New Zealand Super Fund Shifts Passive Equities to Low Carbon

The NZ$35 billion ($25.6 billion) New Zealand Superannuation Fund’s (NZ Super Fund) has moved its NZ$14 billion global passive equity portfolio, which accounts for 40% of the overall fund, into low-carbon investments. 

The fund said the  changes have significantly reduced its overall carbon footprint, and are a key part of the trustees’ strategy to address climate change investment risk. As of June 30, the fund’s total carbon emissions intensity is 19.6% lower, and its exposure to carbon reserves is 21.5% lower, than if the changes hadn’t been made.

The transition involved reallocating NZ$950 million away from companies with high exposure to carbon emissions and reserves into lower-risk companies. The fund said the move makes it more resilient to climate change investment risks.

“There is a global consensus that climate change presents material risks for long-term investors,” said Adrian Orr, chief executive of the NZ Super Fund. “Leading investors around the world are adjusting their portfolios to address climate change risk and capture opportunities stemming from the transition to a low-carbon economy.”

The low-carbon portfolio is based on a carbon measurement methodology for listed equities developed by the fund’s trustees in concert with MSCI ESG Research. MSCI ESG Research also provided independent carbon data and company ratings.

Despite the shift, the fund said it will still hold some companies in its passive portfolio that have a high exposure to carbon emissions and reserves. It said it would limit its investment in these companies to ones  that have been rated better than their peers by MSCI ESG Research, and where there is “evidence of strong management engagement with the challenge of climate change.”

Matt Whineray, NZ Super Fund’s CIO, said financial markets were under-pricing climate change risk over the fund’s long investment timeframe. “The global energy system is transitioning away from fossil fuels,” he said. “For investors with very long horizons, such as the fund, reducing exposure to carbon emissions and reserves is a low-cost insurance policy.”

Whineray added that the fund’s trustees also found that carbon exposures were highly concentrated in a relatively small group of companies. “By targeting this group we have been able to significantly reduce the fund’s carbon footprint while retaining the diversification benefits of passive investment,” he said.

“This will help us capture the upside from companies which are better placed to succeed within the rapidly-transforming energy sector,” said Whineray. “The bulk of the fund’s equity exposure is through its passive mandates, although the fund also still holds high-carbon stocks periodically due to the discretionary decisions of active managers.”

While the NZ Super Fund’s initial focus on reducing its carbon footprint has been with the passive portfolio, Whineray said the  next priority is to reduce carbon exposure in the fund’s  active investment strategies.

“We are also pushing ahead with other aspects of our climate change strategy,” said Whineray, “including incorporating climate change risk into our investment analysis, engaging with portfolio companies to promote better risk management, and identifying new investment opportunities from the global transition to a low-carbon economy.”