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ISS ESG has reviewed the Regulatory Technical Standards (RTS) pertaining to the SFDR and mapped the principal adverse impact draft requirements to its proprietary ESG data. The draft RTS for entity level principal adverse impact reporting provide a specification for the content, methodology and presentation of the information required by Article 4(1)-(5) SFDR in respect of the sustainability indicators in relation to (1) adverse impacts on the climate and other environment-related adverse impacts and (2) adverse impacts in the field of social and employee matters . There are a further . An important and timely piece of regulation for the EU is around sustainable finance disclosure. 2023, they will also be required to report on the Principal Adverse Impact Indicators. We are writing to you to ask for technical modifications regarding certain principal adverse impact (PAI) indicators described in the draft Regulatory Technical Standards (RTS) of the EU Sustainable Finance Disclosure Regulation (SFDR) (EU) 2019/2088. Most social-based indicators are no longer mandatory. O ne of the more novel elements of the Sustainable Finance Disclosures Regulation (SFDR) is the introduction of the concept of "principal adverse impact". Covering all the mandatory SFDR metrics as well as the majority of the . The new principal adverse impacts or PAI regime is one of the most challenging elements of the EU's Sustainable Finance Disclosure Regulation (SFDR). From the 32 mandatory adverse impact indicators, the final draft came down to a shortlist of 18 mandatory indicators. ANNEX I Template principal adverse sustainability impacts statement . At the entity level, they limited the number of principle adverse impacts (PIA) indicators on which Financial Market Participants (FMPs) must report upon. for similar RTS covering sustainability indicators in relation to adverse impacts in the field of social and employee matters, respect for human rights, anti-corruption and anti-bribery matters is 30 December 2021. Principal adverse sustainability impacts statement 18 14 2 2 Table 2 (opt-in): Additional climate and other environment-related indicators 22 10 7 5 Table 3 (opt-in): Additional indicators for social and employee, respect for human rights, anti-corruption and anti-bribery matters 24 17 6 1 Grand total 64 41 15 8 *Subject to change based on coverage results from March 2022. Yet, as Exhibit 4 shows, only 43% of surveyed Article 8 and Article 9 funds populated the PAI consideration field. 14 May 2021 On behalf of Eurosif, the European Sustainable Investment Forum, we request from the European Supervisory Authorities some technical modifications regarding certain principal adverse impact indicators (PAII) described in the draft Regulatory Technical Standards (RTS) of the EU Sustainable Finance Disclosure Regulation (SFDR) (EU) 2019/2088. 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 . The revised RTS address the balance between mandatory and opt-in metrics. Labour Standards: Impacts from participation in or facilitation of any . The SFDR requires EU financial actors to report their sustainability impact beginning January 1st, 2022. Principal adverse impact disclosure Article 4(6) and 4(7) SFDR The draft RTS provides a specification for the content, methodology and presentation of the information required in respect of the sustainability indicators in relation to adverse impacts on the climate and other environment-related adverse impacts. in relation to sustainability indicators and adverse sustainability impacts, and the content and presentation of the information in relation to the promotion of environmental or social characteristics and sustainable investment objectives in pre-contractual documents, on websites and in periodic reports . Description of principal adverse sustainability impacts As all products and investee companies of responsAbility have an impact on the environmental and social level, they need to report on their principal adverse impacts on sustainability. The Sustainable Finance Disclosure Regulation (SFDR) introduces environmental, social and governance (ESG) disclosure standards . EN 1 EN . Additionally, it needs to follow good governance practices. A much smaller number of funds, 27%, disclosed a minimum percentage of taxonomy . The optional pick list is longer, and there are now dedicated indicators for investment into: (a) companies; (b) sovereigns and . The EU has identified 64 adverse impact indicators (PAIs). In the feedback in the Draft RTS the ESAs have noted some key unanswered questions e.g. Fund managers must then select one additional indicator . It . In this article we will focus on the SFDR indicators and associated metrics, which are part of the Principal Adverse Sustainability Impacts Statement [PAIS] for Financial Market Participants [FMPs]. Meanwhile, 47% reported a minimum percentage of sustainable investments. Introduction 