ESG

On 1 July 2025, the European securities and markets authority (ESMA) published thematic notes on sustainability-related claims that should be clear, fair and not misleading. The notes are addressed to all market participants in the sustainable investment value chain.

Building on work by the European Supervisory Authorities (ESAs) on greenwashing, ESMA observed market practices to focus first on Environmental, Social, and Governance (ESG) credentials (e.g. labels, ratings, comparisons). It sets out four guiding principles: claims should be accurate, accessible, substantiated, and up to date. In particular, ESMA warns against exaggeration, cherry‑picking, omission, vagueness, inconsistency, lack of meaningful comparisons, etc. The objective is to enhance the clarity and reliability of sustainability-related communications in line with an investor protection perspective, to support firms in making accurate and substantiated claims, and thus to reduce the risk of greenwashing across the sustainable investment value chain.

On 9 September 2025, ESAs published their fourth annual report on Principal Adverse Impact (PAI) disclosures under Article 18 of the sustainable finance disclosure regulation (SFDR). It assesses PAI statements published by financial market participants (FMPs) by June 2024 for the 2023 reference period. By way of reminder, only FMPs with more than 500 employees are required to comply with the mandatory PAI disclosures whereas smaller FMPs may opt to not consider PAIs.

The ESAs observe an overall improvement in the quality and completeness of disclosures compared to previous years, with larger FMPs generally providing more detailed information. Smaller entities often provide insufficient clear information whether PAI are considered or not, by providing less specific or generic descriptions of actions taken or planned. Some common challenges include low data coverage for certain indicators, limited quantification of mitigation actions and difficulties for investors in accessing and interpreting the statements. At the product level, most Article 8 and Article 9 funds now disclose PAIs (approximately 89% and 97%, respectively), though coverage remains incomplete for some indicators, such as non-renewable energy use, real estate exposures and energy-inefficient properties. The ESAs recommend that the European Commission consider requiring machine-readable PAI disclosures integrated into the European Single Access Point (ESAP) and explore revising thresholds for mandatory disclosures to focus on FMPs’ total investment amounts rather than employee count. They also suggest reducing the frequency of Article 18 reporting to every two to three years instead of annually, to focus on improving the delivery of meaningful data and analysis of PAI disclosures.

On 4 August 2025, the ESAs published updates to their consolidated Q&A on the SFDR and its Delegated Regulation, providing new clarifications on PAI indicators in table 2, annex I of the delegated regulation and financial product disclosures in annex II and III of the delegated regulation.

In June 2025, ESMA published its report on the sustainability-related disclosures and the integration of sustainability risks in the investment management sector (the Report). ESMA noted that the level of compliance of investment management firms with the sustainability-related rules is overall satisfactory. Nevertheless, there is still room for improvement with respect to the integration of sustainability risks, entity-level SFDR disclosures and product-level SFDR disclosures. ESMA also mentioned that further work will be performed for promoting supervisory convergence in the area.

On 30 September 2025, the CSSF published its feedback report following ESMA’s Report on the integration of sustainability risks and disclosures in the investment management sector.

Based on its review of a sample of Luxembourg IFMs, the CSSF observed that most managers have integrated sustainability risks into their procedures and remuneration policies, but that further improvements are required. Identified weaknesses include limited data coverage, overly generic action plans for PAI indicators and insufficient clarity on methodologies used to determine sustainable investments. The CSSF also found inconsistencies between pre-contractual and periodic disclosures, and noted that the PAI statements of some IFMs were incomplete, limited to certain products or not easily accessible on their websites.

In addition, the CSSF highlighted the need for better integration of sustainability risks in risk management frameworks, including more comprehensive indicator coverage, regular reporting to senior management and defined escalation measures. The report further reminds IFMs that fund names containing ESG or sustainability terms must be supported by adequate substantiation and transparent methodologies.

The CSSF requests that all IFMs perform a self-assessment against the findings of both the ESMA Report and the CSSF feedback report and implement appropriate corrective measures to ensure full alignment with regulatory expectations.

On 1 October 2025, ESMA submitted its response to the European Financial Reporting Advisory Group’s (EFRAG) Exposure Draft on proposed revisions to the European Sustainability Reporting Standards (ESRS). While supporting the aim of reducing reporting burden and simplifying presentation, ESMA raises concerns about certain proposals that may weaken transparency or comparability.

ESMA cautions against the introduction of two layers of materiality (one for primary users and one for others), fearing this could lead to inconsistency or dilution of disclosures. The authority stresses that material impacts, risks and opportunities should still be captured transparently, even under a more topic-driven presentation approach. ESMA also calls for clarification between “transition plans” and generic “action plans,” recommending the inclusion of baseline disclosures to allow investors to assess credibility.

On reliefs, ESMA warns against granting indefinite or perpetual reliefs, especially for disclosures relating to an entity’s own operations, as these may reduce the incentive to improve disclosure quality over time. The removal of the “net-zero” target definition is also flagged as a backward step. ESMA disfavours converting quantitative resilience disclosures into qualitative ones, arguing this would harm comparability across entities.

Finally, ESMA underlines the importance of maintaining strong interoperability with the International Sustainability Standards Board’s International Financial Reporting Standards S1 and S2 standards. The authority warns that certain proposed relaxations risk creating divergence from global benchmarks, especially in areas linked to financial effects and data points aligned with SFDR.