ESMA CSA on Sustainability Risks and Disclosures - Final Report

What’s new?

On 30 June 2025, ESMA published its Final Report (the Report) which follows on from the Common Supervisory Action (CSA) launched with EU National Competent Authorities (NCAs). The CSA focused on sustainability-related disclosures and the integration of sustainability risks – see our summary here.

What does the Report say?

The Report sets out ESMA’s findings and aims to determine whether financial market participants (FMPs) are complying with the rules on sustainability risks and disclosures at both entity and product levels.

ESMA found that a majority of NCAs confirmed the integration of sustainability risks into managers’ decision-making procedures. However, certain vulnerabilities were found. These include a lack of description of sustainability indicators, infrequent reporting to senior management and poor descriptions of the escalation process in policies.

Based on the NCAs’ observations, ESMA has provided several examples of good, below-average, and non-compliant practices:

1. Integration of sustainability risks and factors

Good practice: Policies and procedures on the integration of sustainability risks

• ESMA found that funds which have a screening criteria, exclusion lists, and annual reviews were satisfactory. If a portfolio becomes exposed to a specific sector, managers can reduce that exposure by diversifying into other ‘non-vulnerable’ sectors.

Below-average practice: Senior management’s skills and expertise

• Senior management’s experience in ESG and the integration of sustainability risks into their governance is limited to one year, primarily acquired through training and seminars.

2. Entity-level SFDR disclosures

Good practice: Engagement policies

• The manager includes in the principal adverse impact (PAI) statement a description of how engagement policies are adapted when no reduction in PAIs is observed over multiple reporting periods. This allows managers to comply with Article 8(2)(b) of the SFDR.

Below average practice: Poor disclosure of remuneration policies

• ESMA found that some managers failed to describe in their remuneration policies the information required by Article 5(1) of the SFDR. This information is also required when calculating variable remuneration.

Consideration of PAI

• Generally, NCAs observed a satisfactory level of compliance with Annex I of the SFDR Delegated Regulation. However, NCAs identified some vulnerabilities, such as managers often failing to provide detailed information about the indicators and methodology used to consider PAIs on sustainability factors.

Non-compliance: PAI statement

• One manager incorrectly believed that their PAI statement only applied to funds disclosed under Article 8 and 9 of the SFDR. ESMA refers to the ESA’s Joint Opinion, which explained that financial market participants are required to consider ‘all investment decisions’ for the purposes of PAI disclosures under Article 4(1)(a), 4(3), and 4(4) of the SFDR.

3. Product-level SFDR disclosures

Good practice: Designation of sustainability characteristics or objectives

• The manager identifies in financial product disclosures a fund’s promoted characteristics and objectives using recognised classifications such as the classification of environmental objectives under Article 9 of the Taxonomy Regulation or the classification of social objectives in the Final Report on a social taxonomy by the Platform on Sustainable Finance (PSF).

Below average practice: Excessive number of characters and objectives

• Some funds disclose in their pre-contractual disclosures that they promote all the Sustainable Development Goals (SDGs) as sustainability characteristics. However, in their periodic disclosures, these funds note that they contributed to one or two of those SDGs. ESMA states that this is clearly a misleading claim because it promotes a high number of SDGs while in reality their investments only contribute towards a small number.

Non-compliance: Good governance criteria

• Under Article 8 SFDR, companies in which investments are made, sustainable or non-sustainable, must follow good governance practices. However, ESMA found that some managers had insufficient processes to ensure these practices are followed. Specifically, there were no defined timeframes or materiality thresholds for how long a portfolio company may engage with a non-compliant company.

Next Steps

To build upon the findings of the CSA, ESMA intends to follow up on vulnerabilities. It also encourages NCAs to proactively engage with FMPs to address any vulnerabilities identified.