The NZ Super Fund has shifted about $25 billion of passive equity investments into low carbon indexes as part of a push to more sustainable investment activity.
This means about 40% of the fund's overall investment portfolio has been moved to market indexes that align with the Paris Agreement, the international climate change treaty.
A statement from NZ Super said the changes apply to the fund’s index-tracking Reference Portfolio benchmark and its corresponding $25 billion of passive investments in global equities.
Earlier this week the fund reported that turbulent global financial markets saw it take a $3.3 billion hit to its value in the financial year to June 30, 2022.
The fund, set up to help out with the country's future pension requirements, stood at $55.7 billion, down from approximately $59 billion at the end of the previous financial year. It has subsequently grown to about $57 billion. But it has signalled that the days of "extraordinarily high returns" may be over.
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. Implementation is now largely complete.
The Fund previously tracked a custom version of the MSCI All Country World Investible Market Total Return Index.
NZ Super's chief investment officer Stephen Gilmore said that In addition to alignment with climate goals, the fund expects these new indexes to "deliver better environmental, social and governance (ESG) metrics across the board".
He said 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 NZ Super Fund first reduced its exposure to carbon emissions and reserves in 2017, using a bespoke methodology.
Since then it says 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% return over the past six years, was the top performing sovereign wealth fund globally.
As well as further reducing the fund’s exposure to carbon emissions, the latest moves will also significantly reduce the number of publicly listed companies that the fund has direct ownership in.
"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," Gilmore said.
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.
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.
NZ Super Fund said the Paris Aligned indexes 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 midcap 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 said it will continue to obtain some of its benchmark index exposure via derivative instruments "where it is cost effective and efficient to do so".
It will be publicly explaining the changes in its investments over coming days and weeks. This will include the fund's head of asset allocation Charles Hyde speaking to the changes at Top 1000 Funds’ Sustainability in Practice forum at Harvard University on September 14 and chief executive Matt Whineray speaking on the topic and the NZ Super Fund’s sustainable finance approach at the ANZ Māori Investor Forum in Auckland on September 15.
The fund said Interested investment professionals, industry members and stakeholders will be able to learn more about the changes at an online briefing to be held following the release of its annual Report in October on a date yet to be advised.
A carbon footprint of the fund and updated equity holdings list as at June 30, 2022 will be published in October 2022, in conjunction with the annual report.
45 Comments
No, the lesson learned in Europe, is that problems are mutlifaceted and just because a solution hits some of the right notes, doesn't mean you can ignore the other considerations.
Tearing down nuclear power plants and enabling yourself to get hooked on Russian gas has obvious geopolitical implications that clearly weren't given enough thought.
... fossil fuels , supermarkets .... the money to be made is in the industries governments revile the most ...
If you wanna feel good , invest in " green " ... you wont make much profit , but you'll enjoy a feeling of smug superiority ...
... if you want to get rich and reduce emissions : construct a nuclear power plant ....
Green energy is profitable because the wider economy is taxed to subsidise it, the ETS here for example, or green levies added to power bills in the UK, the amount of subsidies paid to Tesla by either US States or other car manufacturers.
I'm not sureI want to see the Super Fund as an active local investor. They should be a lean fund of funds set-up, allocating funds to world class experts. I really don't want to read about them as an ESG infrastructure investor, leave it to the Govt who are electorally accountable.
The fossil fuel industry is profitable because the wider economy is taxed to subsidise it, to the tune of more than US$500 billion per annum. The industry's profits are about double that each year, so half of their total earnings are subsidised by tax payers. They use some of that profit to buy the political system, to maintain and increase subsidies, and to undertake advertising and public relations, to maintain consumer acceptance.
How much subsidy is there to green energy and what is your source of information?
How much subsidy is there and has there been to the automotive industry in general (versus that specifically related to 'green' vehicles)?
Given that this past and ongoing subsidisation will be changing very soon, or we won't have a future where our investment returns can buy us anything worth having, and won't meet the Paris Agreement, it could well be that the Super Fund is deleveraging from an industry which is in for a much less profitable period than the past, and investing into a growth industry, i.e. making the best investment choices in terms of balancing of risk and reward.
https://dysonenergyservices.co.uk/what-is-the-green-levy/
https://www.ref.org.uk/ref-blog/370-offshore-wind-subsidies-per-mwh-gen….
https://www.latimes.com/business/la-fi-hy-musk-subsidies-20150531-story…
There is loads out there if you google it, your comments about fossil fuel are nonsensical. Petrol is virtually free in most producing nations, most Govt's tax it to the hilt.
