FE fundinfo's Helen Slater: Sustainable funds battling an identity crisis

Two rulebooks, one industry

This article by Helen Slater, Regulatory Manager at FE fundinfo, was published in Investment Week in December 2025.

Not long ago, the idea of a defence fund being labelled 'sustainable' would have raised eyebrows across the investment community.

That has now become reality, with products such as HANetf's Future of European Defence UCITS ETF reclassifying from Article 6 to Article 8 under the Sustainable Finance Disclosure Regulation (SFDR) - a clear sign the industry's understanding of 'sustainability' is evolving.

We are moving beyond the era of clear-cut distinctions like no arms, no oil, no tobacco, and toward a more nuanced view, recognising that security and social stability are part of what keeps economies and societies sustainable in the long term.

For years, ethical investing was defined by its restrictions. Management companies drew clear moral boundaries as a way to show their portfolios reflected investors' values and avoided what could be perceived as contentious sectors. But markets, like societies, evolve.

Under SFDR, the focus has shifted from moral absolutes to measurable outcomes: how firms manage their environmental impact, treat employees, govern responsibly and contribute to broader social stability.

That shift has opened the door for new interpretations and new controversies. Defence companies, once the archetype of exclusion, are now being reappraised through a different lens: as contributors to resilience in an unstable world.

Perspectives on investing in defence will always differ but it is increasingly difficult to deny its importance in today's geopolitical climate. Security and resilience are now central to how societies protect themselves and their future.

The great SFDR climb

The climb up the SFDR ladder is not without risk. The European Commission's ongoing review aims to bring clarity, yet the current reality remains patchy.

Different interpretations across jurisdictions and data providers mean Article 8 can signify anything from genuine ESG integration to light-touch improvements.

For investors, the question is no longer whether a fund is Article 8, but what that actually means.

This lack of clarity can make it hard to know what they are really buying. If a 'sustainable' fund can include a defence manufacturer or arms supplier, investors will want that information readily available and accessible.

Unless reclassifications are backed by credible data and genuine stewardship, the trust sustainable finance depends on will begin to erode.

Age of uncertainty

The war in Ukraine has upended Europe's sense of what it means to be 'sustainable'. Issues once seen as geopolitical factors like national defence, energy independence and supply chain resilience, are now recognised as fundamental to social and economic stability.

A defence manufacturer investing in cleaner production or a utility company bolstering energy security might not fit the traditional ESG mould, but they now sit squarely within this broader interpretation of sustainability.

The UK's Sustainability Disclosure Requirements (SDR) capture this nuance well. Defence-linked or infrastructure-focused funds could plausibly fall into 'sustainability improver' or 'mixed goals' categories - labels that recognise incremental progress without overstating impact.

It is a pragmatic approach, recognising that companies can contribute to resilience and stability while continuing to develop their sustainability practices.

As Europe redefines what counts as 'sustainable', the rulebook itself is being rewritten. The EU is busy reforming SFDR, while the UK's SDR are being rolled out across the market.

Both frameworks share the same ambition: to make sustainable finance simpler and more credible. Yet without coordination, they risk creating the very confusion they were designed to solve.

For global asset managers, diverging definitions complicate reporting. For investors, they blur what a 'sustainable' fund really represents. If 'Article 8' in Brussels does not mean the same thing as 'Sustainability Focus' in London, investors could end up holding portfolios that include assets they never expected to see. Ultimately, this lack of transparency and coordination poses a trust issue that is difficult to overcome.

Credibility test

Sustainable finance has never been more visible or more scrutinised. Labels and data points now fill thousands of pages of documentation. But for investors, the question has shifted from what is being disclosed to whether it actually helps them make better decisions.

Reclassification can signal maturity; it is evidence the industry is learning and responding to a changing world. But progress must be grounded in clarity, not convenience. If sustainability labels become too elastic, stretched to fit every narrative, they risk snapping altogether.

The future of sustainable finance will depend on better communication. Communication that is honest and consistent. Only then can visibility evolve into trust.

Expanding the definition of sustainability to include security and resilience reflects how recent geopolitical events and policy changes are reshaping priorities. But this broader lens also raises the stakes. For regulators and asset managers, the drive to simplify disclosures must not come at the expense of investor understanding.

True progress will lie in frameworks that are flexible enough to evolve, yet precise enough to protect what investing sustainably truly means.

Sustainable finance can only retain its integrity if every label, disclosure and definition stands up to scrutiny.

Simplification should make the system smarter and, above all, worthy of the trust investors place in it.