Briefing: 2025 Report on Principal Adverse Impact (PAI) Disclosures

Executive Summary

The European Supervisory Authorities (ESAs) have released their fourth annual report on Principal Adverse Impact (PAI) disclosures under the Sustainable Finance Disclosure Regulation (SFDR), covering the reference period of January 1 to December 31, 2023. The 2025 report, published on September 9, 2025, indicates a general and steady improvement in the quality and completeness of disclosures by Financial Market Participants (FMPs).

Key findings reveal a persistent trend where larger FMPs, particularly those within multinational groups, provide more detailed and compliant disclosures. In contrast, smaller entities often conflate general ESG marketing material with regulatory disclosures, leading to a lack of clarity. The report notes that FMPs have begun to integrate good practices highlighted in previous ESA reports.

Despite overall progress, the quantification of actions taken to mitigate adverse impacts remains the weakest area of disclosure, frequently characterized by generic statements lacking measurable targets or clear timelines. The ESAs also highlight ongoing challenges for National Competent Authorities (NCAs), including the resource‑intensive nature of manual supervision and data reliability issues.

Based on these findings, the report makes several key recommendations to the European Commission. These include considering a shorter, machine‑readable format for PAI statements integrated into the European Single Access Point (ESAP), re‑evaluating the 500‑employee disclosure threshold in favor of a metric based on total investments, and reducing the frequency of this annual report to every two or three years to allow for more meaningful analysis.

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1. Overview of the 2025 Report

This briefing synthesizes the findings from the "JC 2025 26 Report on PAI disclosures under Article 18 SFDR," published by the Joint Committee of the ESAs on September 9, 2025. The report fulfills the annual mandate under Article 18 of the SFDR to assess the extent of voluntary PAI disclosures at both the entity and product level.

The analysis is based on three primary inputs:

• NCA Survey: Responses from 29 National Competent Authorities (NCAs) on the state of PAI disclosures in their jurisdictions.
• Qualitative Assessment: The ESAs' own desk‑based research and qualitative review of 91 publicly available, entity‑level PAI statements.
• Quantitative Assessment: A quantitative analysis of product‑level PAI disclosures from investment funds, using European ESG Template (EET) data obtained via Morningstar in January 2025.

The report covers disclosures published by June 30, 2024, for the 2023 reference period.

2. Primary Findings: A General Improvement in Disclosure Quality

The 2025 report confirms a positive trajectory in PAI reporting, with FMPs demonstrating a greater effort to provide complete and compliant information.

• Enhanced Quality: There is a general improvement in the quality of information provided in PAI statements compared to previous years.
• Size and Affiliation Matter: The trend continues where FMPs that are part of larger multinational groups provide more detailed, appropriate, and higher‑quality disclosures. Smaller, standalone entities tend to produce shorter, less detailed statements and often mix marketing language with regulatory information.
• Adoption of Good Practices: NCAs reported that several FMPs have incorporated the good practices highlighted in previous ESA reports, leading to tangible improvements in their disclosures.
• Non‑Consideration Statements: The quality of explanations from FMPs choosing not to consider PAIs remains unsatisfactory. Reasons cited, such as limited resources and data availability, are often generic, repeated year‑on‑year, and lack a forward‑looking perspective on when consideration might be introduced.

3. Detailed Analysis of Entity‑Level PAI Statements

Market Coverage and Trends (NCA Survey)

Data provided by NCAs shows a varied landscape, though inconsistencies in data collection make a complete EU‑wide comparison challenging.

• Voluntary Disclosures: Smaller FMPs often choose not to disclose PAIs voluntarily. However, those belonging to international financial groups are more likely to opt‑in.
• Sectoral Breakdown: The asset management sector accounts for the largest share of FMPs across all categories: mandatory disclosures (67.9%), voluntary disclosures (20.9%), and non‑disclosures (40.4%). Insurance undertakings also represent a significant portion of mandatory (22.0%) and non‑disclosing (28.1%) entities.
• Assets Under Management (AuM): Among FMPs covered in the survey, the asset management sector holds the vast majority of AuM at €5,931 billion, followed by banks at €214.89 billion.

ESAs' Desk‑Based Analysis of PAI Statements

The ESAs' direct review of 91 PAI statements revealed specific strengths and weaknesses.