Virtually free to buy, not to produce.
https://www.mfat.govt.nz/en/environment/fossil-fuel-subsidy-reform-ffsr…
https://www.imf.org/en/Publications/WP/Issues/2021/09/23/Still-Not-Gett…
https://www.nature.com/articles/d41586-021-02847-2 :
"Each year, governments around the world pour around half a trillion dollars into artificially lowering the price of fossil fuels — more than triple what renewables receive."
"Consumption subsidies, meanwhile, cut fuel prices for the end user, such as by fixing the price at the petrol pump so that it is less than the market rate. These are more common in lower-income countries — in some, they help people to get clean cooking fuel they couldn’t otherwise afford. In others, such as the Middle East, the subsidies are sometimes regarded as helping citizens to benefit from a country’s endowment of natural resources..."
PS I just followed your links. The Renewable Energy Foundation is an astroturf group set up by TV personality Noel Edmonds (associate of Mr Blobby) to oppose wind energy, and funded by Barclays Bank (the biggest funder of fossil fuel investments in Europe) and Calor Gas, a bottled gas company.
The LA Times article is from seven years ago, but I did know that Elon Musk was adept at milking government subsidies.
Kia ora - Conor from the Super Fund's communications team here. In response to the comments about performance - we’re confident these changes won’t have a significant detrimental effect on returns and that having a more concentrated portfolio will provide cost and efficiency benefits. Our analysis suggests that historically, the new benchmark indices would have delivered superior financial returns to our previous index. Our modelling also shows that the carbon reductions we have made since 2017 haven’t hurt the financial performance of the Fund.
Back in 2020 when Grant Robertson & Chris Faifoi decided that the NZ Super Fund needed to be free of fossil fuels , oil was just $US 20 per barrel ... its 5 times that , now ... because , however " green " & woke we wish to be , the real world runs on oil , and will continue to do so for decades to come ...
... therefore , I reject your theory that these moves in the NZ Super Fund won't affect performance .... we'll be poorer , but smuggier from these initiatives ...
Thank you for your response. It's not so much a "theory". As I say, we modelled the impact of the shift and found the Paris-aligned index would have delivered superior financial returns to our previous index. Our modelling also shows that the carbon reductions we have made since 2017 haven’t hurt the financial performance of the Fund. Hopefully this alleviates your concerns.
Hi fra99le - if by higher carbon investments you mean just the broad market without any carbon exclusions, then the answer is yes. We made the initial shift to a low-carbon portfolio in 2017 and our modelling of the performance of what our previous reference portfolio index would have delivered verse what our index with carbon exclusions did deliver shows it didn't hurt the financial performance of the Fund.
In terms of the additional shift to a Paris-aligned index, we compared its performance verse our existing Reference Portfolio MSCI index and found the former outperformed the latter.
Thanks Conor - but that's re-answering the question about past/present performance, which you already answered very well. What about any analysis of the risks associated with deleveraging from carbon-intensive investments vs remaining in them? For instance, one might assume that the world has to reduce carbon emissions and has made legal undertakings to do so, so therefore 'high-carbon' investments might take a hit as that reduction happens. Conversely, one might look at scenarios where there's a political shift and green industries are decimated by ideologues.
Hi fra99le,
Thanks for the follow up. Our current thinking is that the risk of climate change has not been properly factored into the market. As a long-term investor we have sought to de-risk the portfolio by reducing exposure to climate change emissions and reserves, thereby insulating it against the current and future energy shift.
We published an extensive paper into the underlying analysis as part of our original climate change investment strategy (that I think deals with your question). If you are interested, that work can be found here: https://www.nzsuperfund.nz/assets/documents-sys/Guardians-of-NZ-Super-C…
When I first read this I thought it was a subtle piece of satire, but having read the comments below, I guess it's not.
The Super Fund choosing to have a more concentrated portfolio and using historical fund performance to predict future performance...what could possibly go wrong.
Has the NZ Super Fund done a cost-benefit analysis on the Paris Agreement?
"It is found that Paris will deliver very little CO₂ or temperature reduction at a cost of $1 trillion–$2 trillion per year. While these reductions will have benefits, it is likely that the costs will vastly outweigh the benefits, with every $1 of cost achieving 11¢ of climate benefit."
https://www.sciencedirect.com/science/article/pii/S0040162520304157
"Not a single G20 country is in line with the Paris Agreement on climate, analysis shows"
https://edition.cnn.com/2021/09/15/world/climate-pledges-insufficient-c…
"... But what transformed that one-off shift in the relative price for energy into a global disaster was two decades of green-energy policy beforehand. In Europe, that includes a fixation on renewables incapable of powering industrial economies absent battery technologies that don’t exist, a refusal to tap domestic fossil-fuel reserves such as shale gas, and a deep and irrational hostility to nuclear power in many parts of the Continent.
This has created an energy system of dangerous rigidity and inefficiency incapable of adapting to a blow such as Russia’s partial exit from the European gas market. It’s almost inevitable that the imminent result will be a recession in Europe. We can only hope that it won’t also trigger a global financial crisis."
https://www.wsj.com/articles/the-coming-global-crisis-of-climate-policy…
The UK reached a tipping point a few weeks back, requiring a rescue package of circa NZ$400b to cap residential and some commercial energy prices over two years. They have also announced 130 exploration licenses for North Sea oil and fracking restarted. It is estimated just 10% of the UK's gas reserves would meet 50 years of gas needs.
There are some lessons here.
"Anything the U.S. does to reduce emissions won’t matter much to global temperatures. U.S. cuts will be swamped by the increases in India, Africa and especially China. Look no further than China’s boom in new coal-fired electricity.
...Since China signed the non-binding Paris pact, its coal-fired power capacity has increased by some 185 gigawatts, S&P Global Commodity Insights estimated earlier this summer.
...It estimates that, as of July 2022, China had some 258 coal-fired power stations—or some 515 individual units—proposed, permitted or under construction. If completed they would generate some 290 gigawatts, more than 60% of the world's total coal capacity under development.
Global Energy Monitor also reports that as of July China had 174 new coal mines or coal-mine expansions proposed, permitted or under construction that when complete would produce 596 million metric tonnes per year."
https://www.wsj.com/amp/articles/chinas-coal-power-boom-beijing-xi-jinp…
In general, when assessments such as these are done, its is really hard to be neutral because most people have some concept of desired outcome: a bias.
It would go right back to who is the Manager in charge of the study. Who the employing manager was and whether they had any bias in appointing staff. eg Was that job applicant asked about their opinion on climate change?
Probably.
If that applicant said: "I have yet to form a view on what proportion of these changes are due to humankind".
Would they get appointed? Probably not! Even in a (govt) financial institution.
Exactly, I see similarities beteen Net Zero and the Covid response. Centralised advice (WEF, WHO), sensationalised risk, Groupthink, virtue-signalling. Yes, we Green is good, but the transition must be orderly. Videos of people dropping on the street = flooding events.
There are also eerie similarities to how the fascists gained power in the 1930s. A succession of crises, each used to increase centralisation of power. The Monnet method is basically the same. Our own Dear Leader's utterances could have been written by Goebbels. There is the scary assumption that they know best, the mark of the smug, arrogant sociopath. All the mass murderers of the last century thought they knew best, too.
Recommended reading that goes into depth about how the fascists gained power: https://www.penguin.co.uk/books/442868/how-to-stop-fascism-by-mason-pau…
Not sure about that book
"The far right is on the rise across the world. From Modi's India to Bolsonaro's Brazil and Erdogan's Turkey, fascism is not a horror that we have left in the past; it is a recurring nightmare that is happening again - and we need to find a better way to fight it"
Fascism is politically agnostic, most of the major atrocities have been by the Left, with one obvious exception. It's totalitarianism.
Even if you end up disagreeing with it, it's still an excellent resource that I recommend reading. It documents what happened about 100 years ago in great detail and to me it's eerily similar to what has been happening in this century. 'History doesn't repeat itself, but it often rhymes' / 'Those who cannot remember the past are doomed to repeat it'.
https://www.rnz.co.nz/news/world/474737/switching-to-renewable-energy-c…
This is obviously the time to invest. It's all opportunity not cost.
"Well, if you seek “climate risk” to financial stability, look around you. It has arrived, although in exactly the opposite manner to what our current crop of eco-financiers predicted. Europe’s plight tells a tale that could become all too familiar in the U.S. soon.
The U.K. may be facing a wave of business bankruptcies exceeding anything witnessed during the post-2008 panic and recession. Some 100,000 firms could be forced into insolvency in coming months, bankruptcy consultancy Red Flag Alert warned this week. These are otherwise healthy firms with at least £1 million in annual revenue. Business failures on this scale would dwarf the roughly 65,000 firms of any size that went under from 2008-10.
The culprit is energy prices, which the consultancy believes could account directly