On October 30, 2024, the ESAs published their third report on voluntary PAI reporting. The findings are based on surveys completed by national supervisors from member states. The purpose of the survey was to gather input on the current status of voluntary PAI disclosures at the entity and product level.
Similar to previous years, the 2024 report addresses the statements made by financial market participants (“FMPs”) that choose to explain why they do not consider the negative impacts of investment decisions on sustainability factors, as well as the statements relating to PAI considerations for financial products. New in the 2024 report is the evaluation of the PAI indicators based on Annex I of the SFDR Delegated Regulation, also known as Annex I.
In this article, we discuss the good and bad practices identified by the ESAs in their annual report on voluntary PAI reporting.
The ESAs open on a positive note, acknowledging improvements in voluntary reporting on entities and products compared to previous reports.
Additionally, positive progress has been made in various areas over the past years, particularly in the accessibility of the reports and the quality of the information provided. Significant improvements have also been noted in the product PAI (Principal Adverse Impacts) reports, although the share of products disclosing PAI information remains relatively low.
The ESAs further emphasize that this research aims to encourage national supervisors to engage with FMPs (Financial Market Participants) that fail to fully or partially comply with the regulations.
Despite the progress made, the ESAs see room for further improvement. For instance, the explanations provided in “do-not-consider statements” for not considering PAIs—usually related to a lack of resources and data—often lack clear goals or timelines for when the FMP will begin incorporating PAI indicators.
Another issue is that FMPs sometimes mix sustainability risks with SFDR (Sustainable Finance Disclosure Regulation) reports or use these reports for marketing purposes. Additionally, the ESAs note that when an FMP publishes an entity-wide PAI statement, they are more likely to also enhance PAI information at the product level.
While significant improvements have been made in the quality of PAI statements, many FMPs still do not (fully) comply with the legal requirements for the (negative) PAI statement. Below, we summarize the good and bad practices:
General
There has been a significant improvement in the location of the reports, which are now more visible to find compared to previous years. Overall, all national regulators agreed that the information should be prominently placed in a separate sustainability section of the website, with clear references to SFDR or sustainability-related disclosures.
Good practice
Parties that provide direct links on their website to clear sections such as ‘Sustainability-related Disclosures’ or ‘SFDR’.
Bad practice
A bad practice is when information is only found through the website’s search function, with very small fonts or included in sections that are not directly related to sustainability disclosures.
Good practice
The PAI statement generally aligns with the SFDR framework. Good practices include an introductory paragraph for the PAI table and understandable texts with proper legal references.
Bad practice
Bad practices include the use of abbreviations for PAI indicators, unclear explanations (such as an “ESG Commitment score” without further clarification), and reporting results without indicating the measurement method or formula used.
Information about sectors is generally complete. The trend is that larger UCITS and AIF managers tend to provide more detailed information. The ESAs noted that two elements are often missing:
Good practice
A good practice is for PAI statements to clearly describe the methods for collecting and processing data and indicate if data is missing.
Bad practice
A bad practice is when PAI statements are general, outdated, refer to the unavailability of ESG data, or provide opt-in PAIs that are not relevant.
General
The majority of national regulators stated that non-compliance is usually due to misunderstandings regarding the SFDR Delegated Regulation. Some regulators are reaching out to FMPs to clarify their expectations regarding Annex I compliance. This means that the AFM may ask questions about how the PAI statement has been prepared.
Good practice
A good practice is for organisations to use all mandatory and optional indicators. Additionally, ensure that both the publication date and the date of any updates are clearly stated.
Bad practice
Some smaller organisations indicate that they do not use the template in its entirety because it “does not align with their activities.” The ESAs remind organisations that all mandatory indicators must be included, even if they do not align with their business activities. Furthermore, field names must follow the SFDR RTS format, no additional columns may be added, and no changes may be made to the template.
General
The quality of the statements can be improved, but there are clear improvements compared to 2023. Most reports in the asset management sector are considered compliant, while quality in the insurance sector varies depending on the size of the company. In the banking sector, low scores were observed due to the lack of PAI statement disclosures.
Good practice
Good practices include transparency regarding data coverage and a clear overview for investors, making it easier to understand where the figures come from and how the FMPs reached their conclusions.
Bad practice
Common bad practices include errors in calculating PAI indicators, incomplete strategies, unclear engagement policy documents, and missing historical comparisons or publication dates.
General
The general feedback from the ESAs was that the information on actions taken, particularly regarding milestones and the nature of the actions, could be improved. In some member states, none of the FMPs in the national regulator’s sample properly reported on actions taken and planned actions, or on objectives for the next reference period.
Good practice
Good practices include providing quantitative/numerical data that portfolio companies must achieve or comply with. This allows for progress on ESG goals to be measured and compared year over year.
Bad practice
A bad practice is the use of general forward-looking statements that do not include quantifiable targets for future periods, making performance unverifiable.
We conclude this article with a schematic overview of the good and bad practices outlined.
| Good practices | Bad practices & cases of non-compliance | |
| Website | FMPs that provide a dedicated, easily navigable section on the entity’s website for the SFDR Article 4 disclosures. | FMPs that do not have an easily accessible path to finding Article 4 PAI disclosures on their website homepage. Disclosures placed in less intuitive sections of the entity’s website, available only through a google search, combined with other documents, or hard to find without a search function. |
| FMPs that provide direct links on their website and clear sections such as ‘Sustainability-related disclosures’ or ‘SFDR’. | FMPs providing information in the specific section for each fund even if it actually relates to the entity level. | |
| Clarity of disclosures | FMP’s using a clear, simple language with a structured format helps to understand the PAI statement disclosures. | FMP’s disclosing information in a vague and unclear manner, particularly when not considering PAIs, with ambiguous statements, making it difficult for investors to grasp the full context and implications of the disclosures. |
| FMPs that provide translations and have websites available in multiple languages, which increases accessibility. | References to other sections of the website without providing the relevant links, misuse of names for reports, titles, and website sections (e.g., regarding NACE codes). | |
| FMPs that present the information segmented and labelled in accordance with the SFDR requirements, ensuring key points are immediately apparent and easy to comprehend. | Cross reference to other sections of the FMPs’ website without providing the relevant links, misuse of names for disclosures, titles and website sections (including on NACE sectors) | |
| Completeness of disclosures | FMPs reporting all requested information, including indicators from Tables 1, 2, and 3 of the SFDR Delegated Regulation. | FMPs not providing disclosures for all indicators in Table 1 and optional indicators in Table 2 and 3 of the SFDR Delegated Regulation). |
| FMPs providing PAI statements under Article 4(1)(a) including all mandatory environmental and social indicators, including the numerical data in the ‘Impact’ column. | FMPs adding columns that are not required by the templates or disclose indicators that are not relevant (non-compliance) | |
| Good quality answer in open-ended questions. | FMPs omitting to state the actions taken, actions planned, and targets set for the next reference period (non-compliance). | |
| Compliance with Annex I RTS | Use of more than one opt-in indicators from Table 2 and more than one indicator from Table 3 of Annex I of the SFDR Delegated Regulation if it is justified by the FMPs’ investments. | FMPs stating that they cannot use the template because is not appropriate for their activities (non-compliance). |
| FMPs publishing the Article 4 disclosure including all the PAI indicators according to Table 1 of Annex I of the SFDR Delegated Regulation. | FMPs including additional columns or modify Table 1, Annex I of the SFDR Delegated Regulation (non-compliance). | |
| Quality of the PAI-Statement | FMPs providing detailed PAI statements with detailed and comprehensive information. | Some smaller FMPs compiling marketing and regulatory information together, thus reducing clarity. |
| FMPs offering extensive explanations in their PAI statements. | FMPs sometimes lacking clear data on actions taken as a result of using generic statements. | |
| Some FMPs clearly differentiated and specified actions taken for each indicator. | FMPs disclose only a value/number under the “metrics” column in each PAI indicator without any further explanation of methodology, interpretation, or reasoning. | |
| Quantification of actions taken | FMPs’ inclusion of detailed, specific quantification of actions related to PAI disclosures. | Some FMPs providing general forward- looking statements with vague descriptions without specific quantification. |
| Clear description of specific actions already taken or upcoming plans for actions or initiatives. | Descriptions being too general and formalistic that do not necessarily relate to the PAI indicator. | |
| Compliance with the 30 June deadline | High FMP compliance rates with the deadline. | FMPs publishing PAI disclosures late after the deadline (non-compliance). |
| Clearly mention the date of publication of the information and the date of any update. | FMPs failing to disclose by the publication date of their disclosure. | |
| Paris alignment and engagement policies | Commitment to the decarbonisation of investments through an interim target of decarbonisation of, e.g. minimum – 25% for the corporate portfolio by 2025. | General references to the alignment with the Paris Agreement objectives in the policy for integrating sustainability risks in the decision‐making investment process. |
| Description of the share of the portfolio used for ensuring commitment to align with the Paris Agreement, e.g. disclosure of the information about the investments’ current alignment with the objectives of the Paris Agreement by explaining their current share of AuM invested in line with the objectives of the Paris Agreement. | Methodology for measuring the adherence to or alignment with international standards is not disclosed. | |
| Disclosure of the number of engagement actions undertaken and the number of companies targeted, including their geographical and sectoral allocations, information on the votes made, and on topics of focus for their engagement policies. | No details on the resources dedicated to the implementation of the engagement policies, failure of disclosing the objectives of the engagement policy. | |
| Description of the escalation policy implemented and provision of the list of criteria that the FMP uses. | Statement that no engagement policy is required because it is not needed for the attainment of the investment objectives of the financial product. |
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