ESG: ESMA’s Second Thematic Note on Sustainability Related Claims

What’s new?

On 14 January 2026, the European Securities and Markets Authority (ESMA) published its second thematic note (the Note) on sustainability-related claims.

Building on its first thematic note, which explored Environmental, Social and Governance (ESG) credentials, this Note focuses on ESG strategies (integration and exclusions).

For more information on ESMA’s first thematic note, see our Insights article here.

What does the Note say?

The Note first sets out a list of do’s and don’ts for making sustainability-related claims, then provides examples of good and poor practices.

Do’s and Don’ts

Sustainability claims on ESG integration and exclusions

(a) ESG integration

Do

• define “ESG integration” clearly and explain how ESG factors are considered in portfolio construction
• specify whether ESG integration is binding or non-binding
• clarify the role of ESG factors in portfolio decisions and financial analysis
• state at which level ESG integration is applied (e.g., security selection, weighting, asset allocation)
• be transparent about differences in ESG integration across asset classes and sectors at each stage of the investment process and
• clarify whether the strategy uses a single or double materiality approach.

Don’t:

• use “ESG integration” as an umbrella term for various ESG strategies (e.g., exclusions, best-in-class)
• make entity-level claims such as “X% of the assets under management are ESG integrated” without clarifying whether the figures used refer to products only applying ESG integration or if they also include products using other ESG strategies and
• promote a product’s sustainability profile based on its ESG integration, unless this claim is supported by (i) the key role ESG factors play in portfolio construction, (ii) the extent to which these ESG factors are integrated into the financial analysis of holdings or (iii) their actual impact on portfolio composition.

(b) ESG exclusions

Do:

• describe in plain language the process, ESG criteria and thresholds used for exclusions
• clarify whether exclusions are absolute or threshold-based
• be transparent about the use of single or double materiality assessments
• state the impact of exclusions on the investable universe or the final portfolio composition, especially if these are negligible and
• clarify whether claims about a product’s use of exclusions are set by firm-wide policy or tailored to the product’s investment universe.

Don’t:

• claim to adopt an ESG exclusions strategy without a defined and consistently applied criteria and
• use ESG exclusions to claim a product has a superior sustainability profile relative to its peers, unless this is substantiated by the product’s level of ambition in relation to the materiality of the exclusion criteria and the stringency of the thresholds applied.

Examples of Good and Poor Practice

(a) Integration

Good practice

ESMA highlights the following examples of good practice for firms when issuing quarterly updates to clients on their ESG integration strategies. Such updates should:

• clarify that ESG integration is applied only at the security selection stage of its investment process
• explain that ESG integration does not apply to certain frontier and emerging market bond issuers
• clearly state that it only integrates ESG information in its valuation models for issuers for which it has external qualitative ESG research
• point out that integration of ESG factors does not automatically lead to exclusions and
• include a link to the materiality analysis used to select the most relevant ESG factors included in the ESG integration strategy.

Poor practice

ESMA provides the following examples of poor practice by fund managers who offer multi-asset ESG portfolios—including listed equities, corporate bonds, and mortgage-backed securities and who also manage discretionary portfolios for both retail and institutional clients:

• describing the fund as “ESG integrated” without explaining what this means or disclosing that the ESG approach differs across asset classes
• marketing the ESG fund as “substantially different” from a non-ESG version despite a 90% portfolio overlap between the two and
• failing to notify a client requesting an exclusion for companies involved in, for example, animal testing, that this is not a material factor for the given investment universe and will not lead to a meaningful reduction of the permissible securities.

(b) Exclusion

Good practice

Where a global equity fund tracks an ESG benchmark that excludes companies involved in human rights violations and CO₂-intensive industries, and also applies ESG integration at the security selection stage, its strategy enables investment in companies outside the benchmark. Across its marketing material, the fund manager should explain:

• that human rights violations are assessed using a controversy score with exclusions limited to companies involved in only the most severe violations
• for off-benchmark companies, the fund manager applies a series of different exclusions (which it also uses for its other funds) that are not based on a materiality assessment and that may or may not be material for all the off-benchmark holdings. It does this rather than applying the benchmark’s criteria for exclusions and ESG integration and
• that for these off-benchmark companies “The manager may not assess ESG factors and, when it does, not every ESG factor may be identified”.

Poor practice

The firm issues a “green” euro medium-term note (EMTN) with a coupon linked to an ESG benchmark of emerging market equities. The benchmark has exclusions for fossil fuel developers with respect to the development of new oil or gas fields / coal mines.

The firm’s website prominently claims that “the EMTN offers zero exposure to fossil fuel developers”. However, the fossil fuel exclusion is based on two limbs:

1. a peer-relative environmental score that assigns negligible weight to fossil fuels and

2. an exclusion threshold based on a set percentage of revenue from unconventional oil and gas.

These criteria do not prevent the benchmark from holding Company A, the second largest oil developer in the region.

Under the exclusion methodology, fossil fuel developers which do not meet the criteria are permitted where their weight is below 5%, meaning that the benchmark can currently hold 4% of Company A.

(a) Examples for both ESG integration and ESG exclusion

Good practice

Where an investment firm offering portfolio management and investment advice provides marketing material to potential clients describing its ESG integration strategy for discretionary managed accounts, it should:

• clarify that ESG integration refers solely to the consideration of financially material ESG risks
• note that ESG integration may increase the tracking error of a portfolio relative to a benchmark by 1% to 2% and
• explain that in multi-asset portfolios, ESG factors are key investment considerations for equity and bond selection but not for the other asset classes where ESG integration is not applied.

Poor practice

Where an online platform for retail investors uses its own internal classifications for products with ESG exclusions and ESG integration strategies, for instance, a “low-carbon” exchange traded platform (ETF) and EMTN that track benchmarks labelled as “low-carbon”. ESMA provides the following examples of poor practices:

• the exclusions analysis document for low-carbon products is lengthy, difficult to understand and contains irrelevant information such as the number of trees planted each year
• the marketing material fails to clarify that the fossil fuel exclusion thresholds for “low-carbon” benchmarks can be up to 40% higher than those used in the Paris Aligned Benchmark or the Climate Transition Benchmark exclusions
• there is a lack of transparency about the outdated nature of benchmark holdings used in the analysis (12 months old) of ETFs and EMTNs and
• products that track new, unanalysed ESG benchmarks are labelled as “low-carbon” before any analysis is conducted with the review only taking place up to six months after classification.