, institutional and retail alike, don't agree that "ESG policies pushed by radical activist groups are bad for consumers," as Texas Attorney General Ken Paxton put it in an open letter to the grandees of Wall Street.

"Europe wants to channel capital to the growth sectors of tomorrow," says Leo Donnachie, London-based sustainable finance lead at the Institutional Investors Group on Climate Change.

It just needs to work out how.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 10, 2025 10:30 ET (14:30 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.