Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
… Climate reporting to ‘cool manager profits’
Imminent climate disclosure obligations could dent fund manager profits by up to 1 per cent while increasing retail manager fees as much as 2.2 per cent, according to an NZ Government report.
Analysis by New Zealand’s Ministry of Business, Innovation and Employment (MBIE) was released along with the final select committee report on the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Bill last week (August 19), include estimates the proposed new investment portfolio reporting standards could add between NZ$80,000 (A$76,000) and NZ$190,000 per retail (KiwiSaver) scheme.
“Using this information and other information obtained from fund managers, officials estimated that the compliance costs would lead to a 0.9 per cent decrease in operating profit for scheme managers at the NZ$1 billion threshold,” the MBIE report says. “For investment scheme managers with multiple funds, officials estimated through fund managers that the additional costs for disclosure on a fund-by-fund basis was about 1 per cent of the total cost of disclosing on aggregate funds.”
In a further analysis across four scenarios, MBIE says the fund climate-reporting duties could see, for example, KiwiSaver fee hikes ranging from between 0.25 per cent to 2.21 per cent.
However, MBIE leans towards a mid-range climate-related fee increase for KiwiSaver members amounting to just 65 cents “per member per year, or an increase of 0.40 per cent”.
But with most of the detail in the climate-reporting regime to be outsourced to the accounting standards body, XRB, the true costs to NZ fund managers (and others caught under the bill) of the proposed legislation won’t be known for some time.
However, the Economic Development, Science and Innovation Committee final report on the climate-reporting bill includes some relief for fund managers et al with a recommendation the greenhouse gas (GHG) portfolio assurance obligations be pushed out to three years following royal assent, compared to just one year in the original draft.
The committee report also recommends a number of other sweeping changes to the bill such as:
- excluding listed entities with a market capitalisation below NZ$60 million;
- dropping the licensing and accreditation rules for GHG “assurance practitioners” that were to be governed by the Financial Markets Authority (FMA);
- removing the option for entities to opt-out of climate-reporting under “disclose-or-explain provisions”;
- cutting the requirement for entities to explain why some information has been left out of climate reports on ‘immateriality’ grounds;
- clarifying how amalgamated firms will be treated under the law; and,
- inserting a clause making it a criminal offence (with a maximum NZ$50,000) fine for climate ‘assurance practitioners’ to breach as-yet-undefined professional standards.
The Boutique Investment Group (BIG) – an industry body representing about 20 local managers – can claim some influence on the report outcome with MBIE partly backing its submission to exclude managers from the GHG assurance rules.
But MBIE rejected the BIG call to delay the introduction of civil liability for climate breaches “until there is more confidence within the industry and from regulators as to production of reporting”.
MBIE also side-lined the BIG submission – one of the almost 60 responses to the consultation on the draft climate bill – request to permanently exempt managers from GHG assurance as well as excluding cash funds entirely from the proposed obligations.
“We are unsure whether we agree or not [on the two BIG ideas],” MBIE says. “However all three issues can be dealt with through secondary legislation. Secondary legislation would be preferable because:
- consideration could be given to whether any regulations or exemptions should be subject to conditions; and
- it may be necessary to modify them in response to changing circumstances.”
The climate-reporting bill, which heads back to parliament for its second reading, will capture NZX-listed entities (above the $60 million threshold) as well as most insurers, banks and other financial institutions, and licensed investment schemes with more than $1 billion under management.
Based on the $1 billion funds under management threshold, MBIE documents show 19 of the 48 registered investment schemes would be caught by the climate-reporting rules. The 19 billion-dollar plus managers comprise about 92 per cent of all licensed assets under management, equating to $68.7 billion at the time MBIE reported.
The select committee, chaired by Labour MP Jamie Strange, says in the report that the legislation “is based on the idea that financial markets will help contribute to the economic transformation that is needed to shift investment away from emission-intensive activities, towards those that are more resilient and produce lower emissions”.
If adopted, NZ will be the first country to mandate climate-reporting across a wide range of financial firms.
