Data from a new study by PwC Luxembourg, the first of its kind, shows that only 21.6% of the management companies in the scope of the study issued a publicly accessible Principal Adverse Impact (PAI) statement.

Of the issued statements, just over one in five (21.9%) followed the template prescribed by the Sustainable Finance Disclosure Regulation (SFDR)’s Regulatory Technical Standards (SFDR Level II), resulting in significant disparities with limited data comparability.

The report ‘Principal Adverse Impact Statements in the AWM Industry: Mind the Gap’ also found that 22.2% of the firms surveyed were not compliant with the regulations, in other words neither published a PAI statement nor 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. PwC Luxembourg reviewed data from 2,012 management companies across nine European countries, accounting for 62.6% of the total number of UCITS ManCos, AIFMs, and Super ManCos registered with ESMA, finding wide variations in the quality and substance of publicly available PAI statements.

While there were positive examples, the majority of published statements were incomplete, lacked quantitative- and qualitative-rich insights, or in some instances were left entirely blank.

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.

Results of selected PAIs provide limited insights. For the environment-related PAIs, the self-reported data shows that Super ManCos have the highest carbon footprint with 450.4 t/EURmn, while AIFMs and UCITS ManCos follow with 399.2 t/EURmn and 395.7 t/EURmn respectively.

The study’s findings on PAI 13 (board gender diversity) disclosures showed an average between 29.8% and 32.6% of women on boards across investments, in line with recent studies on board gender diversity in Europe.

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.

On the other hand, improvements in the structure, completeness, ease of use and prescribed electronic format of the current reporting template would provide a substantial input in easing the challenges for firms and comparability of the statements prepared. This would increase the usefulness for interested stakeholders.

Michael Horvath, partner and regulatory advisor at PwC Luxembourg, said: “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.

Expected growing pains are clearly evident as:
• the required sustainability information is in many instances not easily accessible or available at all from the invested companies;
• for reported PAI results it is in general unclear what controls and quality management measures were put in place;
• 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.”

Olivier Carré, deputy managing partner, technology & transformation leader PwC Luxembourg also added: “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”.

This report is based on an analysis of the PAI statements for the 2022 calendar year retrieved from the websites of over 2,000 ManCos with a presence in nine European countries (Luxembourg, France, Sweden, Germany, Italy, Ireland, Liechtenstein, Netherlands and Spain).

It focuses on disclosures required for financial market participants as defined in Article 2 (1) of the SFDR, more specifically on the PAI entity-level disclosures (SFDR Article 4) of (i) UCITS Management Companies (UCITS ManCo), (ii) Alternative Investment Fund Managers (AIFM) and (iii) entities that hold both licences (Super ManCo).