On 30 June 2025, ESMA published its final report on the common supervisory action (CSA) with national competent authorities (NCAs) on the integration of sustainability risks and disclosures in the investment fund sector (the Report). The CSA launched in July 2023 aimed to assess, foster and enforce compliance of supervised entities with core obligations of the Sustainable Finance Disclosure Regulation (EU) 2019/2088 (SFDR), the Taxonomy Regulation (EU) 2020/852 and related implementing measures, including the provisions in the AIFMD and UCITS implementing measures on the integration of sustainability risks. The CSA also aimed to ensure the adherence to the principles of ESMA's supervisory briefing (May 2022) on sustainably risks and disclosures in the area of investment management and support the identification of greenwashing practices and risks in the EU market. The CSA also supported the feedback gathering on current greenwashing practices and risks in the EU market and the findings informed ESMA's final report on greenwashing (May 2024).
The Report finds that while an overall satisfactory level of compliance of managers with the applicable regulatory requirements was observed, there remains room for improvement with several vulnerabilities identified.
The Report sets out ESMA’s analysis and conclusions of the CSA exercise and presents its views on the findings as well as specific recommendations to NCAs and market participants. ESMA presents two important observations:
- the CSA has helped NCAs to identify breaches that could be addressed by the supervised entities; and
- both supervised entities and NCAs gained experience of the implementation of the regulatory framework since March 2021 and are becoming more familiar with the supervision of the disclosure requirements on the integration of sustainability risks and disclosures and their enforcement.
Issues and vulnerabilities
The key takeaways identified in the Report relate to entity and product-level disclosures under SFDR and the implementation of sustainability risk policies, including the following:
1. Integration of sustainability risks and factors
Key findings
While most managers have integrated sustainability risks into their decision-making processes and organisational requirements, with involvement from senior management and risk committees, the NCAs identified the following vulnerabilities:
- a lack of properly documented policies for sustainability risk integration and poor descriptions of escalation procedures or documentation of sustainability risk breaches;
- insufficient due diligence on how sustainability risks are integrated in the investment management process (including during initial fund set-up);
- inadequate coverage of all asset types (e.g. cash, fixed-term deposits, structured products and derivative instruments); and
confusion between sustainability risk and greenwashing risk, with some entities treating them as the same risk.
Examples of good practice
- Maintaining appropriate policies and procedures on the integration of sustainability risks incorporating:
- screening criteria and exclusion lists which are reviewed at least annually; and
- detection of a portfolio overly exposed to unabated fossil fuels which is then diversified to other (non-vulnerable) sectors.
- Integration of sustainability risks in risk management procedures.
- Risk management which integrates ESG scores into existing metrics when calculating the risk profile of a fund.
- Where a fund has high ESG risk (as determined by the manager) for two consecutive quarters, the manager considers what actions to take to improve the ESG profile of the funds over the longer-term.
- Regular updates and clear internal organisation for sustainability risk management.
Examples of below average practice
- Senior management’s skills and expertise
- Minimal ESG experience i.e. one year and only acquired via training and seminars.
- Inadequate level of resources and expertise for effective integration of sustainability risks.
- Lack of proven track record linked to sustainability, which ought to be complemented by adequate training.
2. Entity-level SFDR disclosures
Key findings
Overall, there is margin for improvement in the overall quality of principal adverse impact (PAI) statements, with the following vulnerabilities identified:
- Lack of specific criteria and indicators to measure how remuneration policies are consistent with the integration of sustainability risk.
- Inadequate level of details and unsatisfactory explanation of non-consideration of PAI of investment decisions on sustainability factors, and inconsistencies in the calculations.
Example of good practice
• Ambitious engagement policies, including how engagement policies will be adapted if there is no reduction in PAIs over time.
Examples of below average practice
- Failure to reference Paris Agreement alignment in carbon reduction disclosures (despite using a specific risk assessment tool for the assessment of the de-carbonisation pathways).
