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.
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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.
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