As asset owners seek to slowly raise their commitments towars impact investments, they will need to be able to assess companies via standardised metrics. Only by doing so can they best measure the success of the ways in which they distribute their money. 
 
New Zealand Super has been placing increased emphasis on investing into and supporting renewable energy, as it looks to deliver on all parts of its climate commitments, said Del Hart, head of external investments and partnerships at the sovereign wealth fund.  
Del Hart, NZ Super
 
This is in large part because of the importance of achieving results as soon as possible. Generation Investment Management, a specialist in the study of climate change and how investors should engage with it, has published analysis stating that greenhouse gas emissions cut today are worth more than cuts promised in the future, due to the escalating risks associated with the pace and extent of climate action.
 
“We believe this is of fundamental importance for investors, since our work depends on accurately assessing the value that companies can create far into the future, based on the assets and liabilities that they have today.”
 
Hart added that NZ Super has revisited its own climate investing plan, originally set out in 2016. It found its renewable energy investments in particular were off, due to a lack of market maturity and a failure to find investing partners for overseas investments. 
 
“We are resetting our investment compass and there’s a lot of work going on at the moment to define target exposures for each objective that we set,” Hart said.
 
The sovereign wealth fund recently recruited a senior adviser for infrastructure, Josie McVitty, whose strategy also has a very strong renewable energy focus. The new allocation target, previously set at 3% of the portfolio, is likely to be scaled upwards, reflecting the increased focus and the integration of renewables within the larger infrastructure portfolio. Board approval is being sought. 
 
The fund’s 2020/2021 annual report, currently being drafted, will be keenly studied for evidence that its climate strategy is continuing to produce positive results. In October last year, it issued its first report based on recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD). The report said its carbon exclusion policy had added approximately NZ$800 million ($560.73 million) to the fund and about 60 basis points per annum to performance since being brought in. 
 
SEEKING GOOD INTENTIONS
 
Hart says NZ Super tries to consider ‘intentionality’ when it assesses new investments or those in its existing portfolio. 
 
“We’ll be testing for that at a very early stage; is there an intention in the management team to invest with the dual purpose of a commercial outcome and a social and environmental outcome? And how are they going to measure and report on that over time?” 
 
She believes this attitude is essential to guard against greenwashing. “There are managers out there who just develop product, so it requires us to dig into how they are making their investment decisions and the outcome they expect to derive.”
 
In other words, no simple solution exists. Asset owners that want truly effective sustainability investment approaches need to study how their external partners and investees do what they claim. 
 
The world is slowly embracing sustainability. But obstacles still exist; pollutive companies have deep pockets and a lot of political influence, while many fund managers find it simpler to brand themselves with green paraphernalia than genuinely try to have an ESG impact with their investment strategies. 
 
Asset owners will increasingly have to look under the hood of ESG products and strategies to ensure their money goes to the latter, not the former. 
 
CLIMATE INVESTING OPTIONS
 
Institutional investors have a range of climate investment options. Below are the main sectors: 
 
Low-carbon equities, active and passive, are expected to insulate portfolios from stranded asset risk in a low-carbon economic transition, with very-low tracking error versus parent indices. They are focused solely on minimising policy-related risk, typically by reducing exposure to both high-carbon emitters (for example, utilities) and fossil fuel reserve owners (for example, oil and gas majors). 
 
Fossil-fuel-free (FFF) equities (defined here as excluding fossil fuel reserve owners), active and passive, are also expected to insulate portfolios from stranded asset risk in a low-carbon economic transition, though this risk-protection benefit is expected to be less-reliable than a low-carbon approach, since an FFF portfolio maintains exposure to high-carbon emitters. Tracking error may also be higher depending on the reweighting mechanisms used. 
 
Sustainable equities, primarily accessible in active strategies, are expected to be well-positioned from a policy point of view but also capture upside from a low-carbon transition through greater exposure to solutions providers. 
 
Sustainable private equity is a mixture of venture, growth and buyout funds focused on investments in companies with significant technology risks and exposure primarily to environmental themes. Funds may be generalist sustainability managers or sector-focused (for example, food and agriculture). 
 
Sustainable infrastructure consists of a broad range of projects and solutions, including renewable energy, that would be expected to benefit from clean technological innovation and strong policy action to combat emissions. Similarly, sustainable infrastructure would benefit by avoiding exposure to assets that may become stranded in a low-carbon transition and/or focusing on retrofitting assets to be climate-resilient. 
 
Green bonds. The green bond market is currently dominated by government/supranational issuances, but more corporate issuance is expected going forward. Corporate green bonds will be issued by organisations that have, in general, proactive climate risk management practices overall and thus may be less susceptible to climate-related default risk. However, on balance, fundamental risks like credit quality and interest rates are likely to dominate, making our expectations of green bonds the same as for typical global-investment grade debt.

This story was originally published in the summer 2021 edition of the AsianInvestor magazine.