Asset Management & Investment Funds: EU & International Developments – July 2025

ESMA advice to the European Commission on UCITS Eligible Assets

The European Securities and Markets Authority (ESMA) issued technical advice to the European Commission on revising the UCITS Eligible Assets Directive, emphasising the importance of harmonised rules across the EU. The EAD is an implementing directive concerning the assets in which a UCITS may invest. The proposed changes, if adopted, would significantly reshape the UCITS fund landscape.

Key recommendations include introducing a look through approach for determining the eligibility of underlying assets for exposures gained through delta-one instruments, derivatives on financial indices, and closed-ended funds.

ESMA also suggests capping indirect exposures to alternative assets at 10% of a UCITS portfolio, with any greater exposure to be managed under the AIFMD framework.

For further details, please read our publication.

ESMA thematic note on clear, fair, and not misleading sustainability-related claims

ESMA published a thematic note providing guidance for market participants on making sustainability related claims, with a particular focus on ESG credentials. This note is part of ESMA’s ongoing efforts to address greenwashing risks and enhance investor protection in the sustainable finance sector. The guidance is intended to ensure that all sustainability claims are clear, fair, and not misleading, in line with the European Supervisory Authorities (ESAs’) common high-level understanding of the core characteristics of greenwashing as stated in ESMA’s progress report on greenwashing. The principles and guidance provided in the thematic note apply to non-regulatory oral and written communications, referred to as “communications”. Further thematic notes may issue.

ESMA’s thematic note outlines four core principles that market participants should follow when making sustainability-related claims:

• Accuracy: Claims must fairly and accurately represent the sustainability profile of an entity or product, avoiding exaggeration, cherry-picking, omission, vagueness, and misleading imagery or sounds. All relevant positive and negative aspects should be disclosed, and claims should be consistent across all communications.
• Accessibility: Information should be easy to access and understand but not oversimplistic, with an appropriate level of detail for the intended readers, such as retail investors, institutional investors, and supervisory authorities. Where space is limited, or when the aim is not to overwhelm the reader with information, additional substantiation can be provided through electronic layered disclosures or links to more detailed information.
• Substantiation: Claims must be supported by clear and credible reasoning, facts, and processes. Methodologies, comparisons, thresholds, and underlying assumptions should be fair, proportionate, and meaningful.
• Transparent: Limitations of information, data and metrics used must be made available.
• Up to date: Claims should be based on the most current information available, with any material changes disclosed in a timely manner. The date and scope of the analysis could be useful for this.

The note provides specific guidance for different types of ESG credential claims:

• ESG credentials: Market participants should clarify how ESG credentials are measured and monitored, and how they are material for the ESG profile of the product or entity. They should explain the significance of third-party assessments and provide details about the credentialing entity including if it includes ex post compliance controls. Outdated or irrelevant credentials should not be referenced, and cherry-picking favourable ratings or omitting unfavourable ones should be avoided.
• Industry initiatives: The significance of participation in net zero alliances must be explained, including any commitments, or reporting requirements. Claims should not be made about initiatives that the entity or product is no longer part of, and transparency is required regarding the basis and implications of any related ratings.
• Labels and awards: The criteria underlying labels and awards should be clearly explained, including whether they are process-based or outcome-based. Any potential conflicts of interest must be disclosed. Regulatory disclosures (e.g. SFDR designations) should not be misrepresented as third-party labels.
• Comparisons to peers: When making peer comparisons, the basis for the comparison, the peer group, and the reasons for its selection must be disclosed. Products may be referenced for comparison purposes only when they promote ESG characteristics or have a sustainable investment objective. Funds and benchmarks should disclose the coverage ratio of the credential, the date of holdings on which the rating is based and the date of the assessment.

ESMA CSA report on the integration of sustainability risks and disclosures

ESMA published its report on the Common Supervisory Action (CSA) conducted in 2023 and 2024 with National Competent Authorities (NCAs), which examined the integration of sustainability risks and disclosures in the investment management sector.

The CSA aimed both to evaluate compliance by UCITS management companies and AIFMs with:

• AIFMD and UCITS organisational requirements on sustainability risk integration,
• the Sustainable Finance Disclosure Regulation (SFDR) entity and product-level disclosure requirements, including EU Taxonomy alignment
• ESMA’s supervisory briefing on sustainability risks and disclosures in asset management

and to enhance supervisory convergence.

The report summarises ESMA’s analysis and findings from the CSA and provides recommendations for NCAs and market participants. The CSA also supported feedback on greenwashing practices and risks, which informed ESMA’s final report on greenwashing.

The CSA was conducted under a common methodology developed by ESMA. Most managers chosen under the assessment framework were UCITS managers, with at least one fund disclosing under Article 6, Article 8, and Article 9 SFDR to allow assessment of a variety of disclosures. Some NCAs included funds making net zero or carbon neutrality claims.

The report states that the overall level of compliance was satisfactory but identifies areas for improvement in the integration of sustainability risks and in entity and product level disclosures under the SFDR. 