- Poor disclosure of remuneration policies - missing information on considerations when calculating variable pay and poor accessibility of disclosures on website.
Example of non-compliance
- Statement on website that PAI statements only relates to Article 8/9 funds, not all investments.
3. Product-level SFDR disclosures
Key findings
The information provided in the disclosures varies widely in terms of detail and quality, with some funds making generic or excessive claims about sustainability characteristics and/or not clearly disclosing the environmental and social characteristics. The NCAs also identified inconsistencies between pre-contractual, periodic and website disclosures and other marketing material.
Website disclosures
- Accessibility could be improved by using simpler language to assist investor comprehension.
- There were some cases of non-compliance, including instances where the 2-page ‘summary section’ was missing, incomplete, longer than two pages or difficult to find.
- Some identified inconsistent use of fund names and examples of greenwashing, including Article 6 SFDR funds using suggestive non-textual imagery and sounds that can be linked to the environment or society, which were subsequently removed.
Sustainable investment under Article 2(17) SFDR
- Discretion permitted under Article 2(17) SFDR means that the criteria for testing sustainable investment and 'do no significant harm' principles (DNSH) vary widely and thresholds are often undisclosed.
- Disclosures by Article 8 SFDR products regarding the criteria used for compliance were less clear than those of corresponding Article 9 SFDR products.
- For some Article 8 SFDR funds there was an absence of processes to ensure that good governance practices were followed in the companies invested in.
- Most passive and index funds set very low minimum commitments (e.g. 0%) to sustainable or taxonomy-aligned investments, on the basis that there isn’t sufficient reliable and consistent data.
- Some managers significantly exceed minimum commitments (e.g. by up to 77%), risking misleading investors with a deliberately unrealistic initial commitment.
PAI consideration, thresholds, criteria and methods to establish contribution and DNSH
- The most common approach identified for measuring contribution to sustainable investments was to set thresholds for revenue that contribute to the UN Sustainable Development Goals (SDGs). Other approaches include thorough negative selections and positive screening methods.
- Compliance with DNSH principles is typically measured using exclusion criteria, analysis of controversies and the degree of alignment with the major international treaties.
Examples of good practice
- Designation of sustainability characteristics or objectives
Identifying in disclosures the promoted characteristics and/or objectives pursued by a fund based on officially accepted classifications e.g. the UN SDGs or the classification of environmental objectives under Article 9 of the Taxonomy Regulation.
Processes for screening for good governance practices, with defined criteria for exclusion or retention of portfolios both at the time of the investment, and on an ongoing basis.
Examples of below average practice
- Identification of excessive numbers of characteristics and objectives.
- Claiming in pre-contractual disclosures to promote all SDGs, while periodic disclosures show only contributing to promotion of a few SGDs.
- Inconsistent methodologies for sustainable investment calculation across two funds managed by the same manager.
Examples of non-compliance
- Failure to perform DNSH analysis due to lack of data, without considering alternatives1.
(a) adequately disclose the fact that the ESG ratings/score of a fund was compared to a well-known benchmark and was calculated on the basis of information provided by a data provider; and
(b) disclose an objective procedure for the calculation of the ESG rating/score,
which may create risk of moral hazard, as the manager may be incentivised to overemphasise the fund’s ESG performance in its internal ESG score/rating.
- Insufficient processes for Article 8 SFDR funds to ensure good governance in investee companies with no defined timeframes or materiality thresholds for non-compliant companies.
- Inconsistency between marketing material and pre-contractual disclosures
ESMA's views and recommendations for NCAs and market participants.
- Resourcing: The necessary workforce with adequate skills, knowledge and expertise for the effective integration of sustainability risks should be acquired and retained by managers, including evidence that training to enhance sustainability related skills were delivered, and at a regular frequency.
- Greenwashing: NCAs should follow up with supervised entities to ensure they take the necessary steps to take into account and mitigate greenwashing risks.
- Policies: Managers must establish and implement robust policies and procedures for sustainability risk integration. NCAs are recommended to check that remuneration policies clearly state how they integrate sustainability risks, including specific sustainability metrics.
- PAIs: NCAs should continue to verify that PAI statements comply with Table 1, Annex I of the Commission Delegated Regulation (EU) 2022/1288 (SFDR Delegated Regulation) and have a clear definition around the actions taken and planned, with targets set for the next reference period.
- Supervisory tools: NCAs should develop tools to enable them to perform controls on entity-level disclosures to check consistency between disclosures and actual investments. NCAs should ensure that entities avoid overly general references to SDGs and should develop tools to be able to perform controls on product level disclosures.
- Website product disclosures: Ensure that these disclosures are accessible, fair, clear and not misleading i.e. easily locatable, presented in simple language instead of using technical jargon.
- Fund names: NCAs should challenge the appropriateness of fund names that do not match investment strategy and encourages them to be vigilant in ensuring that all mandatory PAI indicators2 are used for DNSH disclosures. ESMA notes that the Guidelines on ESG and sustainability related terms in fund names, which became applicable after the CSA was concluded, will assist in this regard.
Thematic note on sustainability-related claims used in non-regulatory communications
In addition to the publication of the Report, on 1 July 2025, ESMA issued a related thematic note on sustainability-related claims used in non-regulatory communications, focusing on ESG credentials. This publication does not introduce new regulatory or reporting requirements, but aims to support market participants making clear, fair and not misleading sustainability claims and so address greenwashing risks in support of sustainable investments3.
The publication highlights the four guiding principles market participants should follow in order to make fair, clear and not misleading claims and avoiding greenwashing risks in their non-regulatory communications. The four principles require non-regulatory communications to be:
Accurate - without exaggeration, consistent across all communications and avoiding omission, cherry-picking and vagueness.
Accessible – sustainability-related claims should be based on information that is easy to access while neither being over simplistic nor overwhelming to the reader.
Substantiated - sustainability-related claims should be clear and have credible reasoning underpinned by facts and processes using methodologies that are fair, proportionate and meaningful.
Up to date - sustainability-related claims should be based on information that is up to date (dated analysis), with any material changes disclosed in a timely manner.
These principles, aligned with previous publications from the other European Supervisory Authorities, focus on applying the four principles to sustainability-related claims and ESG credentials (including references to labels or awards). Given these references are among the most common in retail-investor focused communications, ESMA's note is illustrated through practical examples of both good and poor behaviours based on observed market practices.
Next steps
Through both publications, ESMA has re-emphasised the need for clear, specific, and accessible disclosures, robust internal processes, and the use of all available supervisory and enforcement tools to address persistent vulnerabilities. While highlighting the continued challenges linked to the definition of "sustainable investment" under Article 2(17) SFDR, ESMA notes that the concrete changes coming out of an anticipated forthcoming review of the SFDR will not be applicable in the near future. Hence, it is important that supervised entities continue to be aware of regulatory expectations when seeking to comply with the current provisions.
Going forward, ESMA encourages NCAs to continue proactive engagement with market participants and follow up with those cases where vulnerabilities were detected. While supervisory measures are preferred, ESMA expects that NCAs should use full enforcement powers where appropriate. For its part, ESMA commits to fostering supervisory convergence across the EU and continue to maintain a strong focus on transparency, enforcement, and tackling greenwashing.
The Central Bank of Ireland has indicated that it also intends to share an industry communication containing its findings and expectations following the CSA and the publication of the Report.
If you have any queries on the content of this advisory and/or the impact that it may have on you and your business, please speak to your usual contact in Walkers or any of those listed below.
1 Including those referred to in Article 7(2) of the SFDR Delegated Regulation
2 Table 1 of Annex I, SFDR Delegated Regulation
3 There may be further such thematic notes issued by ESMA in due course, as judged necessary.
