As global scrutiny of sustainability claims intensifies, the European Securities and Markets Authority (ESMA) is stepping up its regulatory game to combat greenwashing and strengthen investor trust. In a decisive move, ESMA is tightening rules around ESG fund labeling and expanding its oversight to include ESG ratings providers—ushering in a new era of accountability and transparency across the sustainable finance landscape.
In May 2024, the European Securities and Markets Authority (ESMA) introduced final guidelines regulating the use of ESG and sustainability-related terms in fund names. These rules respond to concerns that many investment products were using “green” or “sustainable” labels without sufficient alignment to actual portfolio practices—raising risks of greenwashing.
Following the publication of official translations in August 2024, the guidelines became effective on November 21, 2024. New funds must comply immediately, while existing funds have until May 21, 2025, to align. The rules require funds using ESG-related terms to ensure that at least 80% of their assets reflect stated environmental or social characteristics. Those using terms like “sustainable” or “impact” must also apply stricter exclusions, based on EU benchmarks.
The objective is to restore trust in sustainable investing by ensuring fund marketing reflects substance, not just strategy. These guidelines mark a move from self-declared ESG ambition to measurable regulatory alignment.
The regulations faced swift opposition from industry trade groups and Republican state attorneys general, who argued the SEC had overstepped its authority. The legal challenge quickly gained momentum, and with the change in SEC leadership, the agency opted not to continue defending the rules.
Caroline Crenshaw, the lone Democratic commissioner, sharply criticized the move. She described it as an attempt to “unlawfully undo valid regulations” and accused her colleagues of “watching the rule’s demise while eating popcorn on the sidelines.”
In May 2025, ESMA extended its oversight by publishing a draft set of Regulatory Technical Standards (RTS) to regulate ESG ratings providers under the EU’s new ESG Ratings Regulation, adopted in late 2024. These rules are now under public consultation until June 20, 2025.
The draft RTS introduces key requirements: ESG ratings providers operating in the EU must be authorized and supervised by ESMA. They must also publicly disclose their methodologies, data sources, and underlying assumptions—addressing long-standing concerns over opacity and inconsistency in the ESG ratings industry.
Additionally, the proposed framework imposes safeguards to prevent conflicts of interest, particularly where firms offer ratings and related services such as consulting or data sales. The goal is to raise the independence, reliability, and comparability standards across the ESG data ecosystem.
These regulatory initiatives reflect ESMA’s growing focus on creating a more credible, harmonized ESG landscape. From product labeling to third-party assessments, the authority is closing loopholes that have allowed inconsistencies and misrepresentations to persist.
The message for asset managers and ratings firms is clear: ESG marketing is no longer a grey area. Regulators expect proof of substance behind sustainability claims. Whether naming a fund or issuing a rating, firms must demonstrate transparency, governance, and alignment with new EU standards.
ESMA’s efforts also solidify Europe’s leadership in ESG regulation. While other jurisdictions still debate voluntary disclosures, the EU is moving ahead with enforceable rules that are reshaping expectations for financial products and ESG analytics. As the consultation period closes and final rules are adopted, firms operating in the EU—or servicing EU clients—will need to prepare for closer scrutiny.
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