The Financial Markets Authority warns it's coming for people who deceive investors with greenwashing.
The FMA's latest report criticised 14 KiwiSaver and other managed funds for a "blurring of the line" on ethical investments.
The integrated financial products review said funds could be overselling their green credentials.
FMA director of investment management Paul Gregory said fund managers were being put on notice.
"We are sort of done signalling - you need to make a lot of improvement and if you don't, we're prepared to take action," he said.
Gregory said there were a range of regulatory tools at their disposal from stop or interim orders to legal action.
The popularity of ESG investments meant fund managers could profit from people's good intentions.
Evidence on how impactful these investments were as well as their financial returns needed to be communicated clearly, he said.
"You can get three different funds that claim to be ethical but they'll be doing different things."
"You need to know so that you can decide which fund is best suited to your own particular combination of ethics.
"That is where disclosure is really important and where you can be misled."
The report said funds failed to provide adequate information on measurement of performance, reporting and the consequences of breaches.
Investors would therefore find it difficult to understand how a fund was meeting its objectives.
The FMA's research showed 68 percent of New Zealand investors preferred their money to be invested responsibly.