NZ Super Fund shifts passive equities to low-carbon
NZ Super Fund shifts passive equities to low-carbon
• 40% of Fund now low-carbon
• Guardians continuing to implement whole-of-Fund climate change strategy
• 2020 targets set for further carbon reduction
The NZ$35 billion NZ Super Fund’s NZ$14 billion global passive equity portfolio, 40% of the overall Fund, is now low-carbon, the Guardians of New Zealand Superannuation announced today.
The move means the Fund is more resilient to climate change investment risks such as stranded assets.
The changes have significantly reduced the Fund’s overall carbon footprint and are a key plank within the Guardians’ ongoing strategy to address climate change investment risk.
As at 30 June 2017, the total Fund’s carbon emissions intensity is 19.6% lower, and its exposure to carbon reserves is 21.5% lower, than if the changes hadn’t been made.
The transition involved reallocating NZ$950 million away from companies with high exposure to carbon emissions and reserves into lower-risk companies.
Chief Executive Adrian Orr says the NZ Super Fund’s focus on addressing climate change risk is in line with current global best practice by institutional investors.
“There is a global consensus that climate change presents material risks for long term investors,” Mr Orr said. “Leading investors around the world are adjusting their portfolios to address climate change risk and capture opportunities stemming from the transition to a low-carbon economy.”
Mr Orr said the Guardians’ strategy had been calibrated to match the Fund’s investment approach, horizon and needs. “In taking a low-carbon approach to our passive equity portfolio, the largest part of the Fund, we have taken a major step forward.”
Chief Investment Officer Matt Whineray said financial markets were under-pricing climate change risk over the Fund’s long investment timeframe. “The global energy system is transitioning away from fossil fuels. For investors with very long horizons, such as the Fund, reducing exposure to carbon emissions and reserves is a low-cost insurance policy.”
The low-carbon portfolio is based on a bespoke carbon measurement methodology for listed equities developed by the Guardians in concert with MSCI ESG Research. MSCI ESG Research also provided independent carbon data and company ratings.
Mr Whineray said the Guardians found that carbon exposures were highly concentrated in a relatively small group of companies. “By targeting this group we have been able to significantly reduce the Fund’s carbon footprint while retaining the diversification benefits of passive investment.”
The Fund will continue to hold some companies in its passive portfolio with high exposure to carbon emissions and reserves, where MSCI ESG Research rates these companies well relative to their peers and there is evidence of strong management engagement with the challenge of climate change. “This will help us capture the upside from companies which are better placed to succeed within the rapidly-transforming energy sector,” said Mr Whineray.
The bulk of the Fund’s equity exposure is through its passive mandates, although the Fund also still holds high-carbon stocks periodically due to the discretionary decisions of active managers.
“Our initial focus has been on the passive portfolio, as the largest part of the Fund and one in which reducing carbon exposure is relatively straightforward. Our next priority is to reduce carbon exposure in our active investment strategies,” said Mr Whineray. “As a first step the carbon methodology has already been applied to our active New Zealand equity portfolio.”
“We are also pushing ahead with other aspects of our climate change strategy, including incorporating climate change risk into our investment analysis, engaging with portfolio companies to promote better risk management and identifying new investment opportunities from the global transition to a low-carbon economy.”
Mr Whineray noted that reducing the Fund’s exposure to companies at risk from climate change was not the same as applying categorical exclusions to tobacco manufacturers, for example. “Reducing the Fund’s exposure to carbon is a commercial decision based on long-term risk to our portfolio as a whole. Companies have the opportunity to re-enter the portfolio in the future, if they improve their management of climate risk.”
Good progress made towards 2020 Fund targets for carbon reduction
The transition to a low-carbon passive equity portfolio has taken the Fund a long way towards the Guardians’ Board-approved 2020 targets for reducing the Fund’s exposure to carbon. These targets are to reduce the carbon emission intensity of the Fund by at least 20%, and reduce the carbon reserves exposure of the Fund by at least 40%, compared to if the changes hadn’t been made.
The Guardians will publicly report on the Fund’s carbon footprint in relation to these targets annually.
Move supported by industry experts
Simon O’Connor, Chief Executive Officer of the Responsible Investment Association of Australasia: "Leading global investors have accepted the realities of a changing climate and are shifting capital in a way that better positions them for the transition underway towards a low carbon global economy. It's pleasing to see NZ Super Fund's prudent and proactive approach as part of the ongoing implementation of their climate change strategy. Removing significant exposures to climate risks within the passive equities portfolio positions the fund to better weather the economic transition set in train by the Paris Agreement. Furthermore, it positions the NZ Super Fund to play a positive role in support of the low carbon transition and benefit from investment opportunities."
Emma Herd, Chief Executive Officer of the Investor Group on Climate Change: “IGCC welcomes the progress made by NZ Super on implementing their climate change strategy. Investors have such a critical role to play in tackling climate change. Embedding management of carbon into mainstream investing practice is at the core of achieving real, sustained change across the economy. It’s important that funds clearly and transparently tell the community what steps they are taking reduce their exposure to the financial impacts of climate change and pursue low carbon opportunities. This announcement shows real progress and sets out a plan for continuing action”.
Roger Urwin, Global Head of Investment Content at Willis Towers Watson: “The carbon reduction strategy of the NZ Super Fund looks coherent in both thinking and portfolio construction. It seems to gets the Fund ahead of the climate change curve, where it would wish to be. All this was achieved because of strong Board and leadership alignment. None of that comes easy, that’s why it sets an example that other funds will study.”
Keith Ambachtsheer, Director Emeritus, International Centre for Pension Management, Rotman School of Management, University of Toronto: “The NZ Super Fund has followed a deliberate ‘best practices’ investing path since its inception in 2003. This choice has been creating material value for New Zealand’s citizens over the course of the last 14 years. In this context, last year’s decision to develop an integrated strategy to address looming climate change-related opportunities and challenges was not surprising. The August 15 announcement by the organisation that it has reduced the carbon footprint of its NZ$14B global passive equity portfolio by some 20% so far this year confirms this strategy is now being implemented.”
• The NZ Super Fund is a founding signatory of the United Nations Principles for Responsible Investment, and a member of the Carbon Disclosure Project, Investor Group on Climate Change, and Responsible Investment Association of Australasia.
• The Guardians studied climate change strategies from AP4, PGGM and other global investment leaders in developing its strategy. A 2015 climate change study by Mercer, part funded by the NZ Super Fund, was also an important part of the strategy development process.
• Affected NZ companies: Genesis Energy and NZ Oil and Gas. The Fund sold its small holding in Genesis Energy in June as part of the passive transition. Following the application of the carbon methodology to our NZ active equity holdings, an active investment in NZ Oil and Gas was exited in July.
• The NZ$35b Fund has returned 10% p.a. since inception and 18% for the 12 months to the end of May 2017. Its financial result for the year to 30 June will be announced in late September.
A video of Mr Whineray explaining the transition is available here.