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SFDR and the value of asset-level data

asset level ESG PAI

Are you struggling to collect your PAI data for SFDR disclosures? Don’t just fall back on ESG. We explain the SFDR and the value of asset-level data.

This is the first of a series of 3 blogs on the sustainable finance disclosure regulation for any form of private equity.

Much is still unclear regarding the Sustainable Finance Disclosure Regulation (SFDR). Creating legislation within the EU is always an intens(iv)e process. Add to that different cultural backgrounds for opinions, different benefits regarding the (speed of the) transition to a sustainable world, complexity of the financial industry, value of greenwashing and many more. All these factors lead to a challenging endeavor for consensus. 

But one thing is for sure: asset-level data is the way to go for your Principal Adverse Impacts (PAI) disclosures for the SFDR.

Why is that?

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Purpose of SFDR

The SFDR is the new regulation from the EU, regulating sustainability reporting of all financial market participants (FMPs). It aims to provide a framework regarding the disclosures and reporting of FMPs on entity-, portfolio-, and financial product level. As stated on the website of the EU:

“It [the SFDR] lays down sustainability disclosure obligations for manufacturers of financial products and financial advisers toward end-investors. It does so in relation to the integration of sustainability risks by financial market participants (i.e. asset managers, institutional investors, insurance companies, pension funds, etc., all entities offering financial products where they manage clients’ money) and financial advisers in all investment processes and for financial products that pursue the objective of sustainable investment.”

SFDR and the value of asset-level data
SFDR and the value of asset-level data

ESG and PAI

Currently investors can base their investment decisions only on financial return and perceived risk based on ESG. However ESG does not give the needed information to investors or portfolio managers: ESG data is based on country-sector proxies. Hence it does not tell you if you invest in a relatively environmentally aware company in a specific sector and country, or on its polluting and socially irresponsible competitor. 

The information you need for your PAI (principal adverse impacts), however, is whether the (target) asset is 1) currently relatively sustainable2) if it has a high potential for improving sustainable performance and 3) how you will deal with the principal adverse impacts on the environment according to the obligatory and voluntary indicators. This can only really be measured with actual data of the asset-companies.

Do No Significant Harm principle (DNSH)

Asset-level ESG data calculates the exact impact on the climate, the direct environment and people’s health and safety following the operations of target investment: in the case of PE a specific company. Hence, this data discloses the sustainability risks of an (potential) investment based on reality, rather than country-sector proxies. 

When you have calculated the environmental impact of your organisation – either a target-asset or already part of the portfolio – you have generated asset-level data. This asset-level data is able to support that the organisation is doing no significant harm (DNSH). In addition, if the environmental impact is too high, this data is immediately giving insights into the hotspots of the environmental impact. Hence it supports a sustainable strategy for decreasing the impact, both for the asset as for the portfolio.

Finally, all organisational footprints in one’s portfolio together are the footprint of the ‘financial product’ of the private equity and used to report on it’s principal adverse impact.

Added value asset-level data

By offering full transparency towards investors so-called ‘active-ownership’ is unlocked. The data disclosures based on asset-level analysis give potential investors ‘real’ insights in what they invest in. In addition however, there is a list of other added values of asset-level ESG analysis for companies, portfolio managers and investors:

  1. At the moment you want to sell your asset in 8 years (hence when it’s 2030), the environmental performance and environmental compliance is outstanding.
     
  2. It gives companies insights in hotspots within their operations and the supply chain.
  3. This results in low-hanging fruit improvement potentials and quick wins to lower environmental impact.
  4. Create a system based on yearly monitoring. Hence besides providing the data for PAI disclosures every year, we monitor continuous improvement of your sustainable performance.
  5. This data lays the basis for a sustainable strategy based on numbers instead of ‘gut feeling’ and intuition on the company-level (or asset-level).
  6. On the portfolio-level this asset-level data is the basis for your sustainable portfolio strategy.

     

    1. It provides real-life data 
    2. continuous monitoring on yearly or half-yearly basis 
    3. asset-level sustainable improvement measures 
    4. analysis of potential for environmental improvements before investing in asset
    5. all the information for PAI disclosures
    6. future environmental compliance of assets (e.g. the EU-directive of CSRD)
    7. Link the data with carbon net zero, science-based targets, UNSDG’s, or any other initiative relevant for you
    8. and most-importantly: on-time compliance with the future SFDR regulation 

Hence, while still a lot is unclear of the SFDR and its exact Regulatory Technical Standard, don’t wait. By starting up asset-level data analysis on environment, and social and governance impact of the companies you are already compliant with SFDR data requirements and can already reap the benefits of what this has to offer.

Schedule your free consultation to find out what we can do here.