Social and Governance PAI Indicators

Alongside the 9 environmental indicators (indicators 1-9) in Table 1, SFDR's mandatory PAI framework includes five indicators addressing social, employee, human rights, anti-corruption, and governance matters (indicators 10-14). These indicators capture the human dimension of investment impact, from gender equality and labour rights to exposure to controversial weapons.

In plain English: the environmental indicators measure what companies do to nature. The social indicators measure what companies do to people. Both dimensions matter for a complete picture of a fund's real-world impact.

This lesson examines each mandatory social/governance indicator and the sovereign-level indicators in Table 4.

Social and Governance Indicators, Overview

The social and governance indicators in Table 1 (indicators 10-14) span three thematic areas:

1. Norms compliance: Whether investee companies violate or lack mechanisms to comply with international norms on conduct (UNGC, OECD Guidelines)
2. Workplace equality: Gender pay gap and board gender diversity
3. Harmful activities: Exposure to controversial weapons

Unlike the environmental indicators, which use quantitative financial formulas to attribute physical metrics to the portfolio, several social indicators are binary (companies either have/do not have certain mechanisms) or require qualitative assessment alongside quantitative aggregation.

Indicator 10, Violations of UN Global Compact and OECD Guidelines

What it measures: The share of investments in investee companies that have been found to be in violation of the United Nations Global Compact (UNGC) principles or the OECD Guidelines for Multinational Enterprises.

The UNGC's ten principles cover human rights, labour standards, environment, and anti-corruption. The OECD Guidelines extend these to responsible business conduct in areas including supply chains, consumer interests, and taxation.

Practical implementation: Determining which companies are "in violation" requires reference to specialist controversy monitoring services. These services track regulatory findings, legal proceedings, and news-based controversy signals against the UNGC/OECD frameworks. Different providers use different severity thresholds, so the choice of data provider significantly affects what proportion of the portfolio is flagged.

Indicator 11, Lack of UNGC/OECD Compliance Mechanisms

What it measures: The share of investments in investee companies that lack processes or compliance mechanisms to monitor their own adherence to UNGC principles or OECD Guidelines, or that lack grievance and complaints handling mechanisms.

This indicator is distinct from Indicator 10 in an important way: Indicator 10 measures actual violations (outcomes), while Indicator 11 measures the absence of governance processes (inputs). A company may not currently be in violation but still lack the mechanisms that would help prevent violations, it would not appear in Indicator 10 but would contribute to Indicator 11.

In practice, whether a company has appropriate compliance mechanisms is assessed through:

• Codes of conduct and ethics policies
• Supplier codes of conduct
• Grievance mechanisms and whistleblower protections
• Audit/assurance processes for ESG compliance
• Supply chain monitoring programmes

Indicator 12, Unadjusted Gender Pay Gap

What it measures: The average difference between the median or mean pay of male and female employees across investee companies, expressed as a percentage of male pay.

"Unadjusted" means the raw pay difference, without controlling for factors like role type, seniority, or hours worked. The unadjusted gap is a blunter but more widely available metric, adjusted pay gap data (which controls for role differences) is less commonly reported by companies.

Indicator 13, Board Gender Diversity

What it measures: The average ratio of female board members to male board members across investee companies.

This indicator measures governance representation rather than pay equality. A portfolio with a high board gender diversity PAI has more female board representation across its investee companies. An increasing trend over time would indicate positive progress.

Note that board diversity data is typically more widely available than gender pay gap data, as many jurisdictions require listed companies to disclose board composition.

Indicator 14, Controversial Weapons

What it measures: The share of investments in companies involved in the manufacture or sale of weapons that are prohibited or restricted under international conventions.

The RTS specifies the following categories of controversial weapons:

• Anti-personnel mines (Ottawa Treaty)
• Cluster munitions (Oslo Convention)
• Chemical weapons (Chemical Weapons Convention)
• Biological weapons (Biological Weapons Convention)

This indicator is binary, a company either is or is not involved in controversial weapons manufacture or sale. Many FMPs apply sector exclusions for controversial weapons across all products (Article 6, 8, and 9), which would result in a 0% reading for this indicator. Where that is the case, it should be stated clearly in the PAI statement.

Mandatory Indicators, Table 4: Sovereign Issuers

For the portion of a portfolio invested in government bonds and supranational bonds, two additional mandatory indicators apply:

Indicator 1 (Table 4), GHG Intensity of Sovereign Issuers

Data sources include EDGAR (Emissions Database for Global Atmospheric Research), national GHG inventories, and the IEA. GDP data from the IMF or World Bank using PPP adjustment.

Indicator 2 (Table 4), Social Violations in Sovereign Issuers

The share of investments in sovereign issuers of countries subject to EU sanctions, or countries that have violated internationally recognised human rights and labour standards instruments (ILO Conventions, UDHR, UNCAC).

Why Social Indicators Matter for Portfolio Management

The social indicators in the mandatory PAI framework serve a dual purpose.

For investors, they reveal the social risk profile embedded in a portfolio, high controversy scores may signal regulatory or reputational risks ahead.

For society, they create transparency about the social impacts of investment capital allocation, potentially channelling capital flows toward companies with better social outcomes over time.

Engagement strategies, where fund managers actively engage with investee companies on PAI metrics, are one of the most direct tools for improving PAI scores over time. Many institutional investors now use their PAI statement trends as evidence of stewardship effectiveness, demonstrating to clients that engagement activity is producing measurable improvements in portfolio-level social and governance outcomes.