In one of our previous newsletters, we explained how the European Union is progressively implementing the Sustainable Finance Disclosure Regulation (SFDR). This regulation aims at providing greater transparency on the degree of sustainability of financial products in order to channel private investment towards sustainable investments. Under this regulation, the Principal Adverse Impacts (PAI) are intended to measure and avoid the potential negative impacts of an investment.
WHAT ARE THE PAI?
Principle Adverse Impact (PAI) have been defined by the EU as “negative effects, material or likely to be material on sustainability factors that are caused, aggravated by or directly linked to investment decisions and advice performed by the legal entity”. In short, PAIs are the negative consequences of investment decisions on the Environment, Social or Governance (ESG).
PAI are a practical application of the "Do Not Significant Harm" principle (DNSH). They are intended to avoid significant adverse effects on the environmental Taxonomy objectives such as the sustainable investments goals of the SFDR regulation.
These sustainability factors are mainly, as of today, focused on climate and more broadly on environmental issues but without forgetting the social dimension: employee and human rights or fight against corruption.
Since March 2021 financial markets’ participants, are required to provide a statement as part of a narrative disclosure on how they will incorporate PAI into its investment decision process. From June 2023, they will also be required to report on the Principal Adverse Impact Indicators.
WHAT ARE THE PAI INDICATORS?
The PAI are a set of indicators and metrics of which financial market participants are required to report at the management entity/group level across their investments, as well as at funds level when they are submitted to PAI. There are 16 mandatory indicators in total: 14 are applicable to corporate assets, 2 of which are specific to sovereigns and supranational assets, and the last 2 apply real estate assets. In addition to these mandatory indicators, market participants must opt for two optional indicators.