Adverse Impact Indicators as a Measure of ESG Risk? Asset Management Approaches to the Integration of ESG Risk in the Investment Process and Their Interaction with the due Diligence Process in the Context of the SFDR

Large investment firms are required in the EU to integrate ESG risks in their investment process. At the same time, they have to carry out a due diligence process on their assets under management based on the measurement and monitoring of certain adverse impact indicators, applying a “double materiality” approach that is distinctive of the EU’s interpretation of the role of sustainable finance. This chapter investigates how the adverse impact indicators overlay the ESG risk management framework, arguing that conflating ESG risks and adverse impact indicators can be conducive to sub-optimal decision-making processes and inefficiencies. The planned review of the Principal Adverse Impact Indicators by the Joint Committee is an opportunity to consider how a revised approach can clarify and operationalize ESG risk management and adverse impact due diligence in the context of the Sustainable Finance Disclosure Regulation (SFDR).