NZ Super Fund moves from RI to sustainable finance

Andrea Malcolm reviews the NZ Super Fund's approach to responsible investing.

Thursday, December 1st 2022, 9:26AM

by Andrea Malcolm

A significant downturn in global markets during the second half of the financial year saw the NZ Super Fund finish the year $3.3 billion smaller than it was a year earlier. At $55.71 billion (before tax), Fund size was well below the all-time peak for a month-end of $61.3 billion (before tax) seen on 31 December 2021. Overall, the Fund returned -6.99% over 2021/22 (after costs, before New Zealand tax), compared to a Reference Portfolio benchmark return of -14.24%.

An investment strategy review resulted in moving from RI to sustainable finance (SF) with an implementation roadmap. While RI focuses on the ESG risks in investments, sustainable finance also considers the impact of investments on the environment and society. The new direction will see SF in key policies (purpose statement, strategic goals, the Statement of Investment Policies, Standards and Procedures) and into the RI framework which addresses material ESG issues in the investment process.

A key sustainable investment priority for guardians of the New Zealand Super Fund over the past year was to improve the ESG profiles of the fund’s passive global equities portfolio (its single biggest piece at 40%) without compromising financial returns.

According to the NZ Super Fund annual report 2021/2022, this will be achieved in part by switching indices (from the MSCI All Country World Investible Market Total Return Index to the MSCI World Climate Paris Aligned Index and MSCI EM Climate Paris Aligned Index) for the Fund’s Reference portfolio benchmark. This began in June and once fully implemented, the Fund will retain diversity across geographies and sectors while holding shares in significantly fewer companies, resulting in greater alignment with climate-related goals, improved ESG metrics and a more concentrated portfolio that is more manageable and cheaper to run.

As well as changing benchmark indices, Fund guardians have developed an Impact Investment plan focused on measurement and reporting including criteria for what qualifies as an impact investment; and conducted a market review to identify opportunities to increase impact investment and integration of impact investing into existing processes with a programme to raise capabilities, influence and knowledge on the topic.

The annual report says the Fund had no material long term investment in fossil fuel reserves. In October 2021 the guardians committed the Fund to become net zero by 2050, joining the Paris Aligned Investment Initiative’s Net Zero Asset Owners Commitment, continuing to reduce the Fund’s carbon footprint by meeting and reporting a global accepted pathway to net zero. The Fund made a series of new investments in climate change solutions, with a focus on infrastructure and real estate, and partnered with Copenhagen Infrastructure Partners to explore the potential for offshore wind generation off New Zealand’s south Taranaki coast.

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