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/

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Investor Information Document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/engagement-policy/EP_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.