Investor Interest Grows in Measuring Portfolio Temperature
According to a white paper by research provider Cerulli Associates, the majority of US asset managers, 57%, said the pressure to turn net zero commitments into action came from asset owners.
Cerulli’s article, Net zero investmentsaid institutional asset owners around the world are formally committed to net zero: 43% in Europe, 44% in Asia and 32% in the US.
“As they implement measures to achieve this commitment, they will increasingly assess measures at the portfolio level,” Cerulli added.
In Europe, almost all, 80%, of institutional investors request data on their exposure to risks related to the energy transition and physical climate risks and 61% request the carbon footprint of their portfolios. In the United States, asset owners are increasingly considering integrating climate risk into their mandates. Currently, a third, 38%, of companies already require managers to report on climate risks and 34% plan within two years.
“Over the next 12 to 24 months, asset managers should anticipate a surge in interest in measuring portfolio temperature,” Cerulli said.
However, Cerulli pointed out that data supply remains a barrier. As a result, Cerulli expects fund managers, particularly those in Europe, that offer strong expertise in climate risk assessment and reporting, to be well positioned.
“Such tools will be highly sought after by European institutional investors who are increasingly focusing on scenario analysis and stress testing,” the report said.
To help improve data, the United States Securities and Exchange Commission in March of this year proposed new greenhouse gas emissions reporting requirements for certain public companies in their registration statements and their annual reports.
“The agency notes that it aims to require companies to provide not only physical risks, but also actions that companies take to reduce GHG emissions,” Cerulli said. “As the proposal currently stands at the time of this writing, the SEC language includes explicit net zero goals.”
The SEC received about 11,000 comments on the proposal, which is far more than usual, according to the ISS Corporate Solutions article. SEC comments on climate disclosure reveal diversity of views.
ISS, which provides data and analysis on corporate governance and responsible investing, said: “Our analysis shows that while there has been overwhelming investor support for disclosure regulation on the climate in general, comments diverge widely on the recommended regulatory path forward.”
The comment period ended in June and the SEC said it will publish the final rules before the end of 2022.
— Harvard Law School Program on Corporate Governance (@HarvardCorpGov) August 31, 2022
According to the ISS, there was strong support for alignment with the disclosure frameworks of the Task Force on Climate-Related Financial Disclosures (TCFD), the Accounting Standards Board for Sustainability (SASB) and the International Sustainability Standards Board (ISSB) among investors and companies.
“California public pension fund CalSTRS said these guidelines and standards should form the basis of the proposed rules, and asset manager Allianz Group said the alignment would be particularly helpful for international comparisons,” ISS added.
Fidelity Investments has also requested that foreign issuers filing reports in the United States be allowed to follow ISSB standards.
Cerulli added that the TCFD framework’s implicit temperature rise metric will likely become the default metric for measuring the temperature of a manager’s portfolio. The report states, “An alliance of investors with over $5 trillion in combined assets under management supports this metric.”
In the European Union, the Sustainable Finance Disclosure Regulation (SFDR) came into force in 2021 and requires asset managers to use a uniform set of reporting standards to disclose the impact of their portfolios.
Half, 51%, of institutional investors surveyed by Cerulli in 2021 have between 50% and 75% of their portfolio in non-ESG funds. However, only 2% plan to allocate between 50% and 75% of their portfolio to non-ESG strategies in the coming year.
Cerulli finds carbon footprint of investment portfolios more often asked than transition and physics #climaterisk analysis by the French (75%) and the Dutch (70%) #institutional investors than their Italian counterparts (47%). Download👉: https://t.co/9WWKrER9wX pic.twitter.com/2sh0nc2UhR
— Cerulli Associates (@cerulli_assoc) August 30, 2022
“Cerulli expects SFDR to drive a significant reallocation of investors’ portfolios into Section 8 and Section 9 strategies,” the report said. “Thus, companies managing Article 8 or 9 funds will have a clear advantage in the future.”
Article 8 funds are defined as those that promote environmental or social characteristics. The funds must invest in companies that “follow good governance practices” but are not required to have a specific objective directed towards an environmental or social issue.
Article 9 funds must have clearly defined sustainability objectives such as reducing carbon emissions, with an index designated as the benchmark.
Cerulli said, “SFDR is likely to be a primary driver of progress towards net zero for the wider global investment community.”