Since Q2 2021, in an effort towards increasing transparency and integrating sustainability risks, the Sustainable Finance Disclosure Regulation (SFDR) implemented a series of mandatory ESG disclosures: investors must report on Principal Adverse Impacts (PAIs) of their portfolios. The SFDR Delegated Regulation requires financial market participants and financial advisers to publish a Principal Adverse Impact (PAI) statement on their website and describe PAI in pre-contractual information. PAI relates to negative effects on sustainability both on entity and product level.
The SFDR’s mandatory Principle Adverse Impact (PAI) indicator on biodiversity, indicator 7, requires that companies disclose activities that negatively affect biodiversity sensitive areas (defined as 'the share of investments in companies with sites or operations located in or near to biodiversity-sensitive areas, which negatively affect those areas'). This complements a range of evolving disclosure regimes newly taking biodiversity into account. Just updated, guidance published on 12 April provides guidance on formulae as follows:
Added to this, reporting on biodiversity at company level will increase through the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS), which include a reporting standard on biodiversity and ecosystems (see latest draft). All large EU companies and non-EU companies with a significant presence in the EU will need to disclose specific metrics on the impact their activities have on biodiversity loss and ecosystems as well as the impact biodiversity loss will have on the company. Data points are expected to start being reported in 2025 by in scope companies.
We take a three flag approach to calculating PAI 7, also reflected in our Proximity Impact exposure submodule, which takes into account company locations, the materiality of impact, and controversies:
Read the full latest ESMA guidance here.
Source: ESMA, 12 April, 2023, Joint Consultation Paper: Review of SFDR Delegated Regulation regarding PAI and financial product disclosures, Draft regulatory technical standards with regard to the content, methodologies and presentation of sustainability disclosures pursuant to Article 2a(3), 4(6), 4(7), 8(3), 8(4), 9(5), 9(6), 10(2), 11(4) and 11(5) of Regulation (EU) 2019/2088