Only 21.6% of management companies have issued a publicly accessible Principal Adverse Impact (PAI) statement, which fails to comply with Sustainable Finance Disclosure Regulation’s (SFDR) Level II technical standards.
A study conducted by PwC Luxembourg, and presented in the report Principal Adverse Impact Statements in the AWM Industry: Mind the Gap, found while there were positive examples within the PAI statements of management companies, the majority of published statements were incomplete, lacked quantitative- and qualitative-rich insights, or in some instances were left entirely blank. In fact, only just over one in five (21.9%) are following the template as prescribed by the technical standards.
The results of the study are based on an analysis of the PAI statements for the 2022 calendar year, retrieved from the websites of over 2,000 management companies with a presence in nine European countries. Publication of the PAI statement is mandatory for financial market participants with 500 or more employees and was brought into force in January 2023.
Commenting on the findings, Olivier Carré, deputy managing partner at PwC Luxembourg, said: “Sustainability regulations are only going to continue to expand in scope and complexity in the coming years. Our analysis shows much work remains to be done if PAI statements are to play a pivotal role in informing stakeholders about investments’ adverse impacts on sustainability and progressing sustainable investments. To achieve this, management companies need to ensure they have reliable and technologically advanced data collection mechanisms to efficiently track progress, alongside a systematic methodology with well-defined benchmarks.”
Absence of data hinders progress
Among the findings, the study shows that 22.2% of firms surveyed were not compliant with the regulations, neither publishing a PAI statement or a declaration on why they would not report on PAIs at entity level. A further 7.5% of companies, while they had committed to disclosing the data, were not compliant with SFDR Level II.
In addition, 39.1% of the firms surveyed declared they did not consider the PAIs of their investment decisions on sustainability factors, with the most frequently observed reasoning being insufficient availability of satisfactory and pertinent non-financial data, as well as uncertainties regarding the data collection methods required.
“PAI statements are the first step for many firms into sustainability reporting and may provide relevant actionable insights for stakeholders into what impacts firms’ investment decisions have on sustainability factors, but expected growing pains are clearly evident,” added Michael Horvath, partner and regulatory advisor at PwC Luxembourg.
“The required sustainability information is, in many instances, not easily accessible or available at all from the invested companies, and for reported PAI results it is in general unclear what controls and quality management measures were put in place.
“Additionally, the reporting template required to be used by the firms is currently not designed to ensure comparability for reported results between firms as practices differ significantly. This is why we have developed our proprietary scoring model, the PwC PAI Transparency Score Card, which tracks compliance, completeness and transparency of PAI disclosures, to support improved future benchmarking on entity level.”
Given this, the report presents a series of recommendations for firms to ensure better compliance and alignment with regulators’ expectations in future PAI statements, including the systematic usage of the template provided by the European Supervisory Authorities, methodology and data management, as well as highlighting the benefits of accurate PAI reporting for investors.
Improvements in the structure, completeness, ease of use and prescribed electronic format of the current reporting template was also cited as having a substantial effect in easing the challenges for firms and comparability of the statements prepared, increasing the usefulness for interested stakeholders.
