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How sustainability preferences under MiFID II will affect fund groups

You could be forgiven for not realising that most fund management activities fall outside the scope of MiFID II when you consider the information fund groups need to provide to those who are obliged to adhere to its rules.

MiFID II applies to providers of portfolio management services and distributors of investment funds, ie those who deal with the end clients, not to the management of funds.

But since MiFID II came into effect in 2018, fund managers need to disclose all the costs associated with investment in their funds and to define the target market for each fund, so distributors can satisfy their obligations.

That gave birth to the European MiFID Template, or EMT, which is the standard vehicle for fund groups to disclose the necessary information.

And this year, we have another example of fund groups being dragged into MiFID II by the back door.

From 2 August this year, advisers will need to consider their clients’ ESG preferences, if any, in their appropriateness assessments.

Last year, the EMT was updated to show whether a fund has sustainability as an objective (“Article 9” in the jargon of the EU’s Sustainable Finance Disclosure Regulation, or SFDR), it promotes environmental or social characteristics (“Article 8”) or is not marketed as a sustainable fund (“Article 6”).

From August, not only will that level of detail not be good enough, but funds will need to consider reporting on the percentage of their assets deemed sustainable in accordance with the Taxonomy, and whether they consider the “principal adverse impacts” their investments have on the environment, using a number of given criteria.

Which brings us to the European ESG Template, or EET.

The EET was developed to help with the data provision for the SFDR, which was due to kick in fully on 1 July this year, just ahead of the changes to MiFID II.  But now that the level 2 rules for SFDR won’t take effect until 1 January 2023, the order has been reversed and the new MiFID requirements will come in first.

Fund groups hoping for an extra six months to prepare for the EET will be disappointed, as a big side benefit of the EET is that it can provide the detail needed by advisers to consider their clients’ ESG preferences.

As we have seen over the last year or two, the bulk of new investments are going into those funds that can demonstrate some sustainable criteria.  This means that, not only are funds much less likely to receive investments if they don’t provide the sustainability data, but many funds may need to reconsider their investment strategy, in light of the MiFID II change, to ensure they have something to offer from a sustainable standpoint.

There is no doubt this is exactly what the legislators want to happen, as the intention is to drive capital into more sustainable investments, but fund groups need to move quickly, as the impact is being felt more strongly and more rapidly than many had expected.

Many of the fields on the EET will be blank in the early days, but fund groups are advised to populate what they can, as soon as they can after the beginning of August, to get through advisers’ filters when they are required to evolve their client fact finds.  It won’t be easy, but it will be necessary.

At FE fundinfo our in-house ESG and regulatory specialists are available to consult and advise on MiFID II and SFDR compliant solutions. Beside the creation of the EET and EMT template, we also work alongside you and your team to support you in the dissemination and provision of whole of market EET and EMT data fields and ESG documents.

Contact our specialist