What's new?
On 9 September 2025, the Joint Committee of European Supervisory Authorities (the ESAs) published their fourth annual report (the Report) on principal adverse impacts (PAIs) under Article 18 of the Sustainable Finance Disclosure Regulation (SFDR).
What does the report say?
PAI disclosures are intended to highlight the negative impact of financial institutions' investments on the environment and people, as well as, the actions taken by asset managers, investment firms, banks and pension funds to mitigate them.
The Report found that larger financial market participants (FMPs), particularly those in multinational groups, tend to provide better disclosure. Whereas smaller FMPs often mix ESG marketing with regulatory disclosures, leading to unclear reporting.
The ESAs provide a list of good, below average and non-compliant practices, accompanied by recommendations for the European Commission (EC) and National Competent Authorities (NCAs) to consider.
Entity level PAI disclosures
1. Clarity of disclosures
Good practice: PAI statements comply with the template in Annex I of the SFDR Delegated Regulation. FMPs maintain the order, numbering and description of the applicable indicators and provide explanations of the actions and targets set for the next reference period.
Below average practice: Failure to provide explanations of the measures taken or the objectives set for the next reference period.
2. Completeness of the reporting
Good practice: Indicators related to CO2 emissions are detailed, at the level of comments, actions and targets.
Below-average practice: Failure to include accompanying explanations, resulting in unclear information in the explanation column.
Non-compliant practice: Failure to provide a translated summary in English.
3. Quality of the PAI Disclosures
Good practice: FMPs publish detailed statements and provide clear justifications for each indicator, including disclosure of calculation methodology, sources and assumptions. These disclosures are also accompanied specific targets and metrics.
Below average practice: A consistent lack of detailed information regarding the actions taken, actions planned and targets set for the next reference period. The lack of meaningful commentary in the explanation column makes it difficult to assess the actual impact of the FMP's activities compared to the previous year.
4. Quantification of actions taken
Good practice: Detailed actions are provided for each indicator, with some cases including three or more actions per indicator.
Below average practice: General statements that lack quantifiable targets and are applied uniformly across all indicators.
Product Level PAI Disclosures
1. Fund Managers
Good practice: Funds that have a sustainable investment as their objective and proceed to disclose under Article 7(1) SFDR.
Below average practice: For funds that choose to disclose their PAIs, the results are not reported on indicator specific basis.
Next Steps
1. Recommendations to the EC
Consider a shorter form of PAI statements with reduced indicators, in machine-readable format and made available in the European Single Access Point (ESAP).
Explore alternative ways of introducing proportionality for FMPs, as the "more than 500-employees" may not effectively measure the extent to which investments have a principal adverse impact on sustainability factors. For instance, a threshold based on the total amount of the FMP's investments.
Reduce the frequency of annual reports published under Article 18 SFDR to every two or three years.
The recommendations will now be considered by the EC ahead of the forthcoming review of the SFDR.
2. Recommendations to the NCAs
Clearly communicate supervisory expectations with FMPs to support the integration of PAI into FMPs decision-making processes.
Engage with FMPs to support the necessary enhancements that will improve the quality and relevance of disclosures over time.
The recommendations are intended to support NCAs in their supervision of PAI disclosures.
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