Mandatory Principal Adverse Impact (PAI) Indicators

If you have decided to opt-in for the Principal Adverse Impact (PAI) framework, you need to report on how you and your portfolio companies monitor and address their Principal Adverse Impacts.

These indicators aim to measure the negative effects an investment decision might have on sustainability. In the scope of this Regulation, sustainability relates to environmental and social factors, but also employee and human rights matters, as well as anti-corruption and anti-bribery.

Currently, there are 14 mandatory and 35 voluntary indicators. To comply with the Regulation, you need to monitor and report on all mandatory and two or more additional indicators.

ℹ️ For a list of the voluntary/additional PAIs, check this article.

Have you opted-in to comply with the PAI framework at entity-level? Here is how to proceed:

• First, each investee company belonging to one fund needs to fill in their PAIs for the last reporting year. These include indicators such as GHG emissions, but also adherence to human rights standards and gender ratios in boards.
• Second, once all investee companies have filled in the indicators, the results will be aggregated for the entire fund.
• Finally, the Fund Manager must decide on what measures to implement to assist its investee companies in addressing their adverse impacts and ensuring their progressive minimisation

CLIMATE AND OTHER ENVIRONMENT-RELATED PAI INDICATORS

Scope 1 GHG Emissions  

These are the direct greenhouse gas emissions that occur from company-owned and controlled resources and include stationary, mobile, fugitive and process combustion. They are calculated as a weighted average across the entity or portfolio.

For Scope 1, we account for all direct emissions from sources that the business owns or controls. This includes fuel combustion in company-owned vehicles and equipment, on-site heating systems (e.g., natural gas boilers), fugitive emissions such as refrigerant leaks, as well as emissions from waste treatment and industrial processes (e.g., chemical reactions in manufacturing, wastewater treatment, or on-site incineration).

Through the 414 platform, emissions are calculated by collecting activity data, such as liters of fuel burned, liters of refrigerant leaked or tonnes of waste processed, and applying the appropriate emission factor as specified by the GHG Protocol.

Want to dive deeper? Check this article.

Scope 2 GHG Emissions

These are indirect emissions that are released from the consumption of purchased electricity, steam, heat and cooling. Again, they are calculated as a weighted average across the entity or portfolio.

For Scope 2 emissions, which cover indirect emissions from purchased energy, either calculated through a market-based or activity-based method.

We recommend using the market-based method as specified by the GHG Protocol. This method reflects the emissions associated with the specific electricity, heating or cooling contracts a company has. We rely on the data found in the energy bills to determine the quantity of electricity, district heat, or cooling purchased, and also include electricity used for charging electric vehicles.

Would you like to learn more about Scope 2? Check this article.

Scope 3 GHG Emissions

These are all indirect emissions that are not included in scope 2 and include any emissions that occur in the value chain of a company's operations.

Therefore, these are emissions that are not directly produced by the company itself, but are related to its operations. They include all the emissions that occur from sources that the company does not own or control.

There are certain sectors where Scope 3 GHG emissions are particularly helpful:

1. Manufacturing: Helps in understanding emissions from the supply chain, including raw material extraction and transportation.
2. Retail: Useful for assessing emissions from the production of goods sold and their transportation.
3. Technology: Important for evaluating emissions from the use of electronic products and their end-of-life disposal.

The most common categories of Scope 3 GHG emissions are:

• Purchased goods and services
• Capital goods
• Fuel- and energy-related activities
• Upstream transportation and distribution
• Waste generated in operations
• Business travel
• Employee commuting
• Upstream leased assets
• Transportation and distribution of sold products
• Processing of sold products
• Use of sold products
• End-of-life treatment of sold products
• Downstream leased assets
• Franchises
• Investments

For more detail into each of these sources, check this article.

Given that the data required to calculate Scope 3 emissions is often not directly available internally, the data collection process tends to be more burdensome than for the previous two scopes.

This is because it entails a more thorough mapping of the specific sources, reaching out to partners, suppliers, customers and employees to gather the information, and calculating the final CO2 amounts, inevitably relying on estimations where data could not be retrieve or stakeholders remained unresponsive.

Operations in the fossil fuel sector

Any operations that derive revenues from exploration, mining, extraction, distribution or refining of hard coal, lignite and liquid fossil fuels as well as revenues from exploring and extracting fossil gaseous fuels or from their dedicated distribution (incl. transportation, storage and trade). Usually, Article 8 and 9 Funds exclude such investments altogether as part of their commitment to promoting environmental characteristics or making sustainable investments.

