MiFID II, Sustainable Investments, and how PAI could help you meet the new sustainability requirements
Advertising material for professional investors only, investing for their own account – according to MiFID definition
Let's get ready for the MiFID changes
02 August 2022 Deadline
MiFID II, Sustainable Investments, and how PAI could help you meet the new sustainability requirements
Key takeaways • Changes to MiFID II will come into force on August 2 nd 2022 that will drastically affect the way advisers interact with their clients • Distributors and advisers will need to ask clients if they have sustainability preferences, and offer them only MiFID-eligible ESG products if the answer is yes • PAI – Principle Adverse Impacts – is a new reporting requirement for asset managers introduced by the SFDR (Sustainable Finance Disclosure Regulation) that plays several roles in identifying MiFID-eligible products
What are the changes to MiFID II? From August 2 nd 2022, financial advisers and distributors will need to include sustainability preferences in the suitability as- sessments they carry out with their clients. • Advisers will have to ask each client if they have sustain- ability preferences • If the client says yes, the adviser can offer only MiFID-eligi- ble ESG products • It is therefore crucial that distributors and advisers identify a range of suitable products to be able to offer to clients with sustainability preferences
• With the new requirements only a fewmonths away , it is im- portant that distributors get a suitable product range in place
Howwill advisers identifyproducts as suitable for clients with sustainability preferences?
The “suitable” products that an adviser can offer their clients will be those that meet the client’s sustainability preferences as well as the financial suitability measures that are already in place. For these purposes, being Article 8 is not necessarily sufficient: there are additional requirements that MiFID-eligible products need to meet. For Article 8, this could create a new sub-category of products that could be referred to as 8+.
Sustainable Investments “Article 9”
Investments in an economic activity that contributes to a sustainable objective and does not significantly harm others
Financial products suitable for clients with sustainability preferences • Proportion of Sustainable Investments • Proportion of Taxonomy-aligned investments • Consideration of PAI
Products suitable for sustainability preferences so-called “Article 8+”
Products with ESG characteristics “Article 8”
Financial products that promote, among other characteristics, environmental or social characteristics, where the companies invested in follow good governance practices
Other financial products “Article 6”
Financial products that donot qualifyas sustainableorwithenvironmental or social characteristics
Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Investor Information Document (KIID).
MiFID II offers three methods - which can used individually or in combination - of assessing a fund for its suitability for clients with sustainability preferences. These will be products:
1
2
3
...with a minimum proportion of Sustainable Investments
....with a minimum proportion of Taxonomy- aligned investments
...with an investment strategy that considers PAI elements
and/or
and/or
How will this work in practice? • A Sustainable Investment must meet three points1. 1 » It must invest in an economic activity that contributes to an environmental or social objective AND » must not significantly harm any environmental or social objective ( Do No Significant Harm, or DNSH ) AND » must follow good governance practices. Article 9 funds with Sustainable Investments will qualify. The most widely-used definition of Article 9 funds requires them to have Sustainable Investments as their objective, so most Article 9 funds will qualify as MiFID-eligible by this route. Not all Article 8 funds will qualify under this criteria, though some will.
• Taxonomy-aligned investments are investments that the EU Taxonomy classifies as environmentally sustainable. 2 » Taxonomy-aligned investments are currently difficult to identify because at this stage there is limited Taxonomy data available » We believe there will initially be few products that qualify solely under this criteria because of this data challenge and the limited scope of the current taxonomy coverage though this will change over time. • An investment strategy that considers PAI elements. » PAI elements have been clearly defined by the SFDR regulation (see more information about PAI below) » In order to qualify, a product does not need to commit to all the PAI elements. » PAI data can be used in their own right, but also are valuable in helping to assess whether an investment is a Sustainable Investment.
2
3
Illustrative ways to meet MiFID-eligibility requirements
SFDR Classification + additional criteria
MiFID-eligible?
Article 9
With Sustainable Investments
Article 8
+ Sustainable Investments (%)
Article 8
+ Taxonomy-aligned (%)
Article 8
+ PAI elements
Article 8
+ any combination of the above
Article 8
(without additional criteria)
Article 6
not applicable
These are the legal way that a product can qualify as MiFID-eligible. Market practice may refine this over time.
PAI data brings investors new information PAI, or Principle Adverse Impacts, refers to the negative impact a company/issuer has on environmental and social aspects. Asset managers with an ESG focus have long since considered whether potential investments have a negative ESG impact, but the Sustainable Finance Disclosure Regulation (SFDR), which came into force in March 2021 , has introduced both the term PAI and a specific list of indicators to consider.
The PAI indicators Companies/issuers will need to report PAI data in their annual reports. The regulationhas identified 18mandatory indicators (for example, greenhouse gas emissions, carbon footprint and board diversity) with metrics attached and 46 optional indicators. The majority of these apply to companies, although some of them are specific indicators for sovereigns/supranationals or for real estate issuers.
