This article is the final in a four-part series on PAI reports by Responsible Investor. The first three covered data concerns and solutions; investors’ approach to voluntary indicators; and how investors are translating PAI data into pre-trade warnings and portfolio tools.
Investors are using the data gathered in their PAI reports, required under the SFDR framework, to identify targets for engagement, escalation and exclusion, as well as engaging directly with firms to improve data availability.

The reporting template for PAI statements provided by European regulators includes a section for investors to disclose generic engagement policies, but some investors have integrated the data from their PAI reports into new engagements and used the information to develop targeted stewardship tools.

Arguably the most comprehensive framework has been put in place by Storebrand Asset Management (SAM), which has created a traffic-light system in response to its SFDR reporting.

Firms are categorised into three groups: PAI laggards (red), PAI intermediate performers (yellow), and PAI leaders (green).

The Norwegian investor has done an initial gap analysis and assessed the data quality of the PAI indicators to determine whether it is sufficient to classify firms. Currently only three indicators pass this test: GHG intensity, board gender diversity and deforestation. This information is now available to portfolio managers.

Firms identified as laggards may be selected for engagement due to poor PAI performance across several indicators or on PAI indicators critical for the sector the company operates in.

Poor PAI data quality or coverage may also be a reason for engagement. “If the risk and engagement team is not already covering this specific PAI indicator through SAM general engagement initiatives, a specific engagement will be created in order to address and mitigate the specific PAI indicator covering the laggard companies,” the manager said in its report.

On board gender diversity, Storebrand said it plans to further analyse the red-flagged companies and depending on the risk of negative impact, mitigation through engagement will be considered. “We will continue with our voting strategy in order to mitigate adverse impact and risk in relation to this. The red-flagged companies will be reviewed and further actions to mitigate the risk/impact will be considered during the reference period [2023].”

It also plans to vote against the nomination committee and/or re-election of board members at all red-flagged companies for this PAI. 

Storebrand also has targets in place for other indicators. Under deforestation, it will revise its screening methodology to incorporate more forest risk commodities and establish guidelines for voting against directors of red-flagged companies.

Alongside engagement, laggard firms will potentially face exclusion “depending on the risk and severity of the negative impact identified, the total cumulative negative impact across all PAI indicators identified and the probability of successful engagement”.

Other PAIs have been incorporated into sustainable investment definitions. For instance, no companies flagged in breach of the PAIs covering violations of UN Global Compact principles and OECD Guidelines will be eligible as a sustainable investment.

For sovereigns, no investments in sovereign bonds in countries in breach of the PAI on “investee countries subject to social violations”, including no investments in state-owned and controlled companies from these states.

Turning away from red-flagged companies, PAI intermediate performers are further analysed with the aim to mitigate adverse impacts through engagement. When it comes to leaders, the PAI statement explained the data will be further integrated in financial decisions with the aim to allocate more capital to PAI leaders, and “thus lift the sustainability value of our funds”.

Kamil Zabielski, head of sustainable investments at Storebrand, told Responsible Investor that PAIs give the investor additional information on where it needs to focus. “The PAIs however are just one data set we use when selecting companies for engagement. This is how we use the information.”

Other investors take action

Nordea has also created an in-house PAI monitoring system to identify the impact of its investment decisions across all the mandatory and the additional PAI indicators that it has chosen to consider.

The Nordic asset manager’s “PAI engine” is based on data acquired from third-party providers and investee companies. By ranking the performance of companies across each indicator, Nordea aims to identify each company’s negative impact on climate and social issues as defined by the PAI metrics, both intrinsically and compared with its peers.

“We measure the overall exposure on entity level as well as the impact on product level, subject to data availability,” the investor said.

The responsible investment team will then analyse PAI outliers further, and recommend action to the responsible investment committee. The latter is presented with an update on the identified company on a quarterly basis and decides on the appropriate next step, which can range from taking no action, launching an engagement or excluding the investment.

In deciding the appropriate action, the committee considers, among other things, the severity and scope of individual adverse impacts, and the probability of occurrence and severity of adverse impacts, including their potentially irremediable characteristics.

T. Rowe Price has also said it will use the annual reporting exercise to inform its engagement process and, where appropriate, engage with investee companies on specific PAI metrics. In 2022, the UK investor used PAI metrics to identify engagement targets, “feeding into the firm’s stewardship and engagement program for the year ahead”.

GHG emissions and board gender diversity were prominent engagement topics with corporate issuers, however, its firm-level engagement programme was broader driven by issuer-specific and other thematic engagement topics – some of which overlapped with the PAI indicators.

The investor also conducted engagements regarding other PAI indicators, but flagged a lack of data availability when it came to constructively engaging on the unadjusted gender pay gap.

The investor is not alone: almost half of the 30 reports in RI’s sample flagged unadjusted gender pay gap – and tonnes of emissions to water – as having poor coverage.

T. Rowe Price, however, also noted that it was unable to collect energy consumption intensity per high impact climate sector or provide a reasonable estimation, so is engaging firms to obtain it.

Schroders is also engaging with portfolio companies to improve gender pay gap reporting, while Allianz is engaging its data providers and issuers.

Not a novelty

One industry player however, was sceptical about the usefulness of PAIs assisting stewardship targeting, telling RI that a lot of the big indicators – like climate – are already being looked at without this mandatory reporting.

They also noted that lots of engagement and voting is done at the fund level, so entity level reporting is of relatively less use.

In a similar vein, ShareAction’s head of EU policy Maria van der Heide said that of the reports she looked at, she was disappointed by what investors said they had planned on engagement. “The planned actions and targets are often general and are not tailored to the specific indicators.”  

While Danske Bank Asset Management’s head of responsible investment frameworks and governance Stine Lehmann Schack said it has been working on engagement with some indicators long before PAI reporting, she said it is “working with more and more of the indicators in an engagement context”.

“This also speaks to what should be the focus areas, how we should work, what should be the right level of performance when it comes to the PAIs? We look at the output now and say ‘okay, so what should be the engagement focus?’ It is a top priority to work to better integrate the indicators in our engagement approach and in general,” she said.

In a similar vein, Markus Høiberg, senior analyst at KLP, said that the investor would like to use the data from the PAI reports for stewardship policy, but “the indicators are a bit top level so we tried to drill down a bit to see which sectors drive the results for the indicator, and focus engagement work on that sector in order to improve for next year”.

Looking ahead, for van der Heide next year’s statements will shed light on the effectiveness of engagements linked to PAI.

“If there’s no difference or the numbers are worse, then it’s basically showing whatever engagement they’re doing regarding the indicators isn’t working. This would give a clear signal to investors that they need to step up their engagements,” she said.

She also suggested that this information will feed into the upcoming SFDR review, and it may be concluded that a further clarification and strengthening of legal requirements on engagement in SFDR is needed. “We will be curious to see how the the topic of engagement is addressed in the upcoming consultation.”