Sustainability investing: Choosing the right "flavour" with conviction

Think of your favourite milk chocolate bar. For years, it has come in the same familiar form, with the flavour you expect – smooth, sweet, a balanced blend of cocoa and milk. Now imagine the food authority decides that from tomorrow, only bars containing at least 70% cocoa and no milk can be labelled “chocolate”.

Manufacturers now have two options. They can keep the word “chocolate” on the wrapper and change the recipe: remove the milk, increase the cocoa, and turn your creamy bar into a much darker one. Or they can keep the recipe and change the wrapper – “Milk Chocolate” becomes “Milk & Cocoa Bar”. Most of us would likely prefer the latter. We care more about what’s inside, as long as the new name is honest.

The opposite approach is often taken

In the realm of sustainability investing, however, the opposite approach is often observed. When new regulations concerning the use of environmental, social, and governance (ESG) factors in the naming of investment products were introduced, many funds adjusted their “recipe” to keep the “wrapper”.

For instance, the European Securities and Markets Authority (ESMA) reported in December last year that in 2025, 56% of EU asset managers revised their investment policies because of the guidelines on ESG- or sustainability related terms in fund names. In other words: more than half changed what’s inside to preserve what’s written outside.

Starting with investors' goals

The Asset Management division of Zürcher Kantonalbank, under the Swisscanto fund brand, proposes an alternative approach. We call it "from regulation to conviction". This means that Funds should be built first around investor goals and genuine investment beliefs, and only then mapped transparently onto regulation – not designed backwards from a label.

We firmly believe that Sustainability regulation has brought real benefits: clearer standards, stricter naming rules, better disclosure. All of this helps reduce greenwashing – misleading claims about the supposed sustainability of products – and improves transparency. The challenge arises when regulation becomes the starting point for product design.

A process-oriented approach that begins with investors starts, in our view, with the following questions: “What are our clients trying to achieve?” and “What do we believe is a sound way to invest, from a combined financial and sustainable perspective?” In this approach, the investors' goals come first, followed by the appropriate investment strategy and a tailored product.

The rules are still essential, but they are applied to a strategy that already makes sense on its own terms.

The flavour many investors crave

In our experience, most investors choosing ESG or sustainable products have a clear underlying aim: they want competitive long term returns; they often want to avoid certain sectors or practices; they care about long term environmental and social risks; and many like the idea that their capital is part of a positive story.

That’s the “flavour” they are looking for when they pick a fund.

What we often observe in practice, however, is that A naming standards tighten, some existing strategies might no longer fit a preferred regulatory category. Managers face a choice very similar to the chocolate example: alter the strategy to keep the label or alter the label to keep the strategy. A regulation driven response may include to change holdings, add exclusions, or tighten constraints largely so the fund continues to qualify for a certain term in its name. The wrapper looks familiar; the contents evolve – sometimes more than investors might expect.

Packaging follows regulation

The conviction driven approach, on the other hand, begins with clarifying the purpose of an investment fund. Is it mainly about financial returns with ESG as a risk lens? Is it actively seeking sustainable themes? Once the goal is clear, the manager can honestly place the strategy within the regulatory framework and, if necessary, adjust the name and documentation. In this approach, the wrapper adapts to changing rules, while the investment “recipe” remains coherent and recognisable.

In our view, this conviction-driven approach also offers clear advantages from an investor's perspective: It is easier to accept that a fund’s label has changed because regulation has become more precise than to discover that the underlying strategy was reshaped mainly to keep a word in the name.

From an asset manager's perspective, the following key points can be derived:

• Start with purpose, then apply the rules
  
  Designing with conviction means deciding how sustainability materially contributes to the strategy, then shaping the investment approach accordingly: what is in or out, how ESG data is used, how engagement works, and what trade offs are accepted. Only then should the regulatory questions come: what can we legitimately call this, and what must we disclose?
  
  
• Regulation as framework…
  
  Strong regulation remains essential. It sets minimum standards, improves data and processes, and makes claims more comparable. Used well, it is a framework and a common language: “Here is our view of how sustainability affects value; here is how we integrate it; here is how that fits the current rules.”
  
  
• …and not just a checklist
  
  Problems may emerge only when the framework turns into a formula, and funds are engineered mainly to pass tests rather than to serve investors. That is when ESG risks becoming more of a checklist than a tool for better decisions.

This, in turn, can only benefit investors: When funds are built from conviction and then applied to regulation, investors tend to get strategies that genuinely match their expectations, with changes driven by investment reasons, not just by labels. At the same time, this can lead to more robust portfolios that are not distorted by the pursuit of a single regulatory metric. In the long term, this can also build greater trust, because labels and categories describe thoughtfully designed products instead of silently shaping them.

Our conclusion:

Just as with the recipe for a chocolate bar, the investment approach in sustainable finance should be anchored in what investors are really trying to achieve, informed by clear beliefs about how sustainability affects value. The “wrapper” – name, classification, and disclosures – should describe that honestly and in line with evolving rules. That is what it means to move from regulation to conviction: letting regulation clarify but allowing investor needs and investment insight to set the strategy.

Find out more about the oppor­tunities of sustain­ability here