The NZ Super Fund is pushing ahead with its climate change investment strategy and is working with other global sovereign funds to encourage them to follow suit.

At a time when asset owners are being urged to decarbonise their portfolios amid dire warnings about climate change, the $22.9 billion superannuation fund said it is on target with carbon reductions and is finding new climate-related investment opportunities.

In an exclusive interview this week with AsianInvestor, new CEO Matt Whineray explained how the fund's climate change investment strategy is evolving.

“When we announced the strategy two years ago, we wanted to reduce our exposure to carbon emissions intensity and carbon reserves. We transitioned the fund’s global passive equity portfolio (40% of the fund) to a low-carbon approach. We also developed 2020 carbon-reduction targets for the overall fund,” said Whineray, who took over the reins at NZ Super in June.

In 2018, NZ Super has introduced carbon exclusions in selected external manager equity mandates and added climate risk to its valuation models.

The exclusions apply to all passive global equity mandates (with Northern Trust, State Street and BlackRock) and the NZ active equity mandates (with Devon Funds Management and Mint Asset Management). 

The investment team also applied the carbon reductions to the LSV Emerging Markets active equities mandate. In the current financial year, the fund will be working on applying the reductions to factor mandates (low volatility and value) managed by Northern Trust.

Matt Whineray

“We’ve got close to our target on the emissions intensity... [by June]," said Whineray, adding that to-date the figures have improved further. The fund's financial year runs from July to June.

“We put targets in place to reduce by 2020 the carbon emissions intensity of the fund by at least 20%, and reduce the potential emissions from reserves of the fund by at least 40%,” said Whineray.

The NZ Super 2017/18 annual report, released today, shows the total fund’s carbon emissions intensity is 18.7% lower than its baseline level, and its exposure to potential emissions from reserves is 32.1% lower from the baseline level as well.

Whineray said a key aspect of the climate strategy is its ongoing nature, noting that the expectation is the entire process will improve with experience and better data.

"We are getting more granular and having to make fewer assumptions around some of these asset classes," he said.

FINDING SUCCESS

The investment team follows four principles on climate strategy – reduce, analyse, engage and search.

"The first (reduce) is incorporating these risks into our valuation framework. On the analysis side, the question is how do you think about climate risk for an unlisted asset? Do you do that on the cashflows or on the discount rate? How do you think about the price of carbon and what the different scenarios are? So we’ve produced an approach for our investment team and that will evolve as we get better data."

On engagement, Whineray said the fund has implemented its climate voting policies and brought voting control back in-house in the last year.

He indicated that the last of the climate strategy principles is perhaps the most challenging – finding opportunities for deploying capital in the climate space.

"I would say that is going okay," said Whineray. "We’ve had some success in finding suitable investments in renewable energy, wind and solar in the US, through a vehicle called Longroad.”

Another success story was LanzaTech, an alternative energy company that originated in New Zealand but is now headquartered in the US, which converts waste gases from steel plants into hydrocarbon fuel.

“Last week they had their first commercial flight, so they’ve been able to produce jet fuel. Virgin Airlines has used it to fly one of its planes from Orlando to London,” he said.

The NZ Super Fund's assets under management now stand at NZ$39 billion ($25 billion), up $4 billion during the 2017/18 financial year. The fund returned 12.43% (after costs, before tax), beating its passive Reference Portfolio benchmark by 2.02% ($700 million). It exceeded the average return on Treasury Bills, its other benchmark, by 10.71% ($3.7 billion).

MORE INVOLVEMENT NEEDED

NZ Super has been closely involved in the One Planet Sovereign Wealth Fund Group initiative, championed by French president Emmanuel Macron, to develop a climate change framework for sovereign investors.

The publication of the framework in Paris in July 2018 was the work of six SWFs  − Abu Dhabi Investment Authority, Kuwait Investment Authority, New Zealand Super, Norges Bank Investment Management, the Public Investment Fund of Saudi Arabia and the Qatar Investment Authority, who collectively manage over $3 trillion in assets.

Whineray said the working group's framework shows how sovereign funds can think about incorporating climate change issues into their portfolio management decisions.

Another initiative is the Paris Agreement on climate change, signed by 195 nations in 2015: it aims to limit global temperature increases to 1.5 degrees Celsius over the long term. Yet, as it currently stands, a 3 degree increase in temperature is widely expected, suggesting not enough is being done in reality despite the best of intentions.

The need for investors to step up their game on climate change was also underlined by the chief executive of the UN's Principles for Responsible Investment (PRI), Fiona Reynolds: “One thing is clear – investors need to decarbonise their portfolios now,” she told AsianInvestor.

"We are currently on track for a 3.4 degrees increase. Given that we cannot allow the world to reach that level, our belief is that unless there is increased action now in line with the Paris Agreement, at some point in the future − we suggest 2025 − governments across the world are going to need to bring in significant regulation and use policy levers to ratchet up climate action to avoid catastrophic climate disasters."

Reynolds said the disaster could easily extend to financial markets and affect investment returns.

She added that investors need to understand their exposure to climate risk across asset classes.

"They should consider allocating investments to low carbon opportunities and new technologies, engaging with companies about their transition to a low carbon economy as well as engaging with policy makers on the need for a price on carbon and on the removal of fossil fuel subsidies."