The first quarter of 2022 marked a huge step forward for the United States in its progress toward improving and standardizing climate-related disclosures. Investors and stakeholders have strongly called for more consistent, comparable and reliable climate information about how a business currently operates and how it plans to operate in the future.
“Total return” may have a different connotation as we move towards a world where investors expect their investments to not only generate profit, but to have a meaningful impact while limiting the damage to the world in which they operate.
In the United States, current resources for providing ESG information to underlying investors are fragmented and inconsistent. While we are certainly catching up with many parts of the world, the Securities and Exchange Commission (SEC) announced on March 21, 2022 that it was proposing rule changes that would require public companies to include certain climate-related disclosures in their records and reports. periodicals. When the release came out, SEC Chairman Gary Gensler went on to say:
“I am pleased to support today’s proposal because, if adopted, it would provide investors with consistent, comparable and useful information to make their investment decisions, and it would provide consistent and clear reporting requirements to issuers…investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate-related risks can pose significant financial risks to businesses, and investors need reliable risk information to make informed investment decisions.
In summary, the proposed rule would require registrants to disclose information about their governance of climate-related risks, any climate-related risks materially impacting business strategy and financial statements, how the registrant has gone about identify risks and how climate-related events (both physical and transitory) have directly impacted financial statement line items.
The rule also requires the operating company to disclose information on its direct greenhouse gas (GHG) emissions (Scope 1), indirect emissions from other forms of energy (Scope 2) and GHG emissions activities upstream and downstream of the company’s value chain (Scope 3).
Currently, the proposed rule only applies to public companies and not to public funds. While this proposal should provide a solid framework for how climate-related disclosures could be applied at the level of public funds, fund managers have concerns about the appropriateness of the proposed measures when considering a portfolio holding a basket of shares listed on the stock exchange.
At the Investment Company Institute (ICI) conference last week, Nuveen Asset Management‘s Bob Grohowski said it’s possible investment regulators are “applying these concepts at the fund level too quickly.” He then asked if company-based disclosures really apply at the fund and advisor level.
The other concern of fund companies is the cost of sourcing and reporting ESG data. This may be a cost, however, that they will have to bear. Investor appetite for funds focused on responsible investing has grown.
At the end of March 2022, assets under management of open-ended equity, mixed-asset and fixed-income funds receiving the Lipper responsible investment (RI) flag totaled $839.9 billion – equity funds ($455.3 billion), mixed asset funds ($231.1 billion) and fixed income funds ($153.5 billion).
For equity, mixed-asset and fixed-income funds, inflows into responsible investing declined slightly in Q3 2021 (+$20.2 billion) but recovered in Q4 ( + 29.7 billion) to end the year on a strong note. RI equity funds continue to dominate quarterly inflow, posting five straight quarters of outflows over their mixed-asset and fixed-income counterparts.
Q1 2022 flows will be finalized soon, but what we can see is that RI fund launches by investment firms fell slightly in Q1 2022 after recording four consecutive quarters of increases . IR Equity Funds (-41) and IR Fixed Income Funds (-18) were down quarter over quarter, while IR Mixed Asset Funds (+4) were down showed a slight increase.
While fund managers may pause to see how/if the proposed climate-related disclosures will be implemented at the fund and/or advisor level, there is no debating the continued demand from investors for sustainable investments.
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.