4 3. The first results will be published in 2023. ISS ESG's SFDR Principal Adverse Impact Solution enables Financial Market Participants to measure the performance of their investments against the regulatory defined Principal Adverse Impact indicators and metrics in order to comply with the new disclosure obligations. The Principal Adverse Impacts (PAI) Indicators are used both Financial Market Participants (FMP) and Financial Advisers (FA) in order to comply with SFDR and MiFID II/IDD regulations respectively. In accordance with the regulation, all financial market participants must disclose 14 mandatory indicators* and two additional metrics (i.e., from the environmental and social tables) for public equity (PE) investments at an entity level. In our view if a Fund considers the PASIs, this does not mean they are automatically an Article 8 Fund. Robeco has started measurinwg performance on Principal Adverse Impact as of 31 March 2022. The dataset is taken from our wider ESG Data service that captures over 550 company-reported data points from publicly-available sources and reports as well as ESG risk analysis based on data from our data collaborator, RepRisk. whether . Out of the . the final draft contains a reduced set of "universal mandatory indicators" (now 14 set out in Table 1, reduced from 32) and a set of additional "opt-in indicators" for environmental and social factors (set out in Tables 2 and 3), with separate indicators for investments in sovereign assets and real estate assets. Article 8 and 9: Principal Adverse Sustainability Impact (based on client feedback) Article 16(3a) and 23(3a) of the ESA's Final Report on the draft RTS: For funds that commit to making sustainable investments or have a sustainable investment objective, the description shall include an explanation of " how the indicators for adverse [3] Human Rights: Impacts that fail to support and respect the protection of internationally proclaimed human rights, complicity in human rights abuses. Impacts Regime. ANNEX I. Template principal adverse impacts statement. Based on the final . The solution maps S-Ray's suite of proprietary raw data metrics covering more than 4,000 entities to the 47 corporate-level Principal Adverse Impact (PAI) indicators required by the SFDR, resulting in over 120 S-Ray raw sustainability data indicators that can be delivered at an individual entity and portfolio-wide level. 1 Contents 1. The Principal Adverse Impact Statement as required by Sustainable Finance Disclosure Regulation (SFDR) outlines how ACTIAM considers principal adverse sustainability impacts of its investment decisions for its fund holdings. The number of indicators has been reduced from 32 mandatory plus 2 optional plus any others considered "principal" in context (as consulted upon) to 14 mandatory plus 2 optional plus any others considered principal. Feb 2022. The RTS contains 14 mandatory ESG metrics ('principle adverse sustainability impact indicators'). 11 May 2022. On 6 April 2022, the European Commission adopted the final Regulatory Technical Standards (RTS) under the Sustainable Finance Disclosure Regulation (SFDR) and its Annexes, including the entity-level Principal Adverse Impact (PAI) reporting template and indicators and the mandatory pre-contractual / periodic templates for Article 8 and 9 products (Annex 2, Annex 3, Annex 4 and Annex 5). Related topics: Banking and finance ESG Funds and asset management Insurance Securities and derivatives. These indicators can be found in responsAbility's Annual Impact Reports. But when in full effect, it will require relevant firms to provide extensive disclosures on various ESG related matters, including greenhouse gas emissions and other indicators, in a (controversial) template format. These mandatory indicators will be included in the firm's principal adverse impacts statement for the first reference period (i.e. For the . The post is directed especially to asset management firms. The Fund Manager must integrate the sustainability risk indicators into their investment decisions. We are voluntarily disclosing these metrics for MSCI to promote ESG transparency and to facilitate the data collection efforts by EU . From June 2023, they will also be required to report on the Principal Adverse Impact Indicators. The various aspects of this description are more fully set out in the RTS it requires managers to publish quantitative data on 14 key indicators (nine indicators related to the environment, while the remaining five will cover social factors) for assessing adverse sustainability impacts across a range of ESG factors, with additional indicators applicable to investments in sovereigns and . This blog post was first published on December3, 2020 and updated on August 25, 2021. While the concept is ill-defined in the regulation, it is generally interpreted as the negative impact that an investment has on climate change, the environment, social and employee matters, human rights and anti-bribery and anti-corruption. voluntary disclosure of principal adverse impact under the SFDR Report to the Commission under Article 18 of Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 9 on sustainabilityrelated disclosures in the financial services sector JC 2022 35 28 July 2022 . The Disclosure Regulation introduces the idea of "principal adverse impact of investment decisions on sustainability factors" and requires disclosure (at entity level) where a firm has decided to take these into account. 