• Accessibility: Most statements were easy to locate in dedicated sustainability sections on FMP websites. However, some required substantial navigation or a targeted browser search. A notable issue is that some FMPs have removed or overwritten previous years' statements, hindering historical comparison.
• Data Coverage and Quality:While data coverage has generally improved, it remains low for specific indicators, including:
  • Indicator 8: Emissions to water
  • Indicator 9: Hazardous and radioactive waste
  • Indicator 12: Unadjusted gender pay gap
• Methodological Issues:
  • Some FMPs reported PAI figures for 2022 that differed between their 2023 and 2024 publications, often without explanation.
  • Inconsistent units of measurement were observed, such as using CO2 instead of the required CO2 equivalent (CO2e).
  • Methodological discrepancies made indicators 5 (non‑renewable energy) and 6 (energy consumption intensity) non‑comparable across FMPs.
• Content Deficiencies: A common weakness is the poor use of the "Actions taken and actions planned" column in the disclosure template. It was often merged across multiple indicators, contained repetitive text, or was missing entirely. The "Explanation" column also frequently failed to offer additional insight.

4. Detailed Analysis of Product‑Level PAI Statements

Supervisory Observations and Trends

• NCA Challenges: Many NCAs reported that supervising product‑level PAI disclosures is particularly challenging due to the lack of an automated process for FMPs to report this information directly.
• Increased Uptake: A significantly higher number of financial products, particularly those categorized under Article 8 (promoting E/S characteristics) and Article 9 (sustainable investment objective) of SFDR, now disclose PAI indicators compared to the previous year.
• Regulatory Query: On June 13, 2025, the ESAs formally asked the European Commission for clarification on whether a financial product that discloses PAIs is automatically required to be classified as promoting environmental or social characteristics (i.e., an Article 8 product).

Quantitative Analysis of Fund Data

The analysis of EET data from Morningstar shows a high adoption rate of PAI consideration among sustainable funds.

• High Adoption Rate: 89.2% of Article 8 funds (10,214 out of 11,454) and 97.2% of Article 9 funds (943 out of 970) in the sample consider PAIs.
• Improved Data Coverage: Data coverage saw significant improvement for Indicator 9 (hazardous waste) and Indicator 12 (unadjusted gender pay gap).
• Reduction in Zero Coverage: The total number of funds reporting zero data coverage has decreased for nearly all PAI indicators.

5. Assessment of Disclosure Practices: Strengths and Weaknesses

NCAs were asked to rate FMP compliance with key aspects of the PAI disclosure requirements on a scale of 1 to 5. The quantification of actions taken was identified as the weakest area.

6. Supervisory Challenges and Key Recommendations

Challenges for National Competent Authorities

• Resource Intensity: The review of PAI statements is a substantial manual effort, as NCAs must search for and extract information from lengthy documents without a standardized reporting channel.
• Lack of SupTech Tools: Most NCAs do not have access to supervisory technology (SupTech) that could automate and streamline the analysis of PAI disclosures.
• Data Reliability: Methodological limitations and data gaps mean that reported metrics are not always reliable, making robust supervision challenging.

Recommendations to the European Commission

1. Modernize Disclosure Format: Consider the value of maintaining PAI statements, possibly in a shorter form with fewer indicators, delivered in a machine‑readable format and made available through the European Single Access Point (ESAP).
2. Enhance Data Transparency: Implement the best practice of requiring FMPs to disclose the proportion of investments covered by actual data versus estimates, allowing investors to assess the robustness of the indicators.
3. Re‑evaluate Disclosure Threshold: Reconsider the "more than 500 employees" threshold, as it may not be a meaningful measure of an FMP's potential adverse impact. An alternative, such as a threshold based on the total amount of the FMP's investments, could be more suitable.
4. Adjust Reporting Frequency: Reduce the frequency of the Article 18 report from annual to every two or three years to allow the ESAs and NCAs to focus resources on a more in‑depth and meaningful analysis.

Recommendations to National Competent Authorities (NCAs)

1. Continue Engagement: Continue to engage with FMPs to support necessary enhancements in disclosure quality and relevance.
2. Communicate Expectations: Clearly communicate supervisory expectations to support the effective integration of PAI consideration into FMPs' decision‑making processes.
3. Ensure Comprehensive Coverage: Remain vigilant that disclosures cover all investments as required.