1) According to the definition of Sustainable investments in the Sustainable Finance Disclosure Regulation (SFDR) 2) The EU Taxonomy defines environmentally sustainable investments in Article 3 of the Taxonomy Regulation as investments that contribute to an environmental objective, Do No Significant Harm to environmental objectives, and meet Minimum Safeguards.
• Companies/issuers will report this data (required by the Taxonomy and the forthcoming Corporate Sustainable Reporting Directive (CSRD)). • Asset Managers and other financial market participants (FMPs) will use this reported information for various purposes as required by the SFDR. • Large asset managers and FMPs will also report their own corporate-level PAI data. How does NAM use PAI data? NAM has been using elements of the PAI concept for many years. However, the regulation has formalized this framework and we are now taking the opportunity to take our tools to the next level. With the introduction of PAI specifically, we have recognized both the importance and usefulness of PAI indicators by building the “PAI Engine” , part of NAM’s ESG data platform, to compile the PAI data for each company we analyse. Going forward, PAI indicators will be part of the data set that portfolio managers see and consider within their ESG integration process.
ESG Platform
Norms-based screening
PAI Engine
Multiple data sources, including ESG data providers
Responsible Investment (RI) Team Analysis and recommendations
Responsible Investment (RI) Committee Assessment and decision
- Engagement - Exclusion - No action
18 mandatory indicators: 14 for companies, 2 for sovereigns/supranationals and 2 for real estate issuers
GHG emissions Carbon Footprint GHG intensity of investee companies
Violations of UN Global Compact principles and Organisation for Economic Cooperation and Development (OECD) Guidelines for Multinational Enterprises Lack of processes and compliance mechanisms to monitor compliance with UN Global Compact principles and OECD Guidelines for Multinational Enterprises ESG Platform
Greenhouse gas (GHG) emissions
Exposure to companies active in the fossil fuel sector Share of nonrenewable energy consumption and production Energy consumption intensity per high impact climate sector Biodiversity Activities negatively affecting biodiversity/sensitive areas Water Emissions to water Waste Hazardous waste ratio
Social and employee matters
+
Unadjusted gender pay gap Board gender diversity
Exposure to controversial weapons (antipersonnel mines, cluster munitions, chemical weapons and biological weapons) PAI Engine
Norms-based screening
GHG intensity
Environmental
Exposure to fossil fuels through real estate assets
Fossil fuels
Responsible Investment (RI) Team Analysis and recommendations
PAI Report
Energy efficiency
Investee countries subject to social violations
Social
Exposure to energy-inefficient real estate assets
• Engagement • Exclusion • No action
Responsible Investment (RI) Committee Assessment and decision
How can PAI data help identify MiFID-eligible products?
How can NAM help you to build MiFID-eligible portfolios?
In addition to adding metrics to ESG topics that are considered within our ESG analysis, PAI data can be used in the assessment of whether an investment can be considered a Sustainable In- vestment. PAI elements can demonstrate whether an investment 1) carries out an economic activity that contributes to an environmental or social objective, and 2) meets the “Do No Significant Harm” requirement. These are two of the three requirements for Sustainable Investments. One of the advantages of PAI data is that the metrics are clearly defined in the regulation and are therefore comparable across products and across asset managers.
The identification of a product as one that can be sold to clients with sustainability preferences technically rests with the fund distributor or adviser, not with the asset manager. However, the asset manager will need to provide the relevant information to the distributor/adviser to support their assessment of a product’s suitability. At NAMwe continue to develop our processes in order to provide you with robust data. We are particularly working on the way we manage PAI data and Sustainable Investments to ensure that we can offer robust MiFID-eligible products. In our ESG STARS strategies, we are currently monitoring 20 PAI indicators and we have committed that all the solutions in our ESG STARS range, in addition to our Article 9 ESG-themed strategies, will have a certain percentage of their assets in Sustainable Investments. This commitment will be set on a fund-by-fund basis, reflecting differences between the asset classes.
How NAM funds will meet MiFID-eligibility requirements
SFDR Classification + additional criteria
MiFID-eligible? Examples of Nordea funds
Article 9
With sustainable investments
All ESG-themed Article 9 funds
+ Sustainable Investments (%) + PAI elements
Article 8
ESG STARS funds
Article 8
+ PAI elements
“other” Article 8 funds
NAM’s ESG approach has consciously evolved over many years and our award-winning RI team is continuing to develop our ESG systems and processes. We have a proven and robust ESG integration approach and we offer ESG reporting that goes well beyond the regulatory requirements. We are now working to ensure we are well-positioned to support you not only as you select our ESG products, but also as you sell them.
Wondering what to do next?
Take a look at Nordea’s ESG STARS funds, your building blocks to a MiFID-eligible ESG portfolio. Nordea’s ESG STARS solutions span different regions and asset classes. We bring the track record, the scale, and the experience your portfolio needs. Let us be your ESG partner of choice.
Discover more at nordea.lu/ESGBuildingBlocks
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