Key takeaways
While working to publish their SFDR reporting, asset and fund managers started to take a closer look at the numbers, reporting periods, and how they go together. In this piece, Datia’s Head of Product, Vlada Olivia Wester, g into the specifics of the data behind SFDR reports, and discusses what the relationship between some data points means for the usefulness and compliance of the report.
Two main data sets behind all SFDR calculations
There are two main data sets in SFDR calculations. One of them is the data from the portfolio - the instruments, and the absolute values invested in each of them. The second data set is ESG data coming from the investee companies' sustainability reports or estimates. Asset and fund managers need both data sets for their Principal Adverse Impacts (PAIs) calculations, but the reality is that they only have control and immediate access to one of them: their portfolio data.
SFDR reports and issuers’ sustainability reports timelines
The logic behind collecting the portfolio data is simple. Like most financial reports, SFDR reports are supposed to be published around Q1-Q2 of each year and need to cover the period from January to December of the previous year. To reflect the changes in the portfolio constellation, fund and asset managers need to make 4 snapshots of their portfolios, one per quarter.
Sustainability reports from companies are the second and vital element in this puzzle. Just like financial reports, the companies' sustainability reports are covering the previous year. GHG emissions, energy consumption, and even the percentage of female board members. In real life, these KPIs would vary from quarter to quarter, but for reporting purposes, the numbers are aggregated at a year level. So at the beginning of every year, companies need to do a lot of work - finalize their reports and, in the case of some companies, get them audited. This way the companies' yearly report hit the markets during Q1-Q2.
You might have already noticed the project management conundrum here. The report preparations on the companies' side and the investors’ side are happening in parallel. However, to produce a PAI statement, where portfolio data and companies’ sustainability data are covering the same reporting period, a finish-to-start dependency should be resolved.
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Data recency in the 2022 PAI statements
What does this mean for data recency in the upcoming PAI statements and other SFDR reports which are due June 2023? The short answer is: these statements will likely be based on very mixed data.
Probably, some proportion of the companies will manage to produce their 2022 sustainability reports fast enough for fund and asset managers to bring it into play. Their 2022 data will make it to the PAI statements published during Q1-Q2 of 2023 and cover the first reference period.
But some companies will take longer to produce their reports. Therefore by the time the fund managers will start to work on their 2022 PAI statement, they will not have access to 2022 data reported by the companies. In this case, fund and asset managers would have to resort to the best available data - which would be 2021 sustainability reports data.
The calculations for the PAI statements would then be based on 2021 sustainability reports and 2022 portfolio data.
To get the entire perspective, let’s mention that some companies produce reports with incomplete data - Scope 3 emissions often fall victim to incompleteness. Estimations can be used instead of reported data in this case.
And finally, some companies do not publish sustainability reports at all - their numbers will remain unknown, hidden behind the lower coverage rate.
So should you report on PAIs, despite the data incompletion?
As with all financial reporting, SFDR reports are anything but real-time. But a 12-18 months data lag is excessive.
So... is it even worth working on a PAI statement? It actually is.
In a joint report assessing voluntary disclosure of Principal Adverse Impacts, the European Supervisory Authorities (ESAs) guide Financial Market Participants (FMPs) towards considering adverse impacts in their investment and producing full statements despite the data incompleteness. ESAs’ document evaluates and comments on some of the observed reporting practices. For example, a statement showing efforts towards consideration of PAIs while acknowledging the lack of data in certain fields is considered “helpful” and marked as a best practice. Not considering PAIs due to a lack of data is also an option FMPs have. It is however marked as “Considered by the ESAs as examples where there is margin for improvement”. The improvement in this scenario would be to include details on whether and when the FMP plans to consider adverse impacts.
Conclusion
Availability and quality of data remain one of the biggest challenges in SFDR reporting. “Lack of information and clear methodology on how to obtain data from issuers and more broadly lack of publicly available data” is mentioned in the ESA’s report as one of the most common reasons behind FMPs choosing not to consider PAIs. That being said, it is also clear that the reporting entity is not accountable for the availability of issuers’ sustainability data. The best way to show goodwill and get ahead of the competitors would be to consider PAIs, report based on the best available data, and be transparent about the data limitations.
How Datia can help
Datia’s platform helps asset managers solve exactly this challenge: they can create their PAI statements with the consideration of data completion. We support our customers in their ambition to create honest PAI statements based on high-quality data. With that in mind, Datia's team added links to the sources of information and reporting periods to SFDR's Principal Adverse Impact indicators.
Creating a PAI statement is a challenging piece of work. Datia helps FMPs save hours of work by automating data collection and calculations. Get in touch with our team to learn more.
