NZ Super CEO: Decarbonising portfolios won't change real-world outcomes
In what is likely to be one of his last public speeches in his role as outgoing CEO of the New Zealand Super Fund, Matt Whineray said the economic status quo goes against progress in the energy transition space, and it needs to change.
Speaking to the Responsible Investment Association Australasia (RIAA) conference in New Zealand last week, Whineray said there is a need to question whether investment activity by large asset owners is sufficient to drive the changes needed in decarbonisation.
“Voluntary acts by investors and companies like us are a great start. But decarbonising our portfolio through changing the make-up of the global equities portion — while it reduces our exposure to this risk — won’t do much to change the real-world outcome: we need new capital to flow to funding the transition, and we need governments and regulators to act as well.”
NZ Super
But there are practical problems, he added, in that the market can’t do it all because it is fundamentally flawed.
“Mechanisms based on prices and property rights are inherently biased towards maintaining the status quo: we need to change the rules of the game.”
"We need to change the way we behave, and we need to change the way we think. And we need to do that at a deep level, so this means not just changing the rules of the system — how it operates, and what is counted and what isn’t — but also the goals of the system."
DAMAGING IDEOLOGY
But deeper than that is changing the mindset from which the system arises, he added.
"The mindset is the set of unstated beliefs within a society. In the investment sphere, the obvious example is Milton Friedman’s ‘The business of business is business’ mantra. This became the accepted narrative and has caused untold damage. [It’s] a phrase used to proudly justify all manner of anti-social, anti-environmental, and externality-denying behaviour."
Agency issues mean many companies are more likely to lobby for exemptions to the rules than to look for new ways of working that will align them with the long-term objectives of climate change mitigation, said Whineray. And from a narrow ‘profit-maximisation’ perspective, this activity can be rationalised.
“It’s a particularly insidious activity”, he said.
“It’s companies holding up their climate reporting while paying industry bodies to lobby against regulation that would actually effect change. As the owners of these entities, we must ensure that our agents are not acting against our interests in this way."
The systemic nature of these risks means that investors like the NZ Super Fund, as a universal asset owner with a very long horizon, can’t stock pick its way around these problems, or diversify away from them.
“They are innate to the system,” said Whineray.
In 2021, NZ Super adopted a new organisational purpose statement, reflecting a shift from a responsible investment approach in managing the portfolio, to an approach based on the principles of sustainable finance.
“This might sound semantic, like a distinction without a difference, but it’s not,” said Whineray.
“In essence, the shift to sustainable finance represents a change from considering the potential impact of ESG risks on our portfolio to also considering the potential impact of our investments on environment and social outcomes.”
COLLABORATIVE APPROACH
Collaboration is essential, he said, which means stepping up engagement with policymakers and regulators "to set the vision, build the structures and demand the disclosures that will help the rest of us to compete within a system that is not working against our long-term objectives."
And while the market is slow to respond and the social cost of emissions is not properly felt by those responsible for those emissions, the transition is definitely under way, said Whineray.
As AsianInvestor has reported, government support is important in sustaining progress. The amount of money allocated by governments to support clean energy investment since 2020 has risen to $1.34 trillion, according to the latest data from the International Energy Agency.
Global investment in energy transition technologies, including energy efficiency, reached a record high of $1.3 trillion in 2022. However, annual investments need to at least quadruple to remain on track to achieve the 1.5°C scenario as outlined in the International Renewable Energy Agency’s (IRENA) World Energy Transitions Outlook 2023 report.
Investment in renewable energy still represents less than one-third of the average investment needed each year.
Investments are also not flowing at the pace or scale needed to accelerate progress towards universal energy access.