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. ESMA's earlier RTS detailed 50 environmental and social metrics for principal adverse impact reporting, comprising 32 mandatory metrics and 18 opt-in metrics. In our first blog of the series, we introduced the Sustainable Finance Disclosure Regulation (SFDR), outlining current requirements for investment firms, different fund classifications, as well as introducing the Principal Adverse Impacts (PAIs). For all products, CapitalAtWork is collecting this information on a best-effort basis. For the SICAVs for which it is Investment Manager . (c) at least one additional indicator related to principal adverse impacts on a social, employee, human rights, anti -corruption or anti bribery sustainability factor that qualifies as principal as set out in Table 3 of Annex I; and (d) any other indicators used to identify and assess additional principal adverse impacts on a sustainability . Our partner Mika Lehtimki discusses in the post the revised, more detailed principal adverse sustainability impacts regime of the EU that will require extensive organisational resources and analysis from financial firms in 2022. Best practices and preliminary . principal adverse impacts and indicators The CapitalAtWork approach for addressing the obligation of reporting on Principal Adverse Impact is composed of three elements. Principal Adverse Impacts Reporting (Article 4 of . It requires a narrative-based disclosure under the level 1 regulation and reporting on a pre-defined list of PAI indicators under the RTS. WHAT ARE THE PAI INDICATORS? to the principal adverse impact statement " . Who Needs to Report on SFDR? This is being introduced in stages, starting from 10 March 2021. In this second blog, we go into more detail regarding the PAI indicators, the resulting challenges . SECR Reporting . of the draft report sets out the final list of principal adverse impacts ("PAIs"). DNSH principle (OECD, UNGPBHR, ILO, IBHR) AND principal adverse impact indicators (14+). Principal Adverse Impact indicators Actively exercising your rights as a shareholder. GET BROCHURE Article 4 SFDR Principal Adverse Impact (PAI) . It will require relevant firms to provide . SFDR's Principal Adverse Impact Indicators on course to change. The reporting framework for principle adverse impact (PAI) at entity level will initially take the shape of a "comply or explain" requirement, moving to "comply" from 30 June 2021 for large. All Article 8 and Article 9 products are required to disclose whether or not they consider principal adverse impact indicators. The draft RTS provides a single framework for adverse impact disclosure by financial market participants, which includes: A mandatory reporting template contains summary, scope, the principal adverse impacts, policies on the identification of principal adverse impacts, actions taken and planned to mitigate the principal adverse impacts, A set of indicators . 4.3 Indicators contained in the principal adverse sustainability impacts statement 12 4.3.1 New transversal mandatory indicator: Non-green asset ratio 13 4.3.2 Indicators relating to residential real estate 14 4.3.3 Indicators relating to auto loans and leases 15 4.3.4 Indicators relating to other types of securitisation 18 Key features. The Sustainable Finance Disclosure Regulation (SFDR) is a piece of EU legislation that aims to increase the transparency of sustainability matters among financial actors. This briefing gives . These are the key changes and clarifications regarding PAI: The timeline for entity level reporting . Subject to being passed into EU law, from 1 January 2023 asset managers will be required to break out how they consider Principal Adverse Impacts into more specific and quantifiable detail, with reference to indicators related to climate and the environment, and indicators related to social and employee issues, respect for human rights, and anti-corruption and anti-bribery matters. Data challenges are expected and hence it is important for the FMPs and FAs to proactive gather data. principal adverse impacts or PAI regime. the calendar year 2022). WHAT ARE THE PAI INDICATORS? All companies have an impact on the environment, both good and bad. The new principle adverse impacts or PAI regime is one of the most challenging elements of the EU's Sustainable Finance Disclosure Regulation (SFDR). Financial firms and larger non-financial . For the