Government could take a more hands-on role in mandating environmental, social and governance (ESG) strategies for state-owned investment funds under a new ‘framework’ laid down last week.
The just-released ‘responsible investment framework’ sets tough new climate change portfolio targets for the Crown Financial Institutions (CFIs) in line with recent legislation.
CFIs are exempt from the Financial Sector (Climate-related Disclosures and Other Matters) Amendment Act that passed through parliament last week, however, the government said at the time it would align state investment funds with the new legislation via ‘letters of expectation’.
In addition to tying CFI climate-reporting to new legal standards currently under construction by the External Reporting Board, the government letter – sent last week – also mirrors the law’s ambit-expanding powers to broader ESG issues.
The letter, signed by Grant Robertson and Carmel Sepuloni, respective Finance and Accident Compensation Corporation (ACC) Ministers, says: “… we reserve the right to evolve the Framework to other aspects of Environmental, Social and Governance (ESG) factors where Government policy sets the basis of society’s expectations of responsible investment practice.”
Currently, the CFI cohort is limited to those four funds with at least $1 billion under management: the almost $60 billion NZ Superannuation Fund; the ACC fund ($50 billion); the Government Superannuation Fund ($5.2 billion); and, the National Provident Fund ($2 billion).
Commerce Minister David Clark told parliament during the climate law debate that the government also gave an “undertaking that if the Earthquake Commission fund reaches a billion dollars, it too will be required through the letter of expectation process to do the same thing”.
The government reporting framework follows a ‘principles-based’ approach “to enable flexibility of individual CFI investment strategies while moving towards the overarching policy objective” of a carbon neutral NZ by 2050.
“We recognise the importance of this flexibility to deliver on dual financial and responsible investment objectives over time,” the letter says. “However, you should ensure that progress is transparent. You should measure and report carbon footprint metrics for your investment portfolios clearly, and in the case of fossil fuel reserve owners, also account for emissions from the end-use of their products. “
The government “enduring letter of expectations” further requires the CFIs drive change among local NZ business and investors towards low-carbon initiatives.
“You should actively seek all opportunities to drive the climate transition, from education to active engagement to investment into climate solutions where there is consistency with your investment strategy(s),” the letter says.
The CFIs will have to reply by the end of this December, detailing how they intend to comply with the framework over the next five years.
“You should refresh your commitments regularly, initially prior to 1 January 2025 and within five years after that date,” the letter says. “The intention of regularly updating your commitments is to remain current with evolving expectations of global best practice commitments.”
In a joint response, the four CFIs note they have agreed to shift their portfolios to meet the 2050 net zero emissions goal.
“All four investors have joined the Paris Aligned Investment Initiative’s Net Zero Asset Owners Commitment, under which they will make reductions in portfolio carbon footprint in line with a globally-accepted pathway,” the CFI reply says. “The investors will publicly report on the reductions they have made using common metrics.”