A fund management lobby group has called for regulators to simplify proposed climate-reporting standards for the sector to avoid investor confusion, irrelevant disclosures and higher costs.
In its submission on the latest External Reporting Board (XRB) mooted climate-reporting regulations, the Boutique Investment Group (BIG) says NZ retail fund managers “are in a different position” compared to other entities captured by the new law.
BIG, on behalf of 10 underlying fund managers, says in the submission that the most recent XRB climate-reporting proposals are “too technical and too large in volume” to benefit the targeted end-users – ordinary investors.
The BIG reply says previous Financial Markets Authority (FMA) studies found “that disclosure overload in financial statements can obscure more pertinent information and therefore detract from their usefulness and relevance”.
“We question whether primary users will be in a better position to make well-informed investment decisions given the level of detail and the very technical nature of the proposed climate-related disclosures,” the submission says.
Unlike companies, fund managers rely almost exclusively on incomplete third-party data for climate risk disclosures across often vast and frequently changing portfolio investments.
According to BIG, a “key question will be how deeply we need to drill into any particular investee business in order to reasonably convey the climate risk within a fund. This is relevant to our discussion of scenarios as well as to targets and metrics”.
The submission notes, too, that fund managers could incur substantial expense in complying with the climate-reporting proposals.
“… between growing our in-house capability, paying for access to data and paying for assurance across multiple funds, it is likely that there will be a material cost burden for someone pay,” BIG says. “The parties most likely to carry that burden will be the investors.”
The XRB tabled part two of its proposed climate-reporting rules in March – covering ‘strategy and, targets and metrics’ – following on from the relatively simpler draft governance regulation released last September.
All licensed NZ fund managers with at least $1 billion under management will have to comply with the climate-reporting legislation, passed in October 2021, along with most NZX-listed companies, banks and insurers.
However, Simon Haines, BIG chair, said there was still much “confusion” about who the proposed fund climate-reporting rules were targeting and whether the aim was to reveal genuine risks or simply highlight holdings of “evil” companies.
“What happens if investing in a vineyard looks like it has more climate risk (because weather will change) than investing in a Saudi oil well (because it is designed to resist everything the desert can throw at it and the Saudi Government is unlikely to regulate away its core business),” he said. “Is that an acceptable answer?”
The imminent climate-reporting standards – due to come into force for the 2023/24 fiscal year (with at least a one-year delay for fund managers) – come amid a long pipeline of regulatory challenges for the local investment industry, Haines said.
As well as potential implications from the draft modern slavery legislation, fund managers may face new compliance challenges through the in-production Financial Services Council ‘stewardship’ code and the final FMA ‘value-for-money’ guidance.
Officially launched in 2020 after operating for years as an informal gathering of investment industry legal and compliance experts, BIG represents most of the “non bank fund managers” in NZ including Devon, Fisher, Harbour Milford, Mint and Nikko.
Haines is also Nikko general counsel.