What are Principle Adverse Impact indicators (PAI) and how to implement them?

The Principle Adverse Impact Indicators (PAI) and how to implement them

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The new implication of the Sustainable Finance Disclosure Regulation (SFDR) can be hard to grasp. Under the SFDR the Principle Adverse Impacts (PAI) have been established. In this blog post, we want to show you what they are and what they imply.

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What are the PAI?

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The PAI are part of the EU Sustainable Financial Action Plan under the SFDR. They aim to establish standards for reporting and indicate the investments' sustainability risk to financial market players (FMPs). There are 14 indicators, of which 9 focus on climate and other environmental factors, and 5 on social and governance factors. While these 14 indicators (see visualization below or in text form at the end of the post) ware mandatory to report, at least one additional climate factor and social factor have to be reported. 

 What should be reported?

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The PAI should are disclosed on the entity (article 4) and product level (article 7). The product level concerns among others: investments, funds, pensions, and investment advice (et cetera). The entity level concerns a firm’s regulations and considerations of sustainability risk. 

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The entity-level disclosure (article 4) requires that FMPs disclose their consideration of the PAI of investment decisions on sustainability factors visible on the website. This disclosure is on a ‘’comply and explain’’ basis which means that if there is a PAI non-consideration, the FMPs have to provide a reason why they did not consider the PAI and if they will in the future. However, if the PAI are considered, FMPs have to create a statement of due diligence including these indicators. For the product level disclosure (article 7), FMPs that do not consider PAI have to indicate the reason why in their pre-contractual disclosure documents. If the PAI are considered, FMPs have to specify in their pre-contractual disclosures how each of their financial products considers the PAI.

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What are the reference periods and reporting deadlines?

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Deadlines for the PAI reporting are approaching rapidly. On the 30th December 2022, FMPs that are complying with the PAI have to disclose on their pre-contractual disclosure how the PAI are considered for each of their financial products. The first entity-level PAI report deadline is in June 2023. For the June 2023 report, the reference period stretches from the 1st of January 2022 to the 31st of December 2022. The second reference period will then be from the 1st of January 2023 to the 31st of December 2023 and so on.

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What are some useful resources to navigate through the PAI?

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PAI disclosure and its reporting requirements can be complex at first impression. Therefore, we summarized some useful official resources that can help you to navigate through disclosure requirements.

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The final report on draft Regulatory Technical Standards (RTS) applies from the 1st of January 2023 and has been published on the 4th of February 2021 by the ESMA. Annex I (from p.52) is especially important for PAI disclosure. It dictates a mandatory format and template for the entity-level statement on PAI of investment decisions on sustainability factors. Further, it entails explanations, formulas, and metrics for the 14 mandatory PAI as well as a list of all optional PAI. 

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In Addition to the RTS, in June 2022, the EMSA published Clarifications on the ESAs’ draft RTS under SFDR concerning specifically PAI disclosure. It has been published after a public request by investors and national players. This clarification offers additional guidance on the definition of certain PAI, and further offers calculation examples.

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Lastly, to not miss any deadline and keep an overview of all the new regulations imposed by the European Union, we recommend you look at the ESMA Sustainable Finance Timeline which entails all important deadlines, references periods, and implementation timelines for the SFDR, TR, CSRD, MiFID, IDD, UCITS, AIFMD. 

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Tekudo can help you with your PAI disclosure!

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The SFDR disclosure requirements are forming a new standard of sustainability reporting. Reporting on the PAI is an integral part of this. Now more than ever investors need to collect ESG data to look out for and report on the sustainability risk of their financial products as the first PAI disclosure deadline was on the 30th of December 2022. Tekudo can help you with that! With Tekudo you can check how your portfolio companies are performing on the PAI indicators and track even more ESG data. We give you advice on the right calculations and automate the data collection for all your portfolio companies.

For more information about ESG reporting follow us on Linkedin or try the Tekudo Software here.


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The PAI in text form:

Climate and Other Environmental-related  Indicators 

- GHG Emissions (Scope 1,2,3, Total)

- Carbon Footprint

- GHG Intensity of Investee Companies

- Exposure to companies active in the fossil fuel sector 

- Share of non-renewable energy consumption and production

- Energy consumption intensity per high impact climate sector 

- Activities negatively affecting biodiversity-sensitive areas

- Emissions to water

- Hazardous waste and radioactive waste ratio

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Social and Governance Indicators 

- Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises 

- Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises

- Unadjusted gender pay gap

- Board gender diversity

- Exposure to controversial weapons

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