Meeting the new MiFID requirements
By Christophe Girondel, deputy CEO at Nordea Asset Management
In order to meet the EU’s climate change commitments made under the Paris Agreement, regulators have been rolling out new initiatives designed to improve disclosure and investor understanding of sustainable investing.
The Sustainable Finance Disclosure Regulation (SFDR) requires financial market participants to disclose relevant information related to the sustainability of products and processes, and was introduced last year. One of the major aspects of SFDR was the classification of financial products according to definitions laid out in articles 6, 8 and 9 of the text. Products promoting environmental or social characteristics are labelled as Article 8, while those with sustainable investments as the investment objective are Article 9.
While SFDR was a major step forward in terms of ESG classification and disclosure in relation to investment vehicles, this is merely the tip of the regulatory iceberg. The next major stop on the regulatory journey for the investment community was the extension to MiFID II, which came into effect this summer, on 2 August 2022. Among a host of MiFID II requirements is one major change for advisers: the need to incorporate sustainability preferences in the overall client suitability assessment. Determining client sustainability preferences is now obligatory for advisers.
Advisers face many crucial considerations
The ongoing sustainability revolution should not come as a surprise to the adviser community. In a recent survey we conducted of 1,200 retail investors across Europe, three-quarters of respondents said they believed investment decisions can make a difference to creating a more sustainable society. This desire to facilitate positive social and environmental impacts has been a primary driver behind the significant rise in demand for ESG-aligned solutions in recent years.
Even though some advisers may still be working to fully grasp how SFDR fund classifications should be used, the expanded MiFID II regime goes above and beyond the requirements of SFDR. While all funds classified as Article 9 under the SFDR are expected to be suitable for clients with sustainability preferences for their investments, not all Article 8 funds will be. The more impactful funds require managers of investment products to meet requirements that surpass those in Article 8. This is probably why we have seen numerous instances of fund classification changes in recent months.
Advisers have many choices to make. Firstly, they need to choose whether to offer sustainable products alongside a more traditional range, or simply transition to a fully sustainable suite of strategies. They will also need to determine the extent of the sustainability strategy for their products[SE2] . This is an important consideration, particularly as concerns around greenwashing are likely to intensify in the future.
Asset managers must share their expertise
Continued investor demand for sustainable products represents a substantial opportunity for advisers who have already made considerable progress transitioning their business model. However, many other intermediaries might be daunted by the ever-changing regulatory maze. Thus asset managers must continue to play a leading role in helping to evolve regulations.
Many asset managers – such as Nordea Asset Management – have undertaken significant work on MiFID II implementation. It is imperative for our industry to work with advisory groups of all sizes to educate workforces, as the new MiFID requires all teams to have robust knowledge of regulations and ESG concepts.
While all of our Article 8 and 9 funds – which represent 65% of our total AUM – qualify as being suitable for clients with sustainable preferences, advisers cannot assume this will become an industry standard. While the asset management community must improve disclosure levels in the post-MiFID II world, ultimately the decision about client suitability rests with the adviser. With the regulations now in force, there is no time to waste to ensure ideal preparation for future success.
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