Key findings:

• SFDR disclosures: instances of vague, overly general, missing key details, or difficult to locate. Inconsistencies were found between pre-contractual, periodic, website disclosures, and marketing materials. Environmental or social characteristics in pre-contractual information were not clearly disclosed, making it unclear how these characteristics were measured or fulfilled. Promoted features or objectives were often described in generic terms (e.g. “the product promotes environmental features” or “the product promotes social objectives”), lacking specificity.
• Principal Adverse Impact (PAI) statements at entity level: in some cases, PAI statements lacked adequate detail and satisfactory explanations for non-consideration. There were inconsistencies in the calculations.
• Integration of sustainability risks: some managers lacked properly documented policies and escalation procedures for breaches of sustainability risk policies.
• Resources: cases where there were too few dedicated employees responsible for sustainability tasks. Employees tasked with sustainability matters sometimes lacked sufficient knowledge or expertise.
• Remuneration policies: cases demonstrating a lack of specific criteria and indicators to demonstrate consistency with the integration of sustainability risks. There was a lack of clear linkage between performance incentives and ESG metrics.
• Controls and processes: some managers lacked processes to ensure that the description of a fund’s ESG strategy was substantiated by the ESG metrics or data used. There was insufficient alignment between disclosed ESG strategies, and the actual environmental/social characteristics and good governance principles.
• ESG data: cases where there was a lack of verification or review processes for ESG data obtained from third parties. ESG data was sometimes incomplete, inaccurate, or used without further checks.
• Auditing system: some managers did not have an audit process in place to review the implementation of internal sustainability policies.

The report includes a series of practical examples of good, below average, and non-compliant practices observed by ESMA during the CSA process on the integration of sustainability risks, on entity-level PAI disclosures and SFDR product disclosures.

ESMA recognises the challenges highlighted by NCAs regarding the discretion afforded to market participants in interpreting certain key concepts of the SFDR. ESMA observes that these challenges could be addressed through a future review of SFDR which establishes product categories with clear criteria, as recommended in the ESA’s joint opinion on SFDR and the ESMA opinion on the functioning of the sustainable finance framework. As any such changes will not take effect in the near term, fund managers are expected to comply with the existing rules.

ESMA notes that the CSA process was useful in detecting several vulnerabilities which were promptly addressed based on engagement between supervised entities and NCAs. ESMA encourages NCAs to continue proactive engagement with market participants and follow up on identified issues, including taking enforcement action, where appropriate. Furthermore, ESMA encourages NCAs to embed the ESA’s common high-level understanding of greenwashing as a reference point in their ongoing supervision.

New UCITS Q&As: notification letters for the cross-border marketing of UCITS and performance fees in feeder funds

ESMA Q&A 2575 concerns the documentation to be included in updates of notification letters for the cross-border marketing of UCITS.

ESMA Q&A 2609 concerns the circumstances in which the manager of a feeder fund can charge a performance fee. In summary it concludes that performance fees, if any, should only be charged at the level of the master fund. This is unless:

• the master fund and the feeder fund are managed by the same manager or by managers belonging to the same group; and 
• the only investor(s) of the master fund is(are) feeder fund(s)

in which case performance fees could be paid at the level of the feeder fund(s), and not at the level of the master fund, provided that this approach applies consistently to all feeder funds, if more than one. 

FSB recommendations on leverage in NBFI 

The Financial Stability Board (FSB) published its recommendations on Leverage in Nonbank Financial Intermediation (NBFI).  

The recommendations are structured around the following areas: 

• risk identification and monitoring (recommendations 1-3) 
• addressing NBFI leverage in core financial markets (recommendations 4-5) 
• counterparty credit risk management (recommendations 6-7) 
• addressing incongruencies in regulatory treatment (recommendation 8) 
• cross-border cooperation (recommendation 9).

These reports form part of the FSB’s work programme to enhance resilience in NBFI. 

Sustainability reporting

Amendments to corporate sustainability reporting obligations were announced at both national and European levels. At a European level, the European Commission announced the adoption of a delegated act which introduces “quick fix” amendments to the European Sustainability Reporting Standards (ESRS). These amendments will apply to those companies that had to start reporting sustainability information under the Corporate Sustainability Reporting Directive for the 2024 financial year (“wave one” companies).

You can read more detail here.

European Commission measures to simplify EU taxonomy reporting requirements  

The European Commission adopted a Delegated Act introducing simplification measures to the EU Taxonomy framework, aiming to ease administrative burdens while preserving climate and environmental objectives. Key changes are detailed in the press release include exemptions from Taxonomy-eligibility and alignment assessments for economically non-material activities, those contributing less than 10% to a company’s revenue, CapEx, or OpEx, and from full OpEx assessments where appropriate. Financial institutions will benefit from simplified KPIs, including an optional two-year deferral on detailed Taxonomy reporting. Reporting templates are streamlined, reducing data points by 64% for non-financial and 89% for financial companies.

The Delegated Act is now subject to scrutiny by the European Parliament and Council, with application from 1 January 2026 (covering FY2025), though companies may defer until FY2026. A Q&A has been published on the Commission’s website. 

