The first quarter of 2022 marked a huge step forward for the U.S. in its progress toward enhancing and standardizing climate-related disclosures. Investors and stakeholders alike have been very loud in their demand for more consistent, comparable, and reliable climate-related information regarding how a company is operating now and how it plans to operate in the future. “Total return” may have a different connotation as we move toward a world where investors expect their investments to not only return profits but provide a meaningful impact while limiting the damage to the world in which they operate.
In the U.S., the current resources to provide “ESG” information to underlying investors is fragmented and inconsistent. While we are certainly playing catch-up to many parts of the world, the Securities and Exchange Commission (SEC) announced on March 21, 2022, that it is proposing rule changes that would require public companies to include certain climate-related disclosures in their registrations and periodic reports. When the release came out, SEC Chair 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 decision-useful information for making their investment decisions, and it would provide consistent and clear reporting obligations for issuers…investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks 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 that have a material impact on business strategy and financial statements, how the registrant went about identifying risks, and how climate-related events (both physical and transitional) have directly impacted financial statement line items. The rule also requires the operating company to disclose information about its direct greenhouse gas (GHG) emissions (Scope 1), indirect emissions from other forms of energy (Scope 2), and GHG emissions from upstream and downstream activities in the company’s value chain (Scope 3).
Right now, the proposed rule only applies to public companies and not public funds. While this proposal should provide a solid framework for how climate-related disclosures could be applied at the public fund level, there is concern among fund managers as to how material the proposed metrics are when looking at a portfolio holding a basket of publicly traded stocks.
Lipper Data
The other concern from fund companies is the costs surrounding sourcing and reporting ESG data. This may be a cost, however, that they will have to stomach. Investor appetite has been growing for funds focused on Responsible Investing. As of March 2022 month end, the assets under management for equity, mixed-assets, and fixed income open-end funds receiving Lipper’s Responsible Investing (RI) flag totaled $839.9 billion—equity funds ($455.3 billion), mixed-assets funds ($231.1 billion), and fixed income funds ($153.5 billion).
When looking at equity, mixed-assets, and fixed income funds, inflows into responsible investments saw a slight dip in Q3 2021 (+$20.2 billion) but have picked right back up in Q4 (+29.7 billion) to finish the year strong. Equity RI funds continue to dominate the quarterly flow intake, seeing five straight quarters of inflows greater than their mixed-assets and fixed income peers.
Q1 2022 flows are soon to be finalized, but what we can see is that RI fund launches from investment companies decreased slightly in Q1 2022 after seeing four straight quarters of increases. Both equity RI funds (-41) and RI fixed income funds (-18) saw a decrease quarter over quarter, as RI mixed-assets (+4) funds saw a slight increase.
While fund management companies may pause to see how/if any proposed climate-related disclosures will be implemented at the fund and/or advisor level, there is no debating the continued investor demand for sustainable investments.
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