In recent years, regulations for sustainability reporting have become more stringent and the pressure to comply with these standards has intensified. The Sustainable Finance Disclosure Regulation (SFDR) imposes mandatory reporting on a range of ESG topics. An integral part of the SFDR is that financial market participants are obliged to report on 14 mandatory and 2 voluntary principal adverse impact (PAI) indicators, on a comply or explain basis. Fund managers navigating the complex SFDR landscape understand the significance of making sustainable investments. Measuring PAI indicators is not merely a compliance requirement; it is an opportunity to demonstrate their commitment to environmental and social responsibility while fostering the long-term sustainable growth of their portfolios.
Although PAI statements are currently considered best practice, the opportunity to explain why fund managers do not consider PAI indicators in their investment decisions instead of disclosing them is rapidly decreasing. Furthermore, investors are increasingly seeking investment opportunities that align with their values, making sustainability a crucial aspect of their decision-making process. A PAI statement therefore also helps to attract a broader investor base and build trust, by allowing fund managers to forge lasting relationships with clients who share their vision of a sustainable future.
Compliance with the SFDR and efficiently measuring PAI indicators can be daunting. The indirect purpose of the transparency SFDR requirements is to decrease the negative impact of investments on the environment and people – such as investments in companies or projects that result in pollution or that contribute negatively to working conditions – and to make the impact on sustainability matters comparable year on year. That seems a straightforward enough requirement. But the problem for asset management and ownership lies in the complexity of their financial products. With investment portfolios consisting of hundreds of companies and investments in real estate or infrastructure projects, making a well-founded comparison poses a conundrum.
So how can fund managers prove the sustainable business practices of companies in their portfolio and how can they demonstrate that decrease in the long-term? Particularly as the EU intends to make changes to some PAI indicators, but the specifics are as yet unknown. Collecting and measuring the right data and calculating it correctly is proving quite a headache. PAI indicators are disclosed at the fund level, while the impact takes place at operating level and individuals companies and investments are not visible in the financial product.
The data collected therefore has to make sense in the context of the individual company and the portfolio as a whole. The quality of the data and its validity in terms of ESG value needs to be ensured. Furthermore, it is important to recognize at which level the raw sustainability data is considered and how it is subsequently calculated and aggregated. Consistency in collecting and calculating methods is key if the data is to be comparable year on year. Similarly, choosing the two voluntary PAI indicators that are relevant to a financial product requires careful consideration. An ill-considered decision could be a costly mistake. In these complex situations, it might be wise to engage an ESG expert.
Our client operates in the infrastructure sector and invests worldwide with the aim of steering more money towards sustainable infrastructure to meet their sustainability goals. To implement their sustainability strategy, they utilized the Principal Adverse Impact (PAI) KPIs not only for reporting purposes but also as KPIs for strategic decision-making.
The client is now compliant with European regulation and is able to meet their clients' demands for sustainable investments. Furthermore, the client is a front-runner in the industry, as ESG KPIs for infrastructure can be complex, and many investors in this sector opt-out or report "no data." The use of the PAI KPIs has had a positive impact on the client's sustainability practices and has helped to attract a broader investor base.
TAUW has extensive experience with corporate sustainability and the sustainability metrics needed for ESG compliance reporting. Our expertise spans technical, regulatory, and environmental domains.
We developed a dedicated PAI tool based on the SFDR but which can easily be used to include other sustainability data and SFDR relevant information. We know the challenges and we understand ESG data. We can get and validate data and provide clients with a higher quality and higher validity of ESG data.
By partnering with TAUW, you can turn the complexities of SFDR compliance into a strategic advantage. Our dedication to innovation, combined with our commitment to environmental and social responsibility, will help you to improve corporate sustainability and position your fund as a sustainable frontrunner.
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