Sustainable Investing
Principal Adverse Impact indicators
Principal Adverse Impact Indicators are a means of measuring the impacts that companies have on the environment and wider society that forms part of the EU’s Sustainable Finance Disclosure Regulation. They form part of the Sustainable Finance Disclosure Regulation introduced across the EU in 2021.
All companies have an impact on the environment, both good and bad. Their equities and bonds are owned by investors who will need to report on the adverse impacts on sustainability at entity and financial product levels. These impacts are defined by the EU as “negative, material, or likely to be material effects on sustainability factors that are caused, compounded by, or directly linked to investment decisions and advice performed by the legal entity.”
The EU has identified 64 adverse impact indicators that must be calculated, of which 18 will be mandatory to report, and 46 will be voluntary. They will focus on standard environmental, social and governance (ESG) factors that investors are used to following. The compulsory factors range from carbon emissions, fossil fuel exposure and waste levels (E) to gender diversity and due diligence over human rights (S) and a company’s record on exposure to corruption, bribery or other scandals (G).
Creating returns that benefit the world we live in
While the regulation will formalize the disclosure process, the concept of trying to find adverse impacts is not new. Robeco routinely integrates ESG aspects throughout the investment process, partly as a form of risk and negative impact avoidance. Under the SFDR, Robeco started considering negative impacts in the form of disclosable (PAIs) from June 2021.
Following the framework provided by the SFDR in 2020, Robeco identified datapoints to acquire the necessary metrics, based on data from the S&P Corporate Sustainability Assessment. For each of the mandatory indicators, Robeco has summarized the methodology of arriving at measuring these indicators and developed a prototype to assess the impact for all of its funds. The Robeco Principal Adverse Impact Statement published in June 2023 discloses data with the first reference period of 1 January 2022 to 31 December 2022.