Sustainability and responsible investing are now well established as critical considerations for investors and, as such, continue to be at the forefront of the minds of many asset managers, with 78% expecting sustainable assets under management to rise in the next two years, and a significant majority (80%) seeing sustainability as a growth opportunity. The EU’s Sustainable Finance Disclosure Regulation (SFDR) recognises this and, amongst other requirements, mandates the use of Principal Adverse Indicators (PAIs) for assessing and reporting the performance of investments with respect to environmental, social and governance (ESG) factors. This is intended to foster transparency and accountability for investors and financial institutions in the drive towards a net-zero economy, but the use of PAI data in practice poses several challenges for asset managers. In this article, GreySpark Partners explores those challenges.
By GreySpark’s Jennie Brotherston, Senior Manager
The measurement of any risk can be complex and difficult to do accurately, but while financial data has been refined over decades and even centuries and is generally consistently calculated and well understood, ESG data is relatively new and immature. SFDR reporting has only been required since 2022 and reporting under UK SDR, the UK equivalent, has yet to begin. As a result, asset managers are often forced to rely on proxies, estimates and qualitative assessments when measuring ESG risks and metrics.
Principal Adverse Indicator reporting is intended to allow investors to assess and compare the negative non-financial impacts of investment decisions on various sustainability factors – including climate change, loss of biodiversity, human rights violations and other ESG-related concerns that are defined in SFDR.
Many asset managers operating in Europe are required under SFDR to report 14 of these indicators as part of their investment process to clients and to some regulatory authorities on a regular basis. There are an additional 31, any two of which are mandatory to report on, and the remaining 29 are optional PAIs that can be included in reporting on a voluntary basis.
Figure 1 illustrates that the calculation and presentation of PAI data can be complex and labour intensive, and that even then the definitions leave room for interpretation.
Figure 1: SFDR Definition and Calculation of PAI 1 and PAI 12
Source: SFDR and GreySpark analysis
(Click image to enlarge)
Data Quality and Completeness
As illustrated, even in the two examples above, PAIs are varied in nature and, as such, are derived from a range of data sources, including company reports, third-party ESG data providers and public databases.
As there is some subjectivity, these sources can be inconsistent in terms of data coverage and quality, and this is also true for the methodology used to gather and report data. For example, some data may not be published – or even be available at all – for smaller companies or those operating in jurisdictions where ESG reporting standards are less stringent. For instance, Board Gender Diversity (PAI 13) is fairly likely to be simple and straightforward to obtain for most organisations, whereas other metrics, such as Exposure to Controversial Weapons (PAI 14), are likely to be much more nuanced and complex. Without a full set of consistent data, it can be difficult for asset managers to assess the risks posed by certain investments, or to comply with regulations such as the SFDR.
Even where a good coverage of data is available, still the quality may vary. From source to source, disclosed data may be outdated or just simply inaccurate and many companies will only elect to report on certain indicators, while excluding others (as allowed within SFDR and other ESG regulations). Even data from vendors which are renowned as providing comprehensive data sets, including detailed data on carbon emissions, labour practices and other sustainability risks, may vary in quality, as the reliability of the data they offer depends heavily on the accuracy of the underlying corporate disclosures used to calculate it – and as mentioned above, these disclosures are not infrequently spotty outside of the mandated indicators.
Given this, and the immaturity of the data generally, investment managers may still not feel able to trust the data provided and may look to make their own assessments and calculations, either in addition to, or in place of, the data provided by vendors.
Lack of Standardisation
While SFDR provides guidance on the principal adverse indicators that should be reported, it does not explicitly prescribe specific methodology for calculation. Consequently, there is a wide variation in how asset managers and ESG data providers interpret, calculate and report their PAI data. Some data providers focus on company-specific ESG risks and opportunities, and others on broader industry-level risks or trends, which leads to quite different metrics being published.
The lack of consistency of methodology means that PAIs provided by different data providers – or those calculated in-house by asset managers or other organisations – can be difficult, or even impossible, to compare directly in a way that is meaningful. In addition, the differing methodologies could very easily lead to investors drawing diverging conclusions about the ESG characteristics of the same investment.
This provides a challenge for asset managers, investors and the market as a whole. Even while trying to align with regulations that emphasise transparency and comparability, asset managers struggle to confidently gauge the real ESG impact of their clients’ investments.
Evolving Standards and Regulation
Regulation surrounding PAIs and wider ESG reporting is at a nascent stage and is still evolving toward maturity. The European legislation discussed in this article has been in place for a relatively short period of time and many other jurisdictions are just beginning to implement similar laws. In 2025, however, the SEC in the US is agreeing to roll back ESG disclosure rules.
This all makes for a complex regulatory landscape in which asset managers – particularly those operating globally – must continually interpret and apply complex new requirements in order to remain compliant and relevant in this dynamic regulatory environment. For many, it may be challenging to develop long-term sustainability strategies in the face of such fluctuation.
No Matter How Slowly You Go, Don’t Stop
ESG PAI data already plays a crucial role in helping investors and asset managers effectively assess and communicate the sustainability risks of their investments and activities. However, challenges surrounding the data make it difficult to fully leverage for decision-making purposes at this time, due to the perceived or actual lack of consistency, availability and accuracy.
As institutional and investor understanding of the data and regulatory- and investor-driven desire for comparability continue to evolve in the coming months and years, GreySpark Partners look forward to seeing how the market responds with improvement and standardisation of PAIs and other ESG metrics.
