The $45 billion Accident Compensation Corporation (ACC) fund has followed the NZ Superannuation Fund (NZS) in aligning its global shares portfolio against a low-carbon index – albeit a different one.
In a benchmark revamp due to roll out over the next month, the ACC underlying global and Australian equities managers will report against new carbon-lite indices rather than broad market yardsticks.
As reported mid-September, the NZS radically reduced holdings in its $25 billion passive global equities exposure, selling down about 1,300 stocks to date as the reference portfolio shifted to new decarbonised benchmarks.
However, the ACC global and Australian shares holdings were unlikely to see much turnover post the index change, according to chief investment officer, Paul Dyer.
“It depends on how benchmark-aware the underlying managers are,” Dyer said. “Some of them are but others are more absolute return-style managers.”
As at 2019, the ACC external international equities managers included: Alliance Bernstein; Arrowstreet; Harding Loevner; Intermede Investment Partners; Marathon Asset Management; Orbis Investment Management; Paradice Investment Management; and, Wells Capital.
The ACC fund also awarded a $1.8 billion global shares mandate in 2020 to former CIO, Nicholas Bagnall, who took the previously in-house managed portfolio under the wing of his new firm, Te Ahumairangi Investment Management.
Under the revised benchmarks, ACC international equities managers will report against the MSCI ACWI Low Carbon Target Index (ACWI LCTI) while Australian share portfolios will use “the S&P/ASX 100 Bank & Low Carbon Adjusted Total Return Index and the S&P/ASX Small Cap Ordinaries Accumulation & Low Carbon Adjusted Index”, according to a statement.
“We changed to lower carbon benchmarks for New Zealand equities in May this year,” the release says.
ACC opted for a different global shares benchmark than NZ Super, which now uses MSCI Paris-aligned indices.
Dyer said the index switch reflected existing carbon reduction targets the ACC has attached to its offshore shares mandates.
“If we had done nothing then the managers would have been measured against all-stock benchmarks, which would have squeezed them into an impossible position,” he said.
About a third of the ACC’s now $45 billion portfolio is in actively managed equities: as at the end of June last year the fund allocated almost 25 per cent to global shares, 8 per cent in the NZ market and 4 per cent in Australasian stocks.
The fund manages all of the local shares and most of the Australian equities in-house.
Despite pressure to offload fossil fuel stocks in recent years, the ACC release says “divestment and exclusion can only be part of the answer”.
“Engagement is becoming increasingly important because companies are more likely to raise their climate ambitions if held to account by responsible investors such as ACC, rather than being owned and controlled by less climate conscious shareholders,” the statement says.
The ACC portfolio is skewed heavily to fixed income with just over half held in bonds as at the end of June last year: about 47 per cent in local government bonds and 4 per cent in global fixed income securities.
Carbon benchmarks do not yet apply to the fixed income component – and the ACC global bond exposure is small at any rate, Dyer said.
“Fixed income is less of a focus now [for carbon exposure] but it will become one,” he said. “Measuring the carbon footprint across debt is very complex.”
Dyer, who served as NZS chief investment officer from 2004 to 2008, replaced Bagnall in the ACC role late in 2020.