Europe's markets watchdog is calling for a rethink of the region's rulebook for environmental, social, and corporate governance (ESG) investing after finding that the existing framework is being misinterpreted.

At issue is the tendency of fund managers and their clients to treat the European Union's (EU's) disclosure regime as an ESG labeling system. Investing clients are often left with the impression that funds within a given disclosure category will deliver positive ESG results, which isn't necessarily the case.

"The use of current sustainability disclosures under SFDR [the Sustainable Finance Disclosure Regulation] as a 'label' can be misleading," Verena Ross, the chair of the European Securities and Markets Authority (ESMA), told Bloomberg. Therefore, ESMA "supports the development of simple and clear information to help investors take informed investment decisions," she said.