• On 9 September 2025, the European Supervisory Authorities (the “ESAs”) published the 2025 edition of their annual report (see here on the website of the European Securities and Markets Authority) on disclosure of principal adverse impacts (“PAIs”) under the Sustainable Finance Disclosure Regulation (the “SFDR”) (the “Report”).
• The Report outlines that the overall market trend has not changed significantly compared to 2024—most asset managers continue to opt out of PAI consideration at firm level, while consideration of PAIs at product level is increasing. The Report should however be observed critically by asset managers as it does not distinguish between specific investment strategies within the fund industry (e.g., managers of public or private financial products).
• Although the ESAs draw an overall positive conclusion on PAI disclosure practices, they display good and bad practices and continue to recommend a different legislative approach to mandatory firm-level approach other than the existing approach based on a 500-employee threshold.

On 9 September 2025, the European Supervisory Authorities (the “ESAs”) published the 2025 edition of their annual report (see here on the website of the European Securities and Markets Authority (“ESMA”)) on disclosure of principal adverse impacts (“PAIs”) under the Sustainable Finance Disclosure Regulation (the “SFDR”) (the “Report”). The SFDR requires financial market participants, such as asset managers, to state whether they consider PAIs of investment decisions on sustainability factors. Large firms with over 500 employees must report information on PAIs at the firmwide level in respect of all their financial products, and smaller firms can generally opt out of this obligation. Firms such as asset managers may also choose to report on PAIs for individual financial products.

The Report reflects the results of surveys by the ESAs of the views of national competent authorities in EU member states and contains a market overview, examples of good and bad disclosure practices and recommendations by the ESAs to the European Commission.

Please see our Debevoise In Depth on the ESAs’ 2024 report here.

Market Overview for Firm-Level and Product-Level PAI Disclosure. The ESAs note that the market overview has not changed significantly since their 2024 report. Most asset managers continue to opt out of disclosing PAIs at the firm level, although the Report states that approximately 40% of the financial market participants voluntarily considering PAIs are asset managers. This reflects the reality that more and more investors are requesting PAI data from asset managers with whome they are investing. As the Report does not differentiate between different types of asset managers (such as between private equity managers and managers investing in listed equities), PAI consideration amongst private equity managers is likely not as common as the percentage for asset managers reflected in the Report amongst all financial market participants suggests.

The ESAs note that there has been an increase in products which consider PAIs, compared to their 2024 report. However, only about 4% of funds disclosing under Article 8 SFDR (i.e., that promote certain environmental and/or social characteristics) disclose PAIs, compared to 20% of funds disclosing under Article 9 SFDR (i.e., that pursue a sustainable investment objective). As had already been highlighted in the ESAs’ 2024 report, this is likely in some part due to the lack of comparable and usable data, which is the biggest obstacle for considering PAIs at the entity level and consequently at the product level.

Many asset managers choose to report PAI data for individual financial products, without disclosing how they have considered these PAIs in their investment decision-making processes at the entity level. Although the Report is silent on this specific practice, it notes that the weakest area overall for PAI reporting is the limited amount of information given in response to the question, “Actions taken and planned to avoid or reduce main adverse impacts”, with many firms providing disclosure about general policies or actions without accompanying metrics and clear timelines. In this regard, the ESAs are keen to ensure that firms actively “consider” PAIs, by putting procedures in place to mitigate those impacts where they arise, as described in these consolidated FAQs (see here on ESMA’s website).

Good and Bad Practices. The Report contains general observations on good and bad practices on disclosure of PAI data at the firm and product level, but do not contain any new or surprising aspects. The Report, however, provides financial market participants with helpful and concrete information points about good and bad practices. It therefore makes sense for asset managers to compare the practices highlighted in the Report with their own practices to see if there is room for improvement. According to the ESAs, PAI disclosures should be clear, should avoid language that is too technical or that has confusing layouts, and should be prominently displayed in the sustainability-related part of the firm’s website or in a section dedicated to mandatory disclosures. Information should not be generic but specific to the product or the firm, and there should be clear targets for the next reporting period to make it easier for investors to compare and track such targets. In addition, the ESAs highlighted that many firms are still publishing poor quality statements on why they do not consider PAIs, including explanations like limited resources and data availability as their main reasons for not doing so, which are repeated year after year without any indication as to whether the firm will consider PAIs.

Recommendations to the European Commission. Similar to the previous reports in 2024 and 2023, the ESAs state that the threshold for firms to consider PAIs at firm level for firms with “more than 500 employees” may not be a meaningful way to measure the extent to which investments may have principal adverse impacts on sustainability factors, given the majority of firms fall below this threshold and can therefore opt out of this requirement. The ESAs suggest adopting a new threshold that is based on the size of a firm’s investments, including total assets under management for asset managers. It is unknown whether the European Commission will make this change under its forthcoming review of SFDR. However, such a shift would mean that a significant number of asset managers with investment activities in Europe could become obligated to consider PAIs at firm level which does not appear to be in line with the European Commission’s recent push to cut down on sustainability-related burdens for companies by means of an Omnibus Directive (please see our Debevoise In Depth on the EU’s Simplification Omnibus Package here).

The ESAs also suggest that firms disclosing PAIs should distinguish between investments covered by data and by estimates, allowing stakeholders to understand how reliable and accurate their PAI reporting is.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.