As easy as PAI?

27 Mar 2023 . 3 min read

ESG regulations tend to have knock-on effects. The arrival of Sustainable Finance Disclosure Regulation (SFDR) reporting for ESG investors is impacting disclosure expectations for corporate issuers – particularly in terms of more questions on Principal Adverse Impact (“PAI”) metrics.

Treasurers are already experiencing a growing flurry of enquiries on this topic. This is to be expected: while European Supervisory Authorities (ESAs) understand the challenge for firms to obtain some of these data points, investors are expected to use “all reasonable means available” to fulfil their reporting obligations.

So, what are the best ways for companies to prepare themselves?

Some further context here is helpful. European investors that run Article 8 (“promotion of sustainability”) or Article 9 (“sustainability as objective”) funds are required to report on 14 mandatory and 2 optional PAI indicators. These range from climate and environmental indicators (e.g. carbon footprint and hazardous waste ratio) to social and governance factors (e.g. gender pay gap and UN Global Compact violations). Limited guidance has been given on what constitutes good practice in determining those indicators or in assessing risk management and broader governance practices by portfolio companies. Understanding how investors are interpreting this data is therefore critical for companies. It is worth investigating what type of funds hold your debt and discussing – for example during roadshows – the way such accounts assess companies’ ESG reporting.

The production of the first of these SFDR reports in 2022 has started a quest for filling data gaps. Typically, investors have consulted ESG data providers (such as MSCI and Sustainalytics), many of whom have developed PAI reporting tools. Understanding how your company’s disclosures are translated into these PAI metrics or extrapolated by major ESG data providers is advisable. Comparatively worse metrics to direct peers could put you at a disadvantage.

Increasingly, however, investors are also going “directly to source”. Here they are finding that certain sectors have a stronger track record in reporting on metrics that align to the required PAI indicators – such as major energy firms (who have been under stakeholder pressure to disclose this type of information for some time). Equally there is a disparity in ease of data extraction.

Eventually, reporting of PAI-consistent information will start to become mandatory for many companies in 2025 (for the 2024 financial year). However in the meantime, having PAI-related and other ESG metrics readily available through spreadsheets or online databases could support your company’s ESG investor relations effort.

Like them or loath them, these PAI metrics will become a lens through which your company is assessed. Best try on the glasses and see for yourself!

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As easy as PAI?

So, what are the best ways for companies to prepare themselves?

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