ESG pushback nothing new to Super guardians

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The Guardians of the NZ Super Fund have been challenged on their investment decisions but best practice investing requires proper consideration of ESG-related risks and benefits, says Matt Whineray.

Wednesday, August 16th 2023, 8:50AM 1 Comment

by Andrea Malcolm

“In the long term, those externalities all come home to roost, “ the NZ Super Fund CEO told the Responsible Investment Association of Australasia Conference last week.

“Yes, the market is slow to respond to the signals the changing climate is sending us. Yes, the social cost of emissions is not properly felt by those responsible for those emissions. Yes, the transition away from fossil fuels is happening more slowly and more hesitantly than we would like. However, the transition is underway.”

Whineray said failing to consider those factors introduces undue and uncompensated risk into a portfolio. The view on which assets might become ‘stranded’ is moving fast.

“Ask yourself whether your view on Auckland clifftop real estate or of forestry in hard-to-harvest places as investment opportunities has changed in the past six months.”

With next month marking 20 years since the NZ Super Fund, now worth more than $55 billion, began investing.

In 2011, Mercer published its first global research report on climate change and asset allocation and in 2014, the NZ Super Fund and other investors commissioned further work.

“The Mercer studies galvanised the financial sector into treating climate change as a systemic risk; for us, they helped guide the development of the climate change investment strategy that we introduced in 2016.”

The Fund began to decarbonise its portfolio, to avoid undue risk. “It was the investment case that got our climate strategy across the line. The implementation of that strategy dramatically reduced the emissions intensity of our portfolio and all but eliminated our exposure to potential emissions from fossil fuel reserves.”

Whineray said the strategy has not cost anything in terms of returns in the six years it has been operating.

The next step was to move to an off-the-shelf index aligned with the Paris targets, resulting in a shift to the MSCI World Climate Paris Aligned Index and its Emerging Markets counterpart.

While the indices do a lot of the heavy lifting, they are just one part of a four-part strategy to respond to climate change, including analysis, engagement and investing in the transition. The Fund is now incorporating ESG and Net Zero considerations into the next biggest chunk  in its portfolio, multifactor equities. Whineray said experience so far has strengthened the Guardians’ belief that investment managers can incorporate ESG standards without significantly reducing market exposures or increasing tracking error.

In 2021, the Fund shifted from a responsible to sustainable investment approach and while this might sound semantic, Whineray said, it’s not. “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. It is, and will always be, a work in progress.”

Navigating political challenge

Identifying the existence of externalities is one thing, how to practically navigate the political challenges to incorporating those externalities in the economy is another. Whineray said 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 environmental objectives.

“From a narrow ‘profit-maximisation’ perspective, this activity can be rationalised. It is a particularly insidious activity. 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.”

Whineray said other systemic risks are emerging: loss of biodiversity, anti-microbial resistance, persistent inequality and consequent social instability, to name a few. “The systemic nature of these risks means that investors like the NZ Super Fund, a universal owner with a very long horizon, can’t stock pick our way around these problems, or diversify away from them – they are innate to the system.

“We need to step 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.”

He said political polarisation has extended to the world of sustainable finance, with ESG being weaponised in countries such as the US.

“These are difficult times, but I’m optimistic we already have most of the solutions we need. We have the tools. The answers are in our hands. We just need to turn our commitments into action.”

Tags: ESG

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