purposes of this Annex, the following definitions shall apply: 'scope 1, 2 and 3 carbon emissions' means the greenhouse gas emissions referred to in point (1)(e)(i-iii) of Annex III of Regulation (EU) 2016/1011 of the European Parliament and of the Council of 8 June 2016 on indices used as benchmarks in financial instruments . the "principal adverse impact statement" is intended to show investors and prospective investors how investment decisions made by a financial market participant have or may have adverse impacts on sustainability factors relating to (i) climate and the environment and (ii) social and employee matters, respect for human rights, anti-corruption and PRINCIPLE ADVERSE IMPACT INDICATOR COVERAGE The regulation To reach the Paris Agreement and reduce the impacts of climate change, several regulations have been drafted. STATEMENT REGARDING THE ADVERSE IMPACTS OF INVESTMENT DECISIONS ON SUSTAINABILITY FACTORS Insight Investment Management (Europe) Limited (the "Firm") has evaluated the requirements of the principal adverse impacts regime as set out in Article 4 of the Sustainable Finance Disclosure Regulation ("SFDR"), and in the Regulatory Technical Standards published in April 2022 by the European . 2. The principal adverse impacts are monitored for the SICAV and Managed Accounts. The two main ways to do this are voting at shareholder meetings and engaging - having an active dialogue - with investee companies. Principal adverse indicators - diligence phase: 1.5 Prior to making any investment decision, our investment committee (referred to below as the "relevant investment professional") are required to conduct investment due diligence on the proposed investment position. The provided list consists of both mandatory and optional principal adverse impact indicators. Address EU adverse sustainability impact regulatory reporting requirements; Mandatory entity-level disclosure for firms with over 500 employees - report on all principal indicators plus two additional . Proposed disclosure indicators include a set of Adverse Sustainability Impact Indicators -Principal Adverse Impacts (32 mandatory metrics) -Additional 18 E&S Impact Indicators Status: -Outcome of consultation on SFDR Level 2 Text has been delayed until January 2021 In April 2020, the ESAs published a joint consultation paper setting out their proposals, including some draft templates (with . The Principal Adverse Sustainability Impacts Statement is completed by reference to two types of indicators: Universal mandatory indicators (" core indictors ") 11, in respect of which a manager has no discretion but to consider these indicators as always having a negative impact on the sustainability factors. There are 16 mandatory indicators in total: 14 are . Robeco has started measuring performance on Principal Adverse Impact as of 31 March 2022. As a global asset manager, the Schroders group plays an important role in understanding the relationship between the social and environmental challenges the world faces and the potential impact that these will have on the investments companies in the group make on behalf of their clients . Principal adverse impacts are described in the recitals as impacts of investment decisions and advice that result in negative effects on sustainability factors (i.e . Given the quick-paced EU developments, Swiss ESG market . Principal adverse impact disclosure. These factors are defined by the SFDR as environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters. The Principal Adverse Sustainability Impact Statement [PAIS] requires mandatory indicators are divided in two main groups: 9 environment related indicators and 5 mandatory social and employee, respect for human rights, anti-corruption and anti-bribery indicators, 2 indicators are related to investments in sovereigns and supranationals and 2 are related to real estate investments. One of the more significant impacts of the SFDR is its mandated disclosure of Principal Adverse Impact (PAI) indicators. 10,000 global companies, 175+ sovereign issuers or countries. Currently includes relevant data on 14 principal adverse impact indicators, 25 additional indicators for approx. Investee companies: A total of 14 core indicators are split between environmental and social & governance issues, all of which are required. 