The NZ Superannuation Fund (NZS) is overhauling its 10-year old responsible investment (RI) strategy to stay on track with global best practice.
In its ‘Climate change report’ published last week, the NZS says the fund had launched a project dubbed ‘Resetting the Responsible Investment Compass’.
According to the NZS paper, the RI rethink – steered by chief investment officer, Stephen Gilmour, and head of responsible investment, Anne-Maree O’Connor – would consider whether its current strategy “(including climate change) is future-proofed given ongoing global and domestic developments”.
A NZ spokesperson said over the last decade “RI approaches have evolved, new tools and methodologies are emerging, and expectations regarding the role of investors on social and environmental issues are changing”.
“The project objectives are to develop an RI strategy that is fit for the future, feasible to implement, and to set forward-looking expectations based on new developments that have been happening around the world.”
Last year’s Willis Towers Watson (WTW) review of NZS also recommended the fund should allocate more resources to RI.
While the NZS kicked back against some WTW recommendations, it had adopted many, as outlined in an updated response to the review this July.
“We have increased the size of the Responsible Investment team, with recruitment of an additional full-time RI professional, increasing the RI team to four (recruitment is still under way),” the NZS response says. “In addition, we have had a summer internship, which has been extended part-time basis for six-months to September 2020. Resourcing requirements for RI will continued to be monitored.”
Under new measures outlined in the NZS climate change report, the $47 billion fund would double its carbon reduction targets over the next five years.
Matt Whineray, NZS chief, says in the report: “In 2016, we set targets to reduce the Fund’s emissions intensity by 20% and its ownership of fossil fuel reserves by 40% by 2020. Having met these targets, we have set new, more ambitious ones: to reduce the Fund’s emissions intensity by 40% and fossil fuel reserves by 80% by 2025.”
To date, the NZS has resized the portfolio carbon footprint primarily via its equities exposure (which represents about 80 per cent of the total) – both through the passive global shares mandates and third-party managers.
The paper says the NZS aims to annually update the portfolio carbon footprint across the whole fund.
“… however, we do not currently consider bonds, positions which are market neutral over the long term or investments which have no clear carbon footprint like life settlements and natural catastrophe insurance,” the report says. “We recognise that our methodology is not perfect and will review this if it is appropriate to include our other investments as carbon accounting methodologies evolve.”
Despite the imperfections, the NZS decarbonisation approach had spiced up portfolio returns since the policy was introduced in 2016, Whineray said in a release.
“… the carbon exclusion policy has added approximately NZD800 million to the Fund and about 60 basis points per annum to performance since it was brought in,” he said. “So not only has this approach reduced what we considered to be an insufficiently rewarded risk, it has also added return.”
The $800 million performance boost reflects what the NZS carbon-lite reference portfolio return compared to the original settings since 2017.
“The benefit to the actual portfolio comes because we replicate the low carbon exclusions in our actual portfolio – essentially the stocks we have sold have performed worse than the stocks we bought to replace them,” the spokesperson said.
The NZS is due to publish its annual report in a week or so.