Super Fund: Carbon risk under-priced

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The $35 billion New Zealand Superannuation Fund has sold off $950 million of companies with high exposure to carbon emissions and fossil fuel reserves.

Tuesday, August 15th 2017, 11:50AM 1 Comment

The selloff includes New Zealand companies Genesis Energy and NZ Oil and Gas.

The Guardians of NZ Superannuation revealed the fund’s $14 billion global passive equity portfolio, 40% of the fund, is now low-carbon.

Chief executive Adrian Orr said the NZ Super Fund’s focus on addressing climate change risk is in line with current global best practice by institutional investors.

“There is a global consensus that climate change presents material risks for long term investors,” he said.

“Leading investors around the world are adjusting their portfolios to address climate change risk and capture opportunities stemming from the transition to a low-carbon economy.”

Orr said the Guardians’ strategy had been calibrated to match the fund’s investment approach, horizon and needs. “In taking a low-carbon approach to our passive equity portfolio, the largest part of the fund, we have taken a major step forward.”

Chief Investment Officer Matt Whineray said financial markets were under-pricing climate change risk over the fund’s long investment timeframe.

“The global energy system is transitioning away from fossil fuels. For investors with very long horizons, such as the fund, reducing exposure to carbon emissions and reserves is a low-cost insurance policy.”

The low-carbon portfolio is based on a bespoke carbon measurement methodology for listed equities developed by the Guardians in concert with MSCI ESG Research. MSCI ESG Research also provided independent carbon data and company ratings.

Whineray said the Guardians found that carbon exposures were highly concentrated in a relatively small group of companies. “By targeting this group we have been able to significantly reduce the Fund’s carbon footprint while retaining the diversification benefits of passive investment.”

The fund will continue to hold some companies in its passive portfolio with high exposure to carbon emissions and reserves, where MSCI ESG Research rates these companies well relative to their peers and there is evidence of strong management engagement with the challenge of climate change.

“This will help us capture the upside from companies which are better placed to succeed within the rapidly-transforming energy sector,” Whineray said.

The bulk of the fund’s equity exposure is through its passive mandates, although the fund also still holds high-carbon stocks periodically due to the discretionary decisions of active managers.

“Our next priority is to reduce carbon exposure in our active investment strategies,” Whineray said. “As a first step the carbon methodology has already been applied to our active New Zealand equity portfolio.

“We are also pushing ahead with other aspects of our climate change strategy, including incorporating climate change risk into our investment analysis, engaging with portfolio companies to promote better risk management and identifying new investment opportunities from the global transition to a low-carbon economy.”

Tags: equities investment Markets NZ Super Fund risk

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