Energy Consumption Intensity per High Impact Climate Sector

The ratio of energy consumption per unit of activity to the total energy consumption in 9 sectors:

• Sector A: Agriculture, Forestry, and Fishing
• Sector B: Mining and Quarrying
• Sector C: Manufacturing
• Sector D: Electricity, Gas, Steam, and Air Conditioning Supply
• Sector E: Water Supply, Sewerage, Waste Management and Remediation Activities
• Sector F: Construction
• Sector G: Wholesale and Retail Trade; Repair of Motor Vehicle and Motorcycles
• Sector H: Transportation and Storage
• Sector L: Real Estate Activities

This means that, even though at this point you should have already collected the energy datapoints to calculate GHG emissions, you must also keep track of the business activities (in the EU these are classified with NACE Codes) of each company in your portfolio and disclose the energy consumption of those which belong to any of the sectors above.

However, it is worth noting a methodological inconsistency in how this PAI indicator is conceived. Since different energy sources (e.g., electricity, natural gas, fuels) are measured in different units, it is not possible to aggregate all energy types into a single uniform disclosure without losing comparability.

For this reason, we generally recommend either splitting energy consumption by type and disclosing each source separately, or where electricity is the only material energy source, focusing the calculation solely on electricity consumption. This ensures greater accuracy and transparency when reporting results.

In any case, make sure to disclose transparently the chosen approach and why in the "Explanation" column of the PAI Statement table.

Renewable Energy Consumption

Renewable energy sources are wind, solar (solar thermal and solar photovoltaic) and geothermal energy, ambient energy, tide, wave and other ocean energy, hydropower, biomass, landfill gas, sewage treatment plant gas and biogas.

This indicator does not merely disclose the amount of renewable energy consumed in total by the portfolio, but rather the share of non-renewable energy consumed when compared to the total energy consumption, expressed as a percentage.

It is common practice to only include those companies that are in control of their own electricity bills, specifying this circumstance in the "Explanation" column.

Negative effects on Biodiverse Sensitive-Areas

The biodiversity-sensitive areas are the Natura 2000 network, UNESCO World Heritage and Key Biodiversity Areas.

Negative effects mean activities that lead to the deterioration of natural habitats and species, and where mitigation measures have not been implemented.

Start by collecting all locations where the companies in your portfolio conduct their business. Then assess the proximity and potential threat to biodiverse-sensitive areas and species. It is advisable to use external resources such as IBAT Alliance and the ENCORE Framework.

Emissions to Water

These are direct emissions of substances that are especially polluting to water, such as hazardous substances, phosphate emissions, pesticides, lead, nickel etc.

It is calculated by adding up all emissions a Fund had in their production processes based on the priority substances as defined in Article 2(30) of Directive 2000/60/EC and expressed as a weighted average.

Hazardous Waste

Hazardous waste contains substances that are explosive, (highly) flammable, toxic etc. as well as any form of radioactive waste.

Similarly to the previous indicator, the tonnes of hazardous waste generated are calculated by adding up all waste which has hazardous properties based on Article 3(2) of Directive 2008/98/EC and expressed as a weighted average.

🔗 read more on this PAI here‍

PAI INDICATORS FOR SOCIAL AND EMPLOYEE, RESPECT FOR HUMAN RIGHTS, ANTI-CORRUPTION AND ANTI-BRIBERY MATTERS

Violations of UN GC Principles & OECD  

This indicator accounts for violations of the United Nations Global Compact (‘UNGC’) Principles and Organisation for Economic Co-operation and Development Guidelines for Multinational enterprises (‘OECD’ guidelines).

In the 414 platform, portfolio companies answer a set of questions based on these documents.

Monitoring UN GC Principles & OECD

Monitoring of Human Rights is assessed by portfolio companies answering a set of questions based on the  United Nations Global Compact (‘UNGC’) Principles and Organisation for Economic Co-operation and Development Guidelines for Multinational enterprises (‘OECD’ guidelines).

Board gender diversity

This indicator shows the ratio between males and females in portfolio companies’ boards, expressed as a weighted average of investment size.

Unadjusted gender pay gap

The difference between average gross hourly earnings of male-paid employees and of female-paid employees as a percentage of average gross hourly earnings of male-paid employees.

This difference is calculated irrespective of their differences in functions and expressed as a weighted average of investment size.

🔗 read more on this PAI here

Weapon manufacture

Manufacturing of anti-personnel mines, cluster munitions, chemical weapons and biological weapons. Usually, Article 8 and 9 Funds exclude such investments altogether as part of their commitment to promoting environmental characteristics or making sustainable investments.

Need help navigating or selecting which PAIs to report on? Reach out for tailored guidance!