Introduction
The European Securities and Markets Authority (ESMA) has recently (i) identified areas where improvements to the supervision of sustainability risks and disclosures are needed; and (ii) promoted clarity in sustainability-related communications:
- On 30 June 2025, ESMA, acting in coordination with National Competent Authorities (NCAs), published the final report on its Common Supervisory Action conducted in 2023–24 (the Final Report);
- On 1 July 2025, ESMA published its thematic notes promoting clarity in sustainability-related claims used in non-regulatory retail communications, emphasising that they should be clear, fair and not misleading, with particular attention to the risk of greenwashing (the Thematic Notes).
By highlighting the points that really stand out, the publication helps shine a light on the main issues covered in both the Final Report and the Thematic Notes.
I. The Final Report
In 2023, ESMA and the NCAs began assessing how investment fund managers (IFMs) were addressing sustainability risks and disclosures under the UCITS Directive1, AIFMD2, SFDR3 and Taxonomy Regulation4. Their work included reviewing whether IFMs accurately reported sustainability-related disclosures and upheld principles designed to protect investors from misrepresentations of environmental, social, and governance (ESG) practices, as entity-level and product-level ESG claims are identified as potential areas of greenwashing risks5.
While many IFMs have made commendable progress in integrating sustainability considerations into their business strategies, the review revealed several shortcomings in ESG disclosures.
The main issues detected by the NCAs, on which the IFMs are expected to improve are the following:
- Sustainability-related disclosures are often vague, unclear, or inconsistent across documents;
- Remuneration policies lacked clear links to sustainability risks;
- Many IFMs lacked internal checks or clear definitions of sustainability risks;
- The principal adverse impacts (PAI) statement under SFDR are reported with an inadequate level of details; inconsistencies in the calculations and unsatisfactory explanation of non-consideration;
- The NCAs noted the lack of resources for sustainability tasks, with a low number of dedicated employees;
- Lack of processes in place to ensure that the description of the funds' ESG strategies is substantiated by the relevant data and lack of verification or review process of ESG data from third parties;
- Some used environmental imagery or names that misled investors about the fund's true sustainability performance; and
- Others conflated greenwashing risk with general sustainability risk.
ESMA reported that sustainability risks are integrated in the managers' decision-making procedures and organizational requirements, with different approaches depending on the size and structure of the IFM. However, vulnerabilities were found in relation to a lack of due diligence, lack of description of indicators, the frequency of the report to senior management and ESMA emphasizes the need for IFMs to acquire and retain a workforce with adequate skills, knowledge and expertise for the effective integration of sustainability risks.
On product-level disclosures, ESMA's review revealed that PAIs on environmental and social well-being were commonly overlooked. By using their own interpretations of sustainable investments, IFMs were either failing to specify rigorous methods for verifying compliance with ESG goals or offering insufficient evidence to demonstrate that their investments met the 'do no significant harm' requirement.
In response, ESMA is encouraging IFMs to enhance their transparency by ensuring that their disclosures are clear, complete and free of misleading language, with the need to avoid general references to SDGs or net-zero objectives for sustainable investments' contribution. The names of funds should align with their actual investment objectives, and comprehensible explanations should be provided where names and strategies differ. ESMA also calls for vigilance when sharing PAI data and emphasizes the need to substantiate contributions to global sustainable development. The Final Report provides several examples of good and bad practices for the attention of the IFMs.
Furthermore, ESMA recommends the development of additional tools for product-level oversight, emphasizing that NCAs should utilize the full supervisory and enforcement toolkit.
ESMA reminds all stakeholders that accurate and honest disclosures are essential for fostering trust in sustainable finance.
II. The Thematic Notes
The main goal of the Thematic Notes is to manage the expectations of financial market participants, including IFMs (FMPs) regarding sustainability claims, and to clarify how these claims should be communicated to investors to avoid misleading them.
Sustainability information is becoming increasingly important to retail investors. In response, FMPs — such as issuers, fund managers and investment service providers — must communicate relevant data in a fair, clear and non-misleading manner.
Heightened concerns around greenwashing — defined as misleading investors by exaggerating or falsely claiming sustainability credentials — have prompted ESMA to issue four guiding principles to prevent such exaggeration or misrepresentation.
- Accurate: Claims must accurately and fairly represent the sustainability profile of the entity or product. Exaggeration and cherry-picking information should be avoided. Market participants should ensure that the ESG terminology, imagery and sounds used are consistent with the entity's sustainability profile.
- Accessible: Information should be easy to understand, without being oversimplified, and detailed enough for meaningful interpretation. In the case of short marketing material aimed at retail investors, additional information can be provided through 'layering' (e.g. clickable links in digital materials).
- Substantiated: Claims must be backed by clear and credible data, and comparisons should be transparent and comparable where possible.
- Up to date: Claims should be updated regularly to reflect any material changes, and the date of the analysis should be clearly indicated.
The use of ESG credentials (e.g., ratings, labels, certificates, awards) in investor communications can be misleading, particularly if the importance or implications of these credentials are overstated. These must provide clarity on their basis, significance, or level of verification.
The Thematic Notes provides examples of good and bad practices that may be used by the FMPs as a reference.
What's next?
The Final Report highlighted that, while most NCAs found that fund managers are generally complying with sustainability-related requirements, there is still room for improvement, particularly with regard to the integration of sustainability risks and the disclosure of related information.
To this end, ESMA will continue to collaborate with national regulators to enhance compliance, provide investors with accurate and reliable ESG information, and encourage NCAs to proactively scrutinize IFMs by continually following up on any identified weaknesses. Active engagement through constructive supervisory dialogue is also crucial to ensure that entities take timely and appropriate measures to address any shortcomings.
Finally, in light of the ongoing regulatory challenges under the SFDR, a future review may clarify product categories and criteria in order to resolve any remaining ambiguities. However, NCAs must remain vigilant in enforcing the current SFDR framework, as statutory changes will not take effect in the near term and entities must continue to adhere to the existing rules.
With the same objective in mind, the Thematic Notes serve as a cautionary document for FMPs. Therefore, FMPs should incorporate these principles into their ESG governance, compliance frameworks and marketing approval processes to mitigate legal risk. While sustainability claims can be useful in helping investors to make informed choices, they must be communicated responsibly to avoid misleading assertions and maintain investor trust.
Footnotes
1. Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities.
2. Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers, as amended.
3. Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability‐related disclosures in the financial services sector.
4. Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the establishment of a framework to facilitate sustainable investment, as amended.
5. See ESMA Report on Greenwashing, 4 June 2024: ESMA36-287652198-2699 Final Report on Greenwashing.
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