Korea’s National Pension Service (NPS) is seeking out attractive opportunities in fossil fuel-related investments at the same time as it pursues responsible investing in publicly listed assets according to environmental, social and governance (ESG) criteria.

By simultaneously pursuing such seemingly contradictory goals, Korea’s largest state pension fund risks opening itself up to accusations that it’s not sufficiently dedicated to pursuing ESG principles.

NPS, which had assets under management worth W736.7 trillion ($593.7 billion) at the end of last year, recently made headlines after conducting a wide array of investments relating to fossil fuels.

It's worth noting that many asset owners feel they shouldn't divest from the listed equity of fossil fuel companies, because they can still push them to improve their behaviour. However, few appear as keen as NPS to add private investments into such companies too.

In December, the pension fund invested in two liquid natural gas (LNG) midstream projects in North America as part of club deals of infrastructure funds run by KKR and Blackstone, respectively.

Market rumour also suggests NPS is the preferred bidder for the Dalrymple Bay Coal Terminal in Queensland, Australia – a sale that has reportedly now been delayed. Local Korean media reports have also highlighted other recent fossil fuel-related investments by the pension fund.

An NPS spokesman told AsianInvestor the pension fund can only provide limited details about its responsible investing aims, as it is currently introducing ESG investment policies. He did, however, provide a peek into progress so far.

“In November 2019, the fund management committee decided to strengthen ESG investment, and the National Pension Service is pushing to apply ESG investment, which was only applied to local stocks as well as foreign stocks and bonds. And for alternative investments, such as infrastructure investments, the committee decided to further review the timing of the introduction considering legal issues and other issues,” the spokesman said.

The latter point particularly applies to NPS’s recent interest in fossil fuel assets. The North American LNG investments are considered to be alternative investments, which is an increasingly favoured asset class for NPS. As alternative assets, they would not form part of its current ESG investment policy.

For listed equities, NPS has a ESG rating index that is currently being applied by some types of domestic stocks. It consists of 52 detailed indicators that are continuously being supplemented, according to the spokesman. Some of these evaluation indicators oversee fossil fuel usage.

CORONAVIRUS DISRUPTION

NPS's ongoing willingness to invest in fossil fuel assets appears inconsistent with its publicly stated advocacy of ESG in Korea.

As the pension fund wrote in its 2019 sustainability report, responsible investments are gaining importance in its investing approach. And at AsianInvestor’s Institutional Investment Forum Korea in Seoul in April last year, NPS chief information officer Ahn Hyo-joo said that NPS “will expand the responsible investments to the public pension fund step by step”.

Together with the country’s sovereign wealth fund, Korea Investment Corporation, NPS is expected to be a first-mover in Korea when it comes to ESG. While Korean asset owners are behind the curve compared to asset owners in other OECD countries, interest has been growing, according to one Singapore-based adviser at a global asset manager familiar with Korean investors.

However, the economic upheaval being caused by the spread of the coronavirus looks likely to slow the momentum for ESG investing in the country.

“Throughout 2019 and early 2020, we saw increasing inquiries on how Korean asset owners could implement ESG criteria into investment strategies. The coronavirus and the subsequent need for portfolio and strategy reassessment have entirely stopped that development, and I think we have to wait a year to see the interest return,” the senior executive told AsianInvestor on condition of anonymity.

Two other Korean pension funds have already created specific policies concerning fossil fuel investments. On October 4, 2018, Korea Teachers' Pension and the Government Employees Pension Service announced together that they would stop financing coal-fired power plants.

COAL ON THE LINE

NPS’s willingness to invest more in fossil fuel projects stands at odds with many of its peers.

Asset owners across the world are increasingly divesting from fossil fuels, particularly coal mining and coal power. To date, over 100 major financial actors with a global reach have announced their divestment from coal mining and/or coal-fired power plants, according to Institute for Energy Economics & Financial Analysis.

Benjamin McCarron

Among asset owners pushing this agenda are Norway's Government Pension Fund Global and Denmark's ATP. On March 16, the Swedish public pension fund AP1 announced that it will no longer invest in fossil fuels altogether.

These decision are not necessarily for investment performance-based reasons, according to Benjamin McCarron, managing director at Asia Research & Engagement (ARE), a Singapore-based consulting firm dealing with Asian investors. 

“For instance an asset owner – such as a university endowment fund or a pension fund – might choose not to invest because a scenario in which a fossil fuel investment makes money is also inconsistent with a world in which the fund beneficiaries can thrive,” McCarron told AsianInvestor.

In terms of fossil fuels more broadly there are few concrete policies. Asset owners investment strategies might focus on carbon optimisation, or emphasise stronger engagement with carbon emitters. 

“One question for investors and companies is whether to frame discussion or policies around what one shouldn’t do or around what one should do. Normally we see policies about what organisations will not do,” McCarron said.

Asian financiers are taking notice as well and have also started to stop financing new coal plants. For example, the largest Singaporean and Japanese banks have set out policies restricting and are even stopping new coal financing altogether, McCarron pointed out.

“In Korea, bank policies on coal result in very little exclusion. For example, we have seen one with a threshold on carbon intensity of generation for developed markets, but no exclusion for emerging markets. This effectively does not restrict financing for coal at all. The result is that Korean banks will need to catch up with global and Asian practices,” he said.