This article is the second in a four-part series on PAI reports by Responsible Investor. The first, covering data concerns and solutions, is available here. Look out for upcoming deep dives on how investors are turning their PAI data into useful portfolio tools and translating it into stewardship opportunities.
The majority of Europe’s largest asset managers steer clear of going beyond the minimum requirements for disclosing on additional PAI indicators in their entity-level reports under SFDR due to data challenges and the reporting burden, research by Responsible Investor has found.
Managers are required to report against a fixed series of indicators, and must choose an additional social and environmental indicator from a second list to report against. They may choose to report against more than two indicators from the list but this is not obligatory.
Analysis by RI of reporting from 30 large financial institutions either based in the EU, or with operations there, reveals that just under one-third have chosen to report against more than two additional indicators.
Even those firms that chose to do so generally kept to low numbers. Danske Bank Asset Management had the highest total, reporting against four indicators on top of the two obligatory ones. Investors including PGGM, M&G, T Rowe Price and KLP also reported more than the minimum.
RI analysis also shows that investors overwhelmingly chose the same additional indicators to report against. On the environmental side, only six of the 30 investors in the sample chose not to report their share of investments in firms without carbon-reduction initiatives.
There was more variety in the social indicators chosen by investors. However, 17 of the 30 chose to report either on investments in companies without human rights policies or on the number of identified cases of severe human rights issues.
Other indicators on the list were only chosen a handful of times. Seven investors reported on their investments in companies without anti-corruption and bribery policies, but no other indicator was picked by more than four investors in the sample.
Policies and coverage
Anne Schoemaker, director of ESG products at Sustainalytics and a member of ESMA’s consultative working group on sustainable finance, tells RI she was unsurprised that investors were steering clear of reporting on more than two additional metrics.
“Given the wide variability in data availability for the different voluntary PAIs, but possibly even more because of the very cumbersome nature of preparing an entity-level PAI statement, it is not surprising that very few have opted to report on more than just the minimum of two opt-in PAIs,” she says.
The types of indicator chosen are also in line with expectations, according to Elizabeth Lance, assistant chief counsel at investment industry group ICI Global.
“The indicators where a company has a policy or not are going to be the most available and reliable data,” she says. “It’s not surprising that those are the ones that people select because that’s where you’re going to have data coverage. I don’t think anyone’s really comfortable reporting something where they may have single-digit coverage of that number.”
Given the significant reporting burden already imposed by PAI statements, Lance says there was no incentive to report against additional indicators unless they are relevant for specific products. “We’re talking about low data coverage and high data costs.”
This was backed up by information given to RI by one data provider. Till Jung, managing director and head of ISS ESG, says the firm’s SFDR solution covers “the vast majority” of commonly requested additional indicators. While the provider does not record how clients use the data it sells, he adds, “we rarely receive client requests for additional indicators not covered within our solution”.
“As a result, it is our understanding that financial market participants are still very selective about which and how many additional indicators they report in.”
Schoemaker says the most commonly chosen indicators combine better data availability, relevance for a wide range of investment strategies, and importance of the topic to end investors.
This justification is echoed by individual investors who spoke to RI about their reports.
DWS only picked two indicators as required by the law: investment in companies without carbon reduction initiatives and identified cases of severe human rights issues.
Dennis Hänsel, global head of ESG advisory, tells RI that the two aligned with existing policy at the German asset manager, given it has a net-zero pledge and excludes human rights violators across its portfolio.
While DWS will probably look to include additional environmental or social indicators in reporting at fund level for climate or social-focused strategies, it is less sure about the entity level, he adds.
Norwegian pensions provider KLP picked four additional indicators. These related to investments in companies without carbon reduction initiatives, without deforestation policies, without anti-corruption and bribery policies, and with operations and suppliers at risk of forced or compulsory labour.
Markus Høiberg, a senior analyst who worked on the report, tells RI that KLP wanted additional indicators to be relevant either for the work it does or work it plans to do.
“We picked four indicators that we felt are relevant, where we can do some work on the sustainable investment side but also where we had a decent amount of data with good enough quality so that the numbers would make sense,” he says.
While KLP stopped at four additional indicators this year, it will look at reporting against more if they meet its criteria.
Stine Lehmann Schack, head of responsible investment frameworks and governance at Danske Bank Asset Management, gives a similar rationale. The manager picked five social indicators, including three applicable to its sovereign investments, and one environmental one.
Lehmann Schack says the indicators had been chosen based on portfolio relevance and data quality, as well as value to external stakeholders. She adds that Danske Bank AM had to strike a balance on information overload and overreporting.
“With choosing the additional indicators we are back to the guiding principle of ‘is this relevant to our portfolio?’” she says. “Is it something that is of relevance to our investors and do we have sufficient data quality? But I could definitely see us selecting more additional indicators as we go along, especially if this improves the sustainability performance of our portfolios.”
This approach was not universal. T Rowe Price’s Luxembourg arm said in its report that it had picked exposure to areas of high water stress and non-recycled waste ratio for environmental indicators, as both were useful for assessing performance on the circular economy.
However, the US investment giant ran into a problem – data coverage was so poor for both indicators that it was unable to draw any meaningful conclusions. That said, it managed to conduct some qualitative analysis and engage companies where the issue was identified as material.
Not necessarily adverse
While some of the most popular additional indicators cover the absence of certain policies, these might not necessarily indicate the presence of an actual adverse impact.
As ICI Global’s Lance points out, just because a company does not have a policy on a topic, that does not mean it actually has an adverse impact on the area in question.
“Those are also some of the more problematic adverse impact indicators because the lack of a policy around something in no way relates to an actual adverse impact,” she says, adding that for some companies an issue just isn’t material. An urban housebuilder, for instance, has no need of a deforestation policy.
Some companies do have a deforestation policy, because it relates to their business, she adds. “Those are the ones for which there is likely a higher likelihood of a deforestation activity, but those are the ones that have the policy.“