ESAs consultation on how to integrate ESG risks in supervisory financial stress tests

The ESAs published a Joint Consultation Paper, providing draft guidelines which aim to ensure that competent authorities consistently integrate ESG risks into their supervisory stress testing activities. This will impact investment firms within the remit of the Capital Requirements Directive. The consultation runs until 19 September 2025.

Council of the EU position on proposed regulation to streamline financial services reporting

The Council of the EU issued its position and reasoning at first reading for its support of the proposed regulation amending the ESRB Regulation, EBA Regulation, EIOPA Regulation, ESMA Regulation, SRM Regulation, InvestEU Programme Regulation and the AMLA Regulation.

The Council supports the objective of ensuring that reporting requirements in the financial services and investment sectors are proportionate, streamlined and effective. The proposal aims to reduce administrative burdens, avoid duplication and improve the efficiency of supervisory data collection.

The Council’s position includes a requirement for the ESAs to prepare a feasibility study and roadmap for an integrated EU reporting system within 60 months.

Guidelines on outsourcing to cloud service providers by non-DORA depositaries

ESMA published updated guidelines on outsourcing to cloud service providers. The guidelines apply to competent authorities and to depositaries under the AIFMD and the UCITS Directive that are not subject to DORA. The guidelines replace ESMA's previous guidelines on outsourcing to cloud service providers, which were finalised in December 2020. The December 2020 guidelines applied to a wide variety of firms subject to EU financial services legislation, as well as to depositaries of AIFs and UCITS.

ESMA revised the December 2020 guidelines to reduce their scope to depositaries under the AIFMD and the UCITS Directive that are not subject to DORA. It made no substantive changes to their content. The guidelines cover:

• governance, oversight and documentation
• pre-outsourcing analysis and due diligence
• key contractual elements
• information security
• exit strategies
• access and audit rights
• sub-outsourcing
• written notification to competent authorities
• supervision of cloud outsourcing arrangements

ESMA newsletter

ESMA published its latest edition of the Spotlight on Markets Newsletter which covers June and July.

AML/CFT 

List of high-risk third countries with strategic AML/CFT deficiencies

Delegated regulation - EU - 2025/1184 was published in the OJ and will enter into force on 5 August 2025. It amends the list of high-risk third countries with strategic AML/CFT deficiencies produced under Article 9(2) of 4AMLD by:

• Adding Algeria, Angola, Côte d’Ivoire, Kenya, Laos, Lebanon, Monaco, Namibia, Nepal and Venezuela.
• Deleting Barbados, Gibraltar, Jamaica, Panama, the Philippines, Senegal, Uganda and the United Arab Emirates (UAE).

Also, the European Commission adopted a proposal committing itself to reviewing the status of countries who the FATF has not identified as high-risk but whose membership in it is suspended - a group that includes Russia, in response to concerns raised by MEPs on listing that country.

AMLA: ESAs sign MoU with AMLA for effective cooperation and information exchange

The ESAs announced that they have concluded a multilateral Memorandum of Understanding (MoU) with the European Union’s new Authority for Anti-Money Laundering (AMLA) to ensure effective and timely cooperation and information exchange between the four institutions. The MoU is available here.

Wolfsberg Group statement on risk-based approach

The Wolfsberg Group published a statement confirming its commitment to the risk-based approach.

The Wolfsberg Group notes that the application of a risk-based approach is critical to the effective design and maintenance of a financial institution's financial crime risk management programme, covering its risk appetite, policies, measures and controls.

EBA Opinion on ML/TF risks affecting the EU’s financial sector

The European Banking Authority (EBA) published its 2025 Opinion on ML/TF risks affecting the EU’s financial sector.

In the Opinion, the EBA opines that 2025 marks a significant change in the ML/TF risk landscape. In a context of important geopolitical developments, legislative reforms and digitalisation new ML/TF vulnerabilities are emerging. Notably:

• FinTech: 70% of competent authorities report high or rising ML/TF risks in the financial sector. They point to weak AML/CFT controls and poor governance, as firms appear to prioritise growth over compliance.
• RegTech: Over half of serious compliance failures reported to the EBA’s EuReCA database involved the improper use of RegTech tools. Despite its potential to enhance compliance, RegTech is often poorly implemented due to lack of expertise and oversight.
• Crypto assets: This remains a high-risk sector, with a 2.5-fold increase in authorised crypto-asset service providers (CASPs) between 2022 and 2024. Many CASPs lack effective AML/CFT systems, and some attempt to bypass regulatory oversight.
• Fraud and AI: Criminals are increasingly using AI to automate laundering schemes, forge documents, and evade detection. Financial institutions struggle to keep pace with these sophisticated threats, highlighting the need for responsible AI use and robust monitoring.
• Restrictive measures: The complexity of EU sanctions regimes poses compliance challenges. Institutions often lack adequate systems to implement sanctions effectively. The EBA’s new Guidelines, applicable from end-2025, aim to harmonise standards across the EU.

For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.