ESMA Steps Up Scrutiny of How ESG Strategies Are Marketed

Key Takeaways

• Clear ESG Language Matters: ESMA is urging market participants to explain ESG integration and ESG exclusions in plain, precise terms so investors understand what these strategies actually involve.
• Greenwashing Risk Is Front and Center: Vague, exaggerated, or inconsistent ESG claims can mislead investors, even when there is no intent to deceive, and undermine trust in sustainable finance.
• No New Rules, Stronger Expectations: The thematic note does not introduce new disclosure requirements but reinforces existing obligations to provide fair, clear, and not misleading information.
• Substance Over Labels: Firms should not rely on ESG labels alone and must be transparent about ambition, methodology, and the real impact of ESG strategies on portfolio construction.
• Part of a Broader Supervisory Push: The guidance builds on ESMA’s wider greenwashing work and signals continued scrutiny of sustainability-related communications across the investment value chain.

Deep Dive

The European Securities and Markets Authority published a second thematic note on sustainability-related claims, this time homing in on how firms describe ESG strategies in their communications. The focus is squarely on two of the most frequently used, and most inconsistently explained, terms in the market of ESG integration and ESG exclusions.

According to ESMA, these strategies are routinely referenced in marketing materials aimed at retail investors, yet they can mean very different things depending on who is using them. When firms fail to explain those differences clearly, the regulator warns, the risk of greenwashing rises sharply.

Rather than laying down new definitions or formal disclosure rules, ESMA’s message is more straightforward. If market participants are going to use ESG labels, they need to explain, in plain language, what they actually do.

Why the Language Matters

ESMA notes that sustainability information is playing an increasingly central role in investment decisions. Claims about ESG strategies often go to the heart of how a product or firm presents its sustainability profile. But the complexity of ESG data, methodologies, and assumptions makes it easy for those claims to be misunderstood—even when there is no intention to mislead.

That risk spans the entire sustainable investment value chain. Issuers, fund managers, benchmark administrators, and investment service providers all make sustainability claims, and all are expected to respect the long-standing principle that information provided to investors must be fair, clear, and not misleading.

The new thematic note builds on ESMA’s broader work on greenwashing and reflects patterns the authority has observed across the market. It also aligns with similar thinking from Europe’s other supervisory authorities, reinforcing a shared view that unclear ESG claims can undermine investor confidence, regardless of whether they sit neatly within the existing sustainable finance rulebook.

ESG Integration vs. ESG Exclusions: Not as Simple as They Sound

A central theme of the note is that ESG integration and ESG exclusions are often treated as shorthand for “doing ESG,” even though their real-world impact can vary widely.

ESG integration is generally described as incorporating ESG risks and opportunities into investment analysis and decision-making, often with the aim of improving risk-adjusted returns. In practice, however, integration can be binding or non-binding, applied across an entire portfolio or only to certain asset classes, and focused on financially material risks alone or broader sustainability impacts. Importantly, integration does not necessarily result in assets being excluded from a portfolio.

ESG exclusions, by contrast, are typically about drawing clear lines around what cannot be held. These strategies rely on filters that rule out certain sectors, activities, issuers, or practices, sometimes based on absolute bans and sometimes on revenue or exposure thresholds. Here too, ambition varies. Some exclusion policies meaningfully narrow the investable universe, while others have little practical effect, despite sounding robust in promotional materials.

ESMA points out that these nuances are often missing from investor-facing communications. Without clarity on how strategies are defined, how consistently they are applied, and whether they actually change portfolio composition, investors may draw conclusions that are not supported by the facts.

What ESMA Expects to See

Throughout the note, ESMA leans heavily on examples of real market practices to illustrate where communications work—and where they fall short. The regulator stresses that firms should avoid using ESG integration as an umbrella term for multiple strategies, or implying superior sustainability credentials without evidence of ambition or impact.

For exclusions, ESMA urges firms to be transparent about the criteria they use, the thresholds they apply, and whether those exclusions are based on a materiality assessment. Claims suggesting zero exposure or above-average ESG performance should be backed by methodologies that actually deliver those outcomes.

Across both strategies, ESMA flags recurring problem areas it has seen in the market: exaggerated differences between ESG and non-ESG products, outdated data supporting bold claims, and key limitations buried in lengthy or hard-to-find documentation.

Part of a Broader Push on Greenwashing

While the thematic note does not introduce new legal obligations, it adds weight to supervisory expectations around ESG communications. ESMA is clear that misleading sustainability claims, whether intentional or accidental, can damage trust in markets and leave investors worse off.

More thematic notes may follow, and ESMA says the guidance should be read as part of a wider body of work aimed at improving how sustainability information is communicated. The underlying theme is that ESG labels are not the problem, but vague explanations and over-promising are.

For firms active in sustainable finance, the takeaway is hard to miss. If you are going to talk about ESG strategies, you need to explain them clearly enough that investors understand what they are and just as importantly, what they are not.

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