We might be slowly, but surely, marching towards more transparency in the industry – this is the main finding of the second annual report published by the European Supervisory Authorities (ESAs) on the voluntary disclosure of principal adverse impacts (PAIs) under the Sustainable Finance Disclosure Regulation (SFDR).
The report defines PAIs as “the most significant negative impacts of investments on the environment and people”. PAI disclosures are voluntary for firms that have less than 500 employees, but when a financial market participant (FMP) decides to consider PAI, it is expected to “seek to reduce the negative impact of the companies it invests in”. To compile the report, the ESAs, which include the European Banking Authority (EBA), European Insurance and Occupational Pensions Authority (EIOPA), and the European Securities and Markets Authority (ESMA), gathered feedback from national competent authorities (NCAs) via a survey.
Room for improvement
Despite an overall improvement in the application of voluntary disclosures, the report finds a number of shortfalls. Explanations for non-consideration of PAIs remain “short and vague”, usually mentioning “issues related to data availability and comparability or insufficient clarity from a legal perspective”. There is still “a low level of understanding by FMPs on the non-consideration of PAIs” even though the ESAs “consider it best practice that FMPs should at least indicate a target date for when they intend to start to consider PAI indicators”.
In light of these findings, the ESAs have compiled a number of best practices suggestions for FMPs. They also recommend that the European Commission consider “other ways of introducing proportionality for FMPs, as the more-than-500-employees threshold may not be a meaningful way to measure the extent to which investments may have PAIs on sustainability factors”. They urge NCAs to support FMPs by highlighting common supervisory expectations, and follow up with non-compliant FMPS – which may include the use of enforcement tools if appropriate.