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ℹ️ Looking for a list of the PAIs? Check this article
The European Commission (EC) established in the SFDR a set of Principal Adverse Impact ('PAI') indicators that can be used to measure the negative effects an investment decision might have on sustainability.
In the scope of the SFDR, the term 'sustainability' encompasses environmental and social factors, but also employee and human-rights matters as well as anti-corruption and anti-bribery.
Comply or explain
Article 4 of the SFDR applies as a so-called ‘comply-or-explain’ article. It means that you have two options:
- Opt-in: To consider PAIs and explain how you do so (comply); or
- Opt-out: To not consider PAIs and explain why, including, where relevant, whether and when you intend to consider them in the future (explain).
Opting-out
If you decide to opt-out, you will need to make this explicit in your SFDR disclosures.
As a fund manager, you must produce a 'Negative Statement' on your website, stating the following:
- That you do not consider PAIs;
- The reasons for which you have decided to opt-out (i.e., proportionality);
- What procedure is set to review this decision and when will the decision be reviewed.
You will need to make this explicit for all your funds in your website disclosure and your prospectus and periodic annexes.
Opting-in
Fund managers that have decided to consider PAI indicators are required to publish a PAI Statement on their website. This statement contains both qualitative information on how you identify, prioritise and address PAIs, as well as quantitative information on a set of PAI indicators.
The SFDR allows you to opt-in on 'entity level' (for all funds you manage) or on 'product level' (for a specific fund).
If you decide to opt-in for a specific fund only, on product-level, you will have to disclose which PAIs you have selected to monitor in your prospectus disclosure, and on the results of your PAIs in your periodic disclosure.
How to disclose?
The indicators are divided into a mandatory set of indicators (14 in total), and additional opt-in indicators for environmental and social factors, of which each fund manager must select at least two (i.e., one environmental and one social indicator).
The PAI Statement consists of five chapters, four of which are purely qualitative:
Chapter 1 – Summary
Chapter 2 - Description of Principal Adverse Impacts
Chapter 3 - Description of policies to identifyand prioritise sustainability impacts of investment decisions onsustainability
Chapter 4 - Engagement policies
Chapter 5 - References to International Standards
The EC released a mandatory reporting template to be used to observe compliance with the PAI Statement in Annex I of the Commission Delegated Regulation (EU) 2022/1288 supplementing the SFDR, which we will use to provide you with the necessary documentation for your compliance.
When publishing the PAI Statement for the first time (i.e.,for the first reference period), you are not obliged to disclose information relating to the previous reference years. However, such ‘historical comparison’ will be required in future disclosures.
