the Principal Adverse Impact (PAI) indicators' framework is a core tool created by the SFDR to facilitate financial companies' reporting of their portfolio companies' adverse impacts ( or negative externalities). Through the PAI framework, sustainability impacts can be accounted for on either or both entity- and product-level.
Entity-Level Sustainability Impact Consideration
Article 4 of the SFDR lays down a firm's obligation to decide on whether to consider sustainability impacts on entity-level.
There is a distinction between the qualitative and the quantitative disclosures to be made on the PAIs. On one hand, a qualitative assessment of an entity's principal adverse impacts is reflected in its PAI statement. On the other hand, a quantitative assessment of an entity's principal adverse impacts makes use of the PAI indicators, and are to be reported on every 30 June of the year, for the preceding financial year (i.e., from 1 Jan until 31 Dec)
An entity can opt in or out of monitoring and publishing entity-level Principal Adverse Impacts (PAIs). How an entity goes about it and if it does at all, depends upon its general ambition and what type of Funds it possesses.
✅ If you wish to make use of 'sustainability' to create value for your
portfolios, we recommend you opt-in on entity-level PAIs.
❌ If you prefer sticking to minimum compliance and you don't desire to
have a large portion of your funds classified as an 'Article 8', you are
not obliged to adopt the PAIs on entity-level.
Product-Level Sustainability Impact
At product level, the category of the fund will determine whether PAI indicators will be required, good to include or not necessary.
Mandatory. For an 'Article 9', you need to opt-in to report on meeting the 'do no significant harm' criteria within the framework of considering an investment as 'sustainable'. To find more information on what classifying your Fund as an 'Article 9' entails, please consult this article.
Recommended. For an 'Article 8', it is a good idea to opt-in as it is an easy way to monitor the 'sustainability characteristics' of the investments. It allows you to monitor your PCs' progress on those impacts, and engage with them to ensure they are managed coherently.
Not required. For an 'Article 6', and if you do not wish to consider sustainability for its investments, this framework it is not necessary and you can opt-out.
You will be required to make a decision for each individual Fund you own on whether to opt-in or out of the monitoring framework. Your decision must be clearly indicated in the website disclosures that need to be produced for each Fund.
Would you like to know more about this framework?
Please consult the following articles on: