NZ Super Fund shifts $25 billion to low carbon indices in sustainability push
POSTED ON: 14 September 2022
The NZ Super Fund has shifted about 40% of its overall investment portfolio to market indices that align with the Paris Agreement, the international climate change treaty.
The changes apply to the Fund’s index-tracking Reference Portfolio benchmark and its corresponding $25 billion of passive investments in global equities.
Chief Investment Officer Stephen Gilmore says: “In addition to alignment with climate goals, we expect these new indices to deliver better environmental, social and governance (ESG) metrics across the board.”
The changes will further reduce the Fund’s exposure to carbon emissions. They will also significantly reduce the number of publicly listed companies that the Fund owns directly. “A smaller, more concentrated portfolio will be cheaper to run, and more manageable for us when looking to identify and engage on responsible investment issues,” says Mr Gilmore.
“Making this shift in a way that will not have a detrimental impact on investment returns has been critical for us. The move follows many months of technical analysis weighing up a range of risk, return, cost and implementation considerations. We’re confident Fund performance will not be adversely affected and see both cost and efficiency benefits in the changes. The new indices provide a simple, off-the-shelf solution for our passive benchmark and holdings.”
The Fund first reduced its exposure to carbon emissions and reserves in 2017, using a bespoke methodology. Since then it has reduced Fund-wide emissions intensity by nearly 50% and no longer holds any material, long-term exposure to fossil fuel reserves, while Fund performance has remained strong. Earlier this year a study by the independent think-tank Global SWF found the NZ Super Fund, with an 11.79 per cent return over the past six years, was the top performing sovereign wealth fund globally.
The Fund is a signatory to the Paris Aligned Investment Initiative’s Net Zero Asset Owners Commitment, under which it has agreed to make reductions in portfolio carbon footprint in line with a globally-accepted pathway.
Mr Gilmore said the Fund would be reporting on progress towards net zero annually under a framework for the New Zealand Crown Financial Institutions, as agreed with the Minister of Finance last year.
The changeover to the MSCI World Climate Paris Aligned Index and the MSCI Emerging Markets Climate Paris Aligned Index commenced in June, with the new benchmark taking effect on 1 July 2022. The Fund previously tracked a custom version of the MSCI All Country World Investible Market Total Return Index. Implementation is now largely complete.
The Paris Aligned indices are designed to support investors seeking to reduce their exposure to transition and physical climate risks and who wish to pursue opportunities arising from the transition to a lower-carbon economy while aligning with the Paris Agreement requirements.
The MSCI World Climate Paris Aligned Index is based on the MSCI World Index, its parent index, and includes large and mid-cap securities across 23 developed market countries. The MSCI Emerging Markets Climate Paris Aligned Index is based on the MSCI Emerging Markets Index, its parent index, and includes large and mid-cap securities across 24 emerging market countries.
The Fund will continue to obtain some of its benchmark index exposure via derivative instruments where it is cost effective and efficient to do so.
Dr Charles Hyde, Head of Asset Allocation, will speak to the index changes at Top 1000 Funds’ Sustainability in Practice forum at Harvard University on 14 September 2022. Guardians’ CEO Matt Whineray is also speaking on the topic and the NZ Super Fund’s sustainable finance approach at the ANZ Māori Investor Forum being held in Auckland on 15 September.
Interested investment professionals, industry members and stakeholders will be able to learn more about the changes at an online briefing to be held by the Guardians following the release of its Annual Report in October (date to be advised).
Earlier this week NZ Super Fund reported it was worth $55.7 billion at 30 June 2022, down from approximately $59 billion at the end of the previous financial year (-6.99 percent – unaudited, after costs and before NZ tax). However, the Fund significantly out-performed its passive Reference Portfolio benchmark by 7.25 percent, generating a record $4.5 billion in value add, considerably reducing the impact of the broad market downturn.
A carbon footprint of the Fund and updated equity holdings list as at 30 June 2022 will be published in October 2022, in conjunction with the Guardians’ Annual Report.