ESG

On 9 April 2025, ESMA published its final report on the common supervisory action (CSA) conducted with national competent authorities (NCA) regarding environment, social and governance (ESG) disclosure requirements under the EU Benchmarks Regulation (BMR). This was the first CSA coordinated by ESMA in its capacity as a direct supervisor of benchmark administrators.

The aim of the CSA was to assess how benchmark administrators comply with their ESG disclosure obligations, enhance supervisory convergence, and improve the transparency and comparability of ESG information for users of benchmarks. The exercise focuses on both benchmark statements and methodologies, including specific disclosures for EU Climate Transition Benchmarks and EU-Paris Aligned Benchmarks.

Key findings from the CSA include inconsistent interpretations of ESG requirements, diverging calculation methods across administrators, and lack of clarity on the definitions of several ESG factors. ESMA noted that most environmental indicators had stronger and more complete data, while social indicators often faced low reporting levels.

To address these shortcomings, the CSA provides guidance on the definitions and methodologies used for the calculation of the ESG factors including a set of good practices and recommendations to the European Commission for a potential revision of the Level 2 BMR Rules. These include:

• aligning ESG factor definitions and methodologies with the other sustainable finance legislation, particularly SFDR, CSRD and the Taxonomy Regulation;
• clarifying when benchmarks should be considered ESG benchmarks (i.e., when ESG data are used to select specific ESG objectives);
• introducing simplified and targeted disclosures based on minimum sustainability indicators (by key performance indicators) rather than full disclosures for all ESG factors;
• increasing data transparency, particularly around data coverage rates and calculation assumptions.

ESMA will continue working in coordination with NCAs to follow up on the findings and provide technical input to the European Commission. Future updates to the BMR may have more impact on the way benchmark administrators disclose ESG information and, indirectly, how asset managers comply with their own ESG obligations when using such benchmarks.

On 10 April 2025, the European Securities Market Authority (ESMA) published a new Trend, Risks and Vulnerabilities (TRV) article analysing the use of ESG-related terms in the names of EU-domiciled investment funds and their impact on investment flows. This report forms part of ESMA’s ongoing risk monitoring framework about sustainable finance.

The study tracks the evolution of fund names containing environmental, social, governance or sustainability-related terms between 2009 and mid-2024, covering both UCITS and AIFs. It also investigates whether such naming decisions influence investor behaviour, particularly net fund inflows, and examines potential incentives for greenwashing. This methodology helped to isolate the effect of the ESG term independently from the fund’s underlying characteristics.

These are the key findings from the TRV article:

• The proportion of funds using ESG terms rose from under 3% before 2015 to 9% in 2024, driven largely by UCITS (15% by mid-2024)
• The term “ESG” became dominant after 2021, accounting for over 40% of ESG-related words used in new fund names, followed by “sustainable” and “climate”
• Funds adding ESG terms experienced an average cumulative increase in net inflows of 8.9% during the year following the name change
• The effect on fund flows was mainly driven by the addition of environmental (E) terms (+16% inflows during the first year) rather than social/governance (S/G) and sustainability related terms

To address the risk of potential greenwashing, ESMA recalls its May 2024 guidelines on fund names using ESG or sustainability-related terms, which aim to ensure that such names reflect the actual investment strategy of the fund. These include:

• a minimum 80% threshold of aligned investments;
• excluding certain sectors (e.g., controversial weapons, tobacco);
• additional commitments for funds using terms such as “impact”, “transition” or “sustainable”.

To conclude, the report highlights that ESG terminology in fund names has a strong influence on investor flows, demonstrating the need to ensure that the fund name using ESG terms reflects the actual portfolio investments.

Finally, ESMA emphasises the importance of strict supervision and clear naming standards to maintain investor trust and support the integrity of the sustainable finance ecosystem.

On 2 May 2025, ESMA published its consultation paper regarding draft technical standards under the ESG Ratings Regulation (Regulation 2024/3005):

The aim of the ESG Ratings Regulation is to improve the transparency, integrity, reliability and comparability of ESG ratings in the European Union by establishing:

• a mandatory common framework for ESG rating agencies;
• supervision by ESMA;
• clear obligations to prevent conflicts of interest, improve communication and guarantee the independence of analysis.

The three drafts Regulatory Technical Standards (RTS) proposed by ESMA cover:

Authorisation and recognition of ESG rating agencies

They provide a standardised process for applications for authorisation (concerning EU-based agencies) or recognition (for non-EU based agencies), and some required disclosures such as, identity, organisational structure, methodologies, conflicts of interest, financial data, etc.

Separation of activities

Article 16 of Regulation 2024/3005 sets out that ESG rating providers may not provide, within the same legal entity, activities such as consulting, credit rating, audit or assurance, investment, credit, insurance and benchmark services except where specific derogations apply. When derogations apply, ESG ratings providers must establish organisational and physical separations (“Chinese Walls”). Such measures include digital access restrictions, information controls for internal documentation, policies and procedures, contractual provisions, staff training, and compliance monitoring to ensure that the level of safeguards is proportionate to the complexity and range of activities engaged in and, ultimately, mitigate the risk of conflict of interests.

Transparency obligations

As outlined in the draft RTS, ESG rating providers must comply with transparency requirements and are required to publicly disclose on their website the methodologies, models and key rating assumptions they make use of.

In addition, EMSA proposes to expand the scope of disclosure to also include rating-specific information on methodology changes and factor specificities, thus providing greater transparency and comparability for users, rated items, and issuers throughout the market.

Following the public consultation closed on 20 June 202, the final report and transmission of the RTS to the European Commission is scheduled for October 2025. The ESG Ratings Regulation will come into force on 2 August 2026, with transitional periods foreseen.

On 7 April 2025, ESMA published a consultation paper for external reviewers of European Green Bonds under the European Green Bonds Regulation. Participants were asked to provide their views on various topics, such as:

• adequacy and effectiveness of systems, resources and procedures;
• the compliance function; and
• internal policies and procedures.

The ESMA will consider the feedback received to the consultation by 30 May 2025 and expects to publish a Final Report and submit the draft RTS to the European Commission for adoption by 21 December 2025 at the latest.