NZ Super: managers must meet ESG mandates within five years
Within five years, all fund managers employed by New Zealand Superannuation Fund (NZ Super) in Asia, or real assets that the fund intends to acquire, will be expected to meet best-in-class ESG standards or will not be hired or bought.
Anne-Maree O'Connor, head of responsible investment (RI), at NZ Super told Asian Investor there were challenges when it came to real asset managers in property, infrastructure and private equity.
“Too often manager are not ahead of the game. The difference is really obvious when you get a good one,” she said. “Currently we are willing to work with a good manager who might be a bit weak [in ESG],” she said, adding that the fund found itself devoting considerable effort to developing and engaging with managers on RI.
Some managers showed a lack of awareness of how industry ratings like GRESB (Global ESG Benchmark for Real Assets) might play a role, for example.
Another shortcoming was to adopt ESG measures without truly being knowledgeable about them - their relevance, strengths and weaknesses – including to the sector or asset class.
“At the investee company level, you want the company management and board to use recognised ESG performance standards and measures for the most material issues. Investment managers must appreciate that some [off-the-shelf] metrics may not be relevant, or are estimated.” she said.
In future, managers or assets that did not have superior ESG frameworks that they could demonstrate had been applied, are unlikely to be considered. “Five years from now, if you have a manager in Asia or other emerging markets, [our] expectation will be that they are already there.”
Increasingly, the fund is embedding requirements to improve ESG performance into manager mandates, O’Connor said.
“With co-investing, too, you have to be on the same page,” she said. “In some cases little additional work needs to be done, and in others the co-investors may want detailed ESG protocols for each stage of allocation or investment gateway”.
Ideally, managers should illustrate an ESG policy in place for at least five years and be able to demonstrate how it has been applied, pointing to real risks and how they had been dealt with. “It is so much less arduous [for us] when it comes to due diligence and the on-boarding process with an experienced manager,” she said.
She singled out CBRE, which manages an emerging markets property portfolio for the fund, as meeting the fund’s requirements.
O’Connor pointed to another property manager they respected for their financial acumen that did not yet have an adequate ESG framework in place but, as part of the due diligence process, had brought a comprehensive RI policy to the fund and set out a pathway and timescale to achieve it.
They could see that this was now an important driver in the industry. Investors in the region had a responsibility to drive managers to higher standards, she said. “
It’s up to asset owners: if they make their expectations clear to managers, that will lead to better outcomes.”
She said there had been a significant reduction in availability of good ESG professionals over the past 18 months to three years. Including O’Connor, NZ Super currently has five full-time staff specialising in ESG (currently recruiting for one of those), and may look to expand in the future.
Part of the problem was the pandemic, which was reducing the ease with which the fund could recruit from overseas.
In addition, sustainability professionals in the corporate and advisory sector were in strong demand as companies built out their teams. Earlier there had been a shortage of safety professionals after new health and safety legislation was introduced in New Zealand, bringing the regulatory landscape more in line with that of Australia.
Like New Zealand, countries in Asia, especially emerging Asia, faced the challenge of attracting international talent that could as easily choose to work in financial centres like London, she said.
“As an asset owner you are competing with fund managers and, more generally, with companies,” she said.
She said that corporates had been ahead of the investment sector when it came to hires in sustainability, driven by the changing business landscape and incentives to collect and report data under initiatives such as the Task Force on Climate-Related Disclosures (TCFD), whose first recommendations were released in 2017, and the Modern Slavery Act in the UK, passed in 2015.
NZ Super operates a buddy system: one of the ESG team operates with the direct investment team, one with the team that selects managers and a third with the team in charge of the fund’s passive and active equity allocations.
When considering a new investment, members of the ESG team will work alongside a portfolio manager – who has ultimate responsibility for the project - to help conduct the ESG due diligence work.
“We have a responsibility both pre- and post-acquisition to do the due diligence and are used to working across teams,” O’Connor said.