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 principal adverse impacts of your investment decisions on sustainability factors. These indicators aim to measure the negative effects an investment decision might have on sustainability.
In the scope of this Regulation, sustainability include environmental and social factors, but also employee- and human-rights matters as well as anti-corruption and anti-bribery.
Opting Decisions
Opting-in
The SFDR allows you to opt-in for monitoring and reporting on the PAIs for a specific Fund (i.e., on 'product-level') you manage and for all Funds you manage (i.e., on 'entity-level', as a Fund Manager).
These decisions are separate. 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 the policies to identify, prioritise and address PAIs, as well as quantitative information on a set of PAI indicators.
If you decide to opt-in for a specific Fund only, on product-level, you do not need to produce the same type of statement, but 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.
Opting-out
If you decide to opt-out on either Fund Manager or Fund-level, you will need to make this explicit in your SFDR disclosures.
As a Fund Manager, you must produce a 'negative express statement' on your website, stating the following:
That you do not consider PAIs on entity-level;
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.
For your opted-out Fund, you will need to make this apparent in all Fund-level disclosures, namely in your Website disclosure and your Prospectus and Periodic annexes.
How to disclose?
The indicators are divided into a mandatory set of indicators which always lead to principal adverse impacts of investment decisions on sustainability factors (irrespective of the result of the assessment), 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 in total, four of which are purely qualitative.
The latter four are:
Chapter 1 - Summary
Chapter 3 - Description of policies to identify and prioritise sustainability impacts of investment decisions on sustainability
Chapter 4 - Engagement policies
Chapter 5 - References to International Standards
One chapter includes the quantitative disclosure requirements on PAI indicators. This is namely:
Chapter 2 - Description of Principal Adverse Impacts
The EC released a mandatory reporting template to be used to observe compliance with the PAI Statement in Annex I of the Delegated Regulation supplementing Regulation (EU) 2019/2088, which we will use to provide you with the necessary documentation for your compliance with the requirement.
While the qualitative parts of the PAI statement should already be published as of 10th of March 2021, the quantitative reporting on indicators should be done per 30 June 2023, over the first reference period which begins on the 1st of January 2022 and ends on the 31st of December 2022.
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 starting 2024 regarding the first reference period of 2022.
To get a comprehensive understanding of the nature of requirement of including at least two voluntary PAIs, please consult the following article: Voluntary Principal Adverse Impacts.