MiFID II, Sustainable Investments, and how PAI could help you meet the new sustainability requirements
- The changes to MiFID II which will come into force on 2 August 2022 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 – Principal Adverse Impacts – is a new reporting requirement for asset managers introduced by the Sustainable Finance Disclosure Regulation (SFDR); PAI could be useful when identifying MiFID-eligible products
What are the changes to MiFID II?
As of 2 August 2022, financial advisers and distributors will need to include sustainability preferences in the suitability assessments they carry out with their clients.
- Advisers will have to ask each client if they have sustainability preferences
- If the client says yes, the adviser can offer only MiFID-eligible 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 just months away, it is important that distributors get a suitable product range in place
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. Products classified as being Article 8 are not necessarily sufficient - there are additional requirements that MiFID-eligible products need to meet. Article 8 products that also meet the additional requirements are sometimes referred to as Article 8+.
MiFID II offers three methods - which can be used individually or in combination - of assessing a fund for its suitability for clients with sustainability preferences. These will be products which have:
- A minimum proportion of Sustainable Investments, and/or
- A minimum proportion of Taxonomy aligned investments, and /or
- An investment strategy that considers PAI elements
What is PAI and how is NAM using PAI data?
PAI refers to the negative impact a company/issuer has on environmental and social aspects. The SFDR, which came into force in March 2021, introduced a specific list of PAI indicators to consider.
Companies/issuers will need to report PAI data in their annual reports. The regulation has identified 18 mandatory indicators (for example, greenhouse gas emissions, carbon footprint and board diversity) with metrics attached and 46 optional indicators. 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.
How can PAI data help identify MiFID-eligible products?
Of the three ways to identify a product as suitable for clients with sustainable preferences, PAI can be used in two. One way for a product to be MiFID-eligible is simply to consider PAI elements. However, PAI can also play a role in another route to MiFID-eligibility – having a percentage of assets invested in Sustainable Investments. Here, PAI can help assess whether an investment meets the criteria to qualify as a Sustainable Investment. 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 criteria required of 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.
How can NAM help you to build MiFID-eligible portfolios?
At NAM we continue to develop our processes in order to provide advisers with robust data. We are particularly working on the way we manage PAI data and Sustainable Investments to ensure that we can offer a wide range of MiFID-eligible products. We are currently monitoring 20 PAI indicators across our ESG STARS strategies and we have committed that all the solutions in our STARS range 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.
For more information on the implementation of PAI data, please access our booklet on the forthcoming changes to the MiFID II regulation:
https://www.nordea.co.uk/en/professional/flippingbook/lets-get-ready-for-the-mifid-changes/
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