EU markets regulator the European Securities and Markets Authority (ESMA) announced the release of a new thematic note aimed at guiding market participants on its expectations for addressing greenwashing risks in marketing of sustainable investment strategies, with a particular focus on ESG integration and ESG exclusion funds.
The new publication forms part of a series of thematic notes launched by the regulator last year regarding sustainability-related claims by issuers and fund managers, with an initial note in July 2025 focused on references to ESG credentials such as qualifications, labels, ratings, and certificates.
The notes set out four key principles for market participants making sustainability claims to ensure that they are fair, clear and not misleading, with claims required to be Accurate, Accessible, Substantiated and Up to Date.
In its new ESG investment strategies-focused guide, ESMA noted that while references to ESG integration and ESG exclusion strategies are often made by market participants and used in marketing communications to retail investors, these strategies are often less ambitious relative to other sustainable investment strategies, and can have varying levels of meaning and ambition within different funds, leading to potentially misleading communication to investors.
In its analysis of observed market practices for ESG integration strategies, ESMA noted several points of difference regarding market practices, with integration of ESG factors in investment strategies sometimes being binding and applied across the entire portfolio, and sometimes optional and applying only to some holdings; material changes in ESG factors creating a need for action in some products, but not in others; ESG factors playing a key role in portfolio construction for some funds, but having a less important role relative to other material financial information in others; and ESG information being integrated more or less significantly in financial analysis of securities, asset classes, sectors and regions.
For ESG exclusion strategies, ESMA found varying levels of ambition in applying thresholds for the exclusions; and only some strategies relying on a materiality assessment in defining the ESG criteria or factors on which the exclusion rules or screenings are based.
In both cases, ESMA noted that it observed that funds communication the application of ESG integration and exclusion strategies “may or may not have a notable impact on the portfolio holdings and weights of the product compared to an otherwise identical strategy.”
In the note, ESMA said:
“These divergent market practices regarding ESG integration and ESG exclusions are often not well explained by market participants, thus creating a risk of claims being misinterpreted and investors being misled in the absence of sufficient transparency.”
In its publication, ESMA listed a series of “Do’s” and “Don’ts” and examples of good and poor practices. For use of the term “ESG integration,” for example, ESMA guided firms to clearly communicate what is meant, using plain language to accurately describe how ESG factors are considered in the portfolio construction process, and including illustrative examples, being clear about whether ESG integration is a binding or non-binding aspect of the product’s approach and if ESG factors trigger portfolio decisions, clarifying the level – such as security selection, security weighting, etc. – at which ESG integration is done, being transparent about varying levels of ESG ambition for various asset classes and sectors, and being clear about the materiality approach used.
For ESG exclusion strategies, ESMA guides firms to describe the process used in plain language, clarify whether exclusions are defined in absolute terms or based on thresholds that apply to all, or just some, criteria, be transparent about the use or lack of a materiality assessment for the exclusion strategy, be clear about the level of impact of the exclusions on the investable universe and the final portfolio composition, and to clarify if the exclusions are defined following a firmwide policy or whether if they are tailor-made to the product’s investment universe.
Click here to access ESMA’s thematic note.