25. The number of mandatory indicators in the Revised RTS has been reduced to 14, with a requirement to include at least one additional indicator related to principal adverse impacts on a climate or other environment related sustainability factor 6 and at least one additional indicator related to principal adverse impacts on a social, employee, human rights, anti-corruption or anti-bribery . EU sustainable finance disclosure regulation applies to financial market participants and financial advisors in the EU (banks, insurers, asset managers and investment firms), including financial market . It will require relevant firms to provide extensive disclosures on various ESG related matters, including greenhouse gas emissions and other indicators, in a (controversial) template format. The 10 key action points of the EU Action Plan ultimately aim to reorient capital flows towards a more sustainable economy, foster long-termism and manage the increasing importance of sustainability risks. While various of the mandatory principal adverse impact indicators are already part of our Responsible Investment approach, others are not, or are only partially included in our current approach. The Principal Adverse Impacts, or PAIs, are measured by an assortment of 14 mandatory corporate indicators, with two additional indicators for sovereigns and two real-estate specific indicators. Firms making PAI . These impacts Executive Summary 2 2. In addition, for some of the principal adverse impact . These indicators should be gathered at portfolio investment level and aggregated at entity level (i.e. This investment due diligence will evaluate a variety of factors including (for the purposes of the PAI Policy) an The lineup is expanded by a list of 46 additional voluntary indicators, of which firms must select at least two additional indicators to report on. If inclined, investors can also . The new EU SFDR requires covered market participants to use the core mandatory indicator set comprising 14 indicators for investments in companies, two for investments in sovereigns and supranationals, and two for . Commission Delegated Regulation (EU) 2021/2139 of 4 June 2021 supplementing Regulation (EU) 2020/852 of the European Parliament and of the Council by establishing the technical screening criteria for determining the conditions under which an economic activity qualifies as contributing substantially to climate change mitigation or climate change adaptation and for determining whether that . Principal adverse sustainability impacts are described in Article 20 of the SFDR as "Those impacts of investment decisions that result in negative effects on sustainability factors, with sustainability factors referring to environmental, social and employee matters, respect for human rights, anticorruption and antibribery matters." Principal adverse impact on sustainability factors negative, material or likely to be material effects on sustainability factors that are caused, compounded by or directly linked to investment decisions and advice performed by the legal entity 32 mandatory indicators 18 voluntary indicators 16 environmental 16 social 11 environmental 7 social To aid in compliance, ICE offers an SFDR Principal Adverse Impact (PAI) solution, which offers continuously updated input values for most of the SFDR indicators. MSCI SFDR Disclosure Report provides metrics and data on mandatory and voluntary adverse impact indicators for MSCI using the latest mapping MSCI ESG Research has developed following the release of the draft Regulatory Technical Standards (RTS) in August 2021. In addition to the . As outlined in our previous blog, there are 9 core environmental Principal Adverse Impact Indicators applicable to investee companies, all. The list identifies the mandatory PAIs, plus a requirement to report on two further indicators, one environmental and one social/governance, with the number of mandatory PAIs set out as follows: Investments in companies: 14 ESMA has divided the mandatory metrics into 14 for investee companies, two for sovereigns and supranationals and two for real estate assets. The European Commission has given the European Supervisory Authorities ("ESAs") a mandate to review the SFDR Delegated Regulation indicators for principal . We would welcome some clarifications around specific indicators in Annex 1 Table 1, Table 2 and Table 3 of the proposed RTS. 8 Fund is to adopt the mandatory principal adverse sustainability indicators ("PASIs"). An overview . By 30 December 2022, this decision will have to be made on a product level as well. These PAI indicators are essentially a set of environmental, social and governance indicators and metrics, ranging from carbon emissions, water emissions, biodiversity impacts, social violations, and gender parity on the board. 1. Capital Dynamics). Table 2: Description of the principal adverse impacts on sustainability factors 1. Description of principal adverse sustainability impacts . Complexities related to SFDR indicators and metrics Principal Adverse Impact (PAI) PAI is an important concept in the regulation that now has even more prominence and interconnectedness in the final report. the "principal adverse impact statement" is intended to show investors and prospective investors how investment decisions made by a financial market participant have or may have adverse impacts on sustainability factors relating to (i) climate and the environment and (ii) social and employee matters, respect for human rights, anti-corruption and The first results will be . 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