EU: ESMA review finds shortcomings in asset managers SFDR compliance and risk integration

The European Securities and Markets Authority (ESMA) has published its final report following a Common Supervisory Action (CSA) carried out with National Competent Authorities (NCAs) on how sustainability risks are integrated and disclosed within the investment fund sector.

The CSA was launched in July 2023 with the aim of assessing the compliance of asset managers with the relevant provisions in the Sustainable Finance Disclosure Regulation (SFDR), the Taxonomy Regulation and relevant implementing measures, including the relevant provisions in the Undertaking for Collective Investment in Transferable Securities (UCITS) Directive and the Alternative Investment Fund Managers Directive (AIFMD) implementing acts on the integration of sustainability risks (for more information on the CSA, see our previous blog post).

Key findings

Whilst there is an overall satisfactory level of compliance of managers with the applicable regulatory requirements, ESMA has found that there is room for improvement in the level of managers’ compliance, particularly on the integration of sustainability risks, entity level SFDR disclosures and product level SFDR disclosures. The CSA has helped NCAs identify several vulnerabilities, which were addressed as part of the process, through bilateral letters and other supervisory orders.

Enforcement

ESMA also highlight that there is a reluctance among NCAs to take enforcement actions with managers who fail to address shortcomings – with only one NCA reporting having taken this step. ESMA acknowledges that NCA’s general preference is to use escalated supervisory measures rather than enforcement actions but invites NCAs to use their enforcement powers if and when appropriate in cases of breaches. 

Next steps

Going forward, ESMA encourages NCAs to continue proactive engagement with market participants and follow up with those cases where vulnerabilities were detected, including enforcement where appropriate. NCAs are also encouraged to embed the ESAs common high-level understanding of greenwashing as a reference point in their ongoing supervision.

ESMA highlights that as concrete changes resulting from a future review of the SFDR will not be applicable in the near term, NCAs should remain vigilant in supervising the current framework, and supervised entities should continue to apply the existing provisions.

Further detail on the findings

Overall, the level of compliance with these requirements was found to be satisfactory. However, in relation to the integration of sustainability risks and disclosures, there was significant room for improvement. In particular, the CSA highlighted the following shortcomings:

• SFDR disclosures: Of the 28 NCAs covered, 10 found evidence of incorrect or misleading disclosures in more than 20% of funds sampled. NCAs detected vague and overly general language, missing or inadequate details and difficult to locate. Several inconsistencies were also observed between pre-contractual, periodic and website disclosures and marketing material. In some cases, the environmental or social characteristics in pre-contractual information were not clearly disclosed, making it unclear how the characteristics were measured and fulfilled. 
• Website disclosures: ESMA found that there were a few funds which disclosed under SFDR Article 6, to denote they did not pursue sustainability objectives, yet were using images on websites suggestive of the environment, such as pictures of windmills, images of recycling, circular economy, nature and wildlife. These were subsequently removed after requests from the NCAs. ESMA noted that whilst this was a concerning example of greenwashing, it was a positive outcome.
• Principle adverse impact (PAI) statements at entity level: The failings included an inadequate level of detail and unsatisfactory explanation of non-consideration. ESMA also pointed to inconsistencies in the calculations used.
• Integration of sustainability risks: The exercise found evidence of a lack of properly documented policies and lack of escalation procedures in the case of a breach of the policies.
• Resources: There were cases of firms having a low number of dedicated employees for sustainability tasks or where their relevant staff had unsatisfactory knowledge of sustainability matters.
• Remuneration policies: There were examples of an absence of specific and indicators to measure how remuneration policies are consistent with the integration of sustainability risk was also observed.
• Controls and processes in place: There was a lack of processes to ensure that the description of the funds’ ESG strategies is substantiated by the ESG metrics used or consistent with environmental and/or social characteristics and good governance principles.
• ESG data: ESMA found a lack of verification or review process of ESG data from third parties with this data sometimes being incomplete or inaccurate.
• Auditing systems: A lack of audit of the implementation of the internal policies.

ESMA’s press release published on 30 June 2025 is available here.