ESMA's Transition and Impact Claims Guidance: Lessons for SFDR 2.0

ESMA's latest guidance clarifies how transition and impact claims should be substantiated. As the EU revises its Sustainable Finance Disclosure Regulation and prepares to introduce official sustainability product categories, its recommendations also raise important questions about the information investors will need to assess claims made about financial products and those conveyed by their regulatory categorisation.

As negotiations on the revision of the Sustainable Finance Disclosure Regulation (SFDR) approach, the European Securities and Markets Authority (ESMA) has published two timely thematic notes providing practical guidance on preventing greenwashing in transition and impact claims.

Acting in its supervisory capacity, ESMA explicitly cautions that these notes introduce no new regulatory requirements and should not be understood as prescribing a particular approach or level of ambition for the ongoing SFDR revision. Yet the principles and practical guidance they articulate have considerable relevance for the choices facing the co-legislators.

ESMA's objective is to help market participants ensure that their sustainability claims are clear, fair and not misleading. Drawing on general investor-protection principles and the European Supervisory Authorities' earlier work on greenwashing, ESMA articulated four expectations for sustainability-related communications in July 2025: accuracy, accessibility, substantiation and timeliness. Its new notes apply these principles to transition and impact claims, addressing the clarity of ambitions, the adequacy of implementation strategies, the relevance of indicators and the substantiation of claimed outcomes or contributions. Drawing on observed market practices, ESMA provides examples of good and poor communication to illustrate how these expectations should apply in practice.

Accuracy means that claims must fairly represent the sustainability profile of a product or entity, without exaggeration, selective presentation of favourable information or omission of material negative aspects. Accessibility requires information to be easy to find, understand and navigate, with supporting explanations available where necessary and without excessive simplification. Substantiation requires claims to be supported by credible reasoning, facts and processes, using meaningful and proportionate methodologies whose assumptions, limitations and relevant comparisons are explained. Timeliness requires claims to rely on up-to-date information and to be revised when material developments affect their validity.

Together, these principles address more than the factual correctness of individual statements. A claim may be accurate in isolation but misleading in its overall presentation, inadequately supported, difficult to assess or no longer current.

Transition and impact claims introduce additional challenges relating to uncertainty about future performance, the credibility of implementation strategies and the attribution of real-economy outcomes to investor actions.

Transition Claims: Ambition, Implementation and Progress

Transition claims are inherently forward-looking. They depend on assumptions about technological progress, public policies, market developments and corporate behaviour, and therefore involve uncertainty. ESMA stresses that this uncertainty does not diminish the responsibility to communicate clearly, fairly and without misleading investors.

Its thematic note organises expectations for transition claims around three connected dimensions.

First, clarity of the transition ambition. Investors should understand what outcome is being pursued and how progress towards it will be assessed. Targets require relevant metrics, clearly defined scopes, baselines, time horizons and intermediate milestones. Material assumptions, dependencies and limitations should also be explained. Where relevant, market participants should clarify how their ambition relates to broader climate objectives, including through science-based and Paris-aligned scenarios or pathways.

Second, the adequacy of the implementation strategy and action plan. Investment strategies should be coherent with the objectives they claim to pursue. Asset selection, portfolio construction and stewardship activities should support the stated ambition. Where sustainability ratings or proprietary assessments are used, their role, relevance and limitations should be explained. Engagement strategies require clear objectives and an explanation of how they support the transition ambition, including escalation mechanisms where appropriate.

Where transition claims rely on investee companies' transition plans, ESMA expects managers to explain the basis for assessing those plans, including the extent to which they are underpinned by validated or science-based climate transition targets. Similarly, where proprietary assessments are used to identify transition leaders, managers should explain the criteria employed and their relevance to the stated transition ambition. The issue is not adherence to any particular assessment framework, but whether the information disclosed allows investors to understand and scrutinise the rationale underlying the transition claim.

Third, transparency about progress achieved. Reporting should allow investors to assess developments against the stated ambition, using consistent indicators and explaining material methodological changes and data limitations. Delays, missed targets and corrective actions are as relevant to an informed assessment as achievements.

These dimensions are closely connected. Ambitious targets do not establish the credibility of a strategy if the actions intended to deliver them are inadequate. Equally, accurate reporting of an indicator does not establish its relevance to the objective it is supposed to assess.

ESMA's practical examples make these distinctions particularly clear.

One example concerns a fund seeking to invest in companies classified as transition leaders through a proprietary assessment. ESMA identifies as poor practice the failure to explain what that classification means, which criteria underpin it, and why those criteria are relevant to the fund's transition ambition.

Another example concerns an issuer using the proceeds of a bond to finance activities presented as supporting its transition strategy. Merely identifying eligible activities is insufficient if the issuer fails to explain how they contribute to implementing the strategy and achieving its objectives.

The underlying issue is not simply whether information has been disclosed, but whether the information provided adequately substantiates the relationship between ambition, implementation and expected progress.

Portfolio Decarbonisation Is Not Real-Economy Decarbonisation

A particularly important distinction concerns portfolio-level emissions reductions.

A portfolio can reduce its reported carbon footprint through changes in its composition without any corresponding reduction in the emissions of the underlying companies. Such a reduction may be accurately measured, but it cannot, by itself, substantiate a claim that the investment strategy is contributing to the decarbonisation of the real economy.

ESMA explicitly warns against presenting portfolio decarbonisation targets in a way that suggests equivalence with real-economy emissions reductions.

One of its examples of good practice concerns a fund targeting a reduction in portfolio carbon intensity that clearly explains that its target should not be interpreted as a target for real-economy emissions reductions.

ESMA had already raised related concerns in its July 2024 Opinion on the functioning of the EU Sustainable Finance Framework. It suggested strengthening the minimum standards for EU Climate Transition and Paris-aligned Benchmarks to promote greater reliance on actual emissions reductions by constituent companies, and developing a broader family of transition benchmarks. These recommendations recognised limitations in existing climate-benchmark methodologies that the new thematic note approaches from the perspective of claims made about portfolio decarbonisation.

This distinction matters beyond the communication of individual fund objectives. It also raises questions about the suitability of portfolio-level emissions-reduction methodologies as sufficient grounds for qualifying products under regulatory categories intended to support the transition of the real economy.

Impact Claims: Intentionality, Additionality and Measurability

ESMA's separate note on impact claims addresses three dimensions: intentionality, additionality and measurability. These help clarify the ambition of impact claims, the mechanisms through which impact is expected to arise and the evidence used to substantiate it.

Intentionality concerns the explicit aim to generate positive environmental or social impact. It should be reflected in clear objectives and an explanation of how the investment strategy is expected to achieve them, including through a theory of change.

Additionality concerns whether positive outcomes would have occurred, or would have occurred to the same extent, without the relevant intervention. ESMA distinguishes between additionality at the level of investee companies or assets and additionality associated with investor actions.

Measurability concerns the indicators used to assess progress towards impact objectives and report results. ESMA distinguishes indicators of outputs, outcomes and impact, emphasising the importance of selecting metrics relevant to the claims made.

Investee Impact, Investor Contribution and Additionality

An essential distinction developed by ESMA is that between the impact generated by investee companies or assets and the contribution of investors to that impact.

Investee impact refers to positive environmental or social outcomes generated by a company, project or asset. Investor impact, or investor contribution, refers to the effects of investor actions in influencing or enhancing those outcomes, for example through the provision of capital, engagement with investee companies or non-financial support.

Investing in companies that generate positive environmental or social outcomes does not, by itself, establish that the investor has contributed to those outcomes. Investor additionality goes further, concerning the extent to which positive outcomes would not have occurred, or would have occurred to a lesser degree, without the investor's involvement. ESMA recognises the difficulty of demonstrating additionality and emphasises the importance of a theory of change explaining how investment strategies and actions are expected to contribute to claimed impacts.

ESMA's examples illustrate the distinction. It identifies as good practice a listed equity fund that explicitly acknowledges that investing in it does not generate additional social impact beyond that created by its investee companies. Conversely, it criticises claims of real-world impact based on generic engagement activities or the attribution of corporate progress to an investor without adequate substantiation.

As Jack Grogan-Fenn and Sarah Wilson of Minerva Analytics have observed, this has important implications for stewardship claims. Reporting engagement activities is not the same as substantiating their relevance to the objectives pursued. Engagement-led strategies should explain their objectives, milestones, escalation mechanisms and indicators of process performance and, where relevant, outcomes. Claims of contribution to real-economy outcomes should be supported by a clear explanation of the expected contribution mechanisms, through a theory of change, and evidence proportionate to the nature and ambition of the claim.

The central distinction is between observing positive outcomes and establishing the investor's contribution to them. The information and evidence required should reflect the nature of the claim, without imposing a universal requirement to demonstrate causal additionality.

What This Means for SFDR 2.0: Credible Categories and Coherent Products

The European Commission's proposed revision of SFDR seeks to simplify sustainability-related disclosures, improve investors' ability to understand and compare financial products, and strengthen protection against misleading sustainability claims. The reform responds in particular to the complexity of existing disclosures and the unintended repurposing of the Regulation's Articles 8 and 9 disclosure categories as de facto product labels, creating confusion among investors and increasing the risks of greenwashing and mis-selling.

To address these shortcomings, the Commission proposes to move from a primarily disclosure-based regime to a system of purpose-built product categories, Sustainable, Transition and ESG Basics, supported by minimum eligibility criteria, streamlined disclosures and restrictions on sustainability-related claims. The objective is to provide clearer guidance for investor choice while supporting the mobilisation and allocation of capital towards sustainability objectives.

These changes are welcome, and the objectives pursued are ambitious. But the introduction of official product categories, combined with the reaffirmed ambition to mobilise and allocate capital in support of the transition of the real economy, also raises the stakes for the regulator. Once regulators define the categories through which sustainability considerations are communicated, they give those categories meaning and must assume responsibility for the claims they enable and the expectations they create.

Categories perform much of the communicative work before any product-specific claim is made. Official categories create legitimate expectations among investors and distributors and invite reliance on regulatory recognition as a substitute for scrutiny.

The revised SFDR therefore faces a dual challenge: its minimum criteria must be commensurate with the expectations that category names legitimately convey, and compliance with those criteria cannot, by itself, establish that the products using them actually serve their stated purpose.

In other words, we need credible categories and coherent products.

The first requirement concerns the credibility of the categories themselves. Their minimum standards must be compatible with what investors can reasonably expect from their designation. This is a responsibility of the legislator: no amount of product-level disclosure can compensate for category criteria that fail to support the expectations created by regulatory recognition.

The second requirement concerns the coherence of products qualifying under those categories. Even robust minimum criteria are insufficient. They establish observable conditions for qualification, but do not necessarily establish that a particular product is designed and managed consistently with the purpose of the category.

This is where ESMA's thematic notes are particularly relevant. Their emphasis on the relationship between stated ambitions, investment strategies, implementation and evidence of progress is consistent with the need for coherence between product objectives and investment processes. Their treatment of impact claims reinforces the importance of distinguishing portfolio characteristics and investee outcomes from investor contributions to real-economy change.

More broadly, the notes highlight why the diversity of investment approaches recognised by SFDR calls for differentiated substantiation rather than presumed equivalence. Financing specific activities, investing in companies with transition plans, reducing portfolio emissions and engaging with issuers involve different mechanisms. The information needed to assess their relevance to sustainability or transition objectives, and the evidence required to support claims about their effects, should reflect those differences.

These considerations are consistent with the approach developed in a recent EDHEC Climate Institute policy note, Completing SFDR: Towards Substantiated Categorisation. We propose complementing formal eligibility criteria with dedicated disclosures explaining and substantiating the coherence between category and product objectives, investment strategies, their implementation and the indicators used to assess operation and progress. Where real-economy effects are claimed or implied, the mechanisms and evidence supporting their plausibility should also be disclosed.

Such disclosures would enable investors, advisers, supervisors and other stakeholders to assess product coherence, with substantiation proportionate to the nature of the investment approach and the claims made. They would not, in themselves, alter eligibility criteria or disqualify products meeting those criteria.

Rather than protecting established investment approaches from scrutiny or imposing a one-off clean-up of sustainability-themed products, the objective is to create conditions for their continuous improvement. By making the coherence, effectiveness and limitations of different approaches more transparent, these disclosures could inform investor choices, encourage improvements in product design and methodologies, and ultimately support the reassessment of regulatory standards where necessary.

From Supervisory Guidance to Regulatory Coherence

ESMA's thematic notes do not settle the choices facing the co-legislators. Their guidance nevertheless deserves consideration as the minimum eligibility criteria for SFDR's new sustainability-related product categories are finalised, particularly given the ambitions expressed by European policymakers to mobilise finance in support of a more sustainable economy and its transition.

More directly, ESMA's recommendations offer valuable input for strengthening the transparency requirements accompanying these categories. Product manufacturers should disclose the explanations and supporting evidence needed for investors, advisers, supervisors and other stakeholders to assess whether the sustainability claims made about their products, as well as those conveyed by their categorisation, are clear, fair and not misleading. This requires transparency about the relationships between objectives, investment strategies, their implementation, indicators of operation and progress and, where real-economy effects are claimed or implied, the mechanisms and evidence supporting their plausibility.

The priority for the co-legislators should therefore be to ensure that Level 1 of the revised SFDR establishes a cross-cutting requirement for disclosure of substantiated justifications of process coherence, with proportionate evidential and disclosure requirements specified at Level 2. This would help align the new categorisation framework with general consumer-protection requirements concerning misleading sustainability claims, while drawing on ESMA's recent guidance on transition and impact claims.

This article is jointly published in the EDHEC Climate Institute and Minerva newsletters.