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With reporting deadlines rapidly approaching, there’s limited time left for investors to get up to speed on reporting portfolio Principal Adverse Impact (PAI) indicators. In a recent webinar, we discussed the main PAI reporting challenges faced by private market investors. The webinar was moderated by Benjamin Howard-Cooper, Head of Sustainable Finance at Briink and featured the participation of Blandine Machabert, Head of Impact at RAISE, and Danielle Cohen Henriquez, Managing Consultant for Sustainable Finance at South Pole.

PAIs Deep-Dive: a webinar on challenges and best practices for private market investors

What are PAIs, and how do they relate to ESG reporting obligations?

The SFDR mandates’ Financial Market Participants (FMPs), including investment firms, asset managers, insurance companies, and pension funds to disclose their sustainability practices and policies, including their impact on the environment and society through PAI indicators. The regulation is designed to ensure that investments that classify themselves as “green” or otherwise sustainable are actually delivering on those promises in the construction of the portfolio. Before the SFDR, it was difficult to compare the sustainability profile of different financial products given a lack of standard lexicon or data points used to measure and assess.

PAIs listed in the regulation include 18 mandatory and 46 additional indicators around environment and social issues, including specific factors relevant for investments in sovereigns and supranationals, as well as real estate assets. Accordingly, FMPs are expected to provide information on all mandatory indicators, as well as one or more additional environment-related indicators and one or more additional indicators on social issues.

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Classification of Principal Adverse Impact indicators. Source: Briink Intelligence GmbH

In the webinar, Blandine Machabert shared more details on how RAISE integrates PAIs into its investment process. RAISE is a France-based private equity impact investment fund that manages €260m. RAISE is a market leader in the integration of ESG and impact considerations into its investment strategy. The fund follows an advanced and rigorous approach to collecting ESG data, including PAIs, from its portfolio companies.

For its assessments, RAISE relies on a framework that distinguishes between exclusionary PAIs, process PAIs, and progress PAIs. This internal classification helps RAISE and its portfolio companies make sense of the PAI framework, and integrate it into the fund’s existing ESG processes.

“Exclusionary PAIs" relate to identifying businesses involved in non-sustainable business activities. Examples include fossil fuel exposure, or activities that can adversely affect biodiversity. “Process PAIs” capture whether a company has implemented ESG-compliant policies or processes. Finally, “performance PAIs“ can be leveraged to measure current environmental and social impacts and to set improvement targets. Metrics like GHG emissions, or gender pay ratios can be used as a baseline to track progress over time and as the business evolves.

When it comes to how PAIs affect actual investment decisions, Blandine stresses that context plays a big role. “If we take the example of GHG emissions, it is clear that a growing company will see an increase in its emissions over time. So, it’s important not to take these metrics at face value, but to understand how we can integrate them into a concrete action plan”.

But PAI reporting also comes with some additional challenges, as discussed by Danielle Cohen Henriquez from South Pole, a global sustainability consultancy with a focus on carbon accounting. With over 1,200 experts across 30 offices worldwide, South Pole leads carbon emissions accounting and decarbonization projects for a broad range of financial sector and corporate clients and has now also started supporting its clients in their PAI reporting. Danielle Cohen Henriquez shared her experience working with these diverse clients, providing tips for mastering the reporting process.

The first challenge she finds is the lack of data. “This is due to a few reasons”, she stated in the webinar. “First, most companies - especially SMEs and startups -  are still out of scope as of the current disclosure mandates (although several larger companies will soon be required to report under the CSRD, which will likely mitigate this issue to a large extent). Moreover, PAI definitions still lack relevance to certain sectors and asset classes. Thirdly, continuously evolving regulations still cause a great deal of uncertainty and disorientation in the industry”.

To mitigate these challenges, the legislation still allows for the use of estimations (or proxy data) in certain cases. Investors can decide where to invest time towards more robust data, depending on what’s most relevant to their sector and asset classes.  The extent to which estimations can be used might change soon as the regulations evolve and there is better baseline data available. Therefore, it's essential that investors and their portfolio companies map out their data collection requirements well in advance, and where necessary identify the right experts or data providers for each PAI.  

“Often, we find that there is already a lot of underutilized information. It can be found in sustainability reports, annual reports, and other disclosures.” “That's where I think tools like Briink's AI-powered software can really help, by analyzing a large amount of existing documents and helping investors gauge their PAIs potential quickly”.

Ultimately, PAI requirements add substantial work to the already burdensome reporting faced by investors in the private markets. As Danielle stressed, “unlike current mandatory disclosures, which are issued on an annual basis, PAI reporting requires an average of four reporting periods over a year.” Therefore, both investors and their portfolio companies should take on a proactive role in collecting and reporting on PAI data.

For sustainability specialists, ESG reporting is not "the job". But new regulations are taking up more and more time and resources that could be devoted towards driving impact - Benjamin Howard-Cooper, Head of Sustainable Finance at Briink

What do private markets funds most struggle with when it comes to PAI reporting?

To confirm South Pole’s view on the topic, about 50% of the fund managers who attended the webinar reported finding PAI data collection, particularly challenging. This in spite of the fact that the vast majority of the respondents were quite advanced in their PAI reporting process, with only about 0.7% of them falling behind, with still no PAI indicators measured for their portfolios.

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Anonymized results of the live poll launched during Briink's webinar "PAIs Deep Dive: Challenges and Best Practices for Private Market Investors"

Do you face challenges with your PAI reporting?

You are not alone: many funds still struggle with data collection, understanding their reporting requirements, and integrating PAI reporting into their broader sustainable investment strategy.

This is why we decided to aggregate some of the questions that have been asked during our webinar, and make them and our experts' view on them freely accessible to everyone. You can find them in this free-to-access Airtable sheet.

If you are looking for a tech solution that can do most of the PAIs heavy lifting for you, Briink’s PAI reporting platform has been recently updated. You can leverage it to complete your PAI reporting before the June reporting deadline, no matter how far along the process you are. Get early access to it - in combination with a 1-on-1 expert advisory - by requesting a demo here.

Leaders in the private markets industry, including Apex Group, Coller Capital, and many more, trust Briink with their ESG reporting needs. Learn more about how we helped Lightrock, a leading impact private equity firm, by reading our case study.