In mid-August we announced that the NZ Super Fund’s global passive equity portfolio, 40% of the overall fund, is now low-carbon. This step followed our development of a fund-wide strategy to address climate change investment risk.
It is becoming increasingly clear that in coming years the global economy will transition away from fossil fuels for energy needs. Governments, technology and society are driving an energy transformation. The forces for change include national and global policy, investments in new energy technologies and pressure from society at large.
These forces are likely to disrupt all industries to different degrees.
For investors, the shift to a low-carbon global economy creates investment opportunities and risks. Some assets may be rendered uneconomic by proper pricing of the carbon pollution externality, made obsolete by new technologies or face a dwindling market as consumers vote with their feet. Investors also need to consider the potential unpredictability of national and global policy initiatives.
We believe financial markets currently under-price long-horizon carbon risk. This gives long-term investors like us an advantage.
We have set two carbon-reduction targets, to be achieved by 2020: firstly to reduce the fund’s carbon emission intensity by at least 20%; and secondly to reduce its carbon reserves exposure by at least 40%.
To decide which stocks to sell, we created a bespoke methodology for assessing our carbon exposure based on independent third-party data on carbon emissions and reserves provided by MSCI ESG Research. It identified stocks that exceed thresholds for either carbon intensity or for carbon reserves, and are not considered to be standout performers.
We found carbon exposures were highly concentrated in around 300 companies of the 6,000 in our passive portfolio. We re-allocated NZ$950 million ($685 million) away from such stocks and into companies identified as lower-risk. As a result, the fund’s carbon emission intensity was 19.6% lower as of June 30, while its exposure to carbon reserves was 21.5% lower.
We will re-apply our carbon methodology to the passive portfolio annually and expect to refine it as the available carbon measurement tools and data improve.
Impact on external managers
Our next priority is to reduce carbon exposure in our active investment portfolio. In July we completed the first step, applying our bespoke carbon methodology to the fund’s New Zealand active equity mandates.
We are continuing to identify attractive investments in alternative energy and transformational infrastructure, and are prioritising climate change engagements with external investment managers and with investee companies. We are also directing our investment managers to vote according to our instructions on climate change resolutions.
A Mercer climate change study that we participated in during 2015 found the biggest risk of climate change to investors was to be on the wrong side of strengthening global policy or technological disruption. But those who get ahead of the curve can mitigate the potential downside.
For more information on NZ Super Fund and details of its climate change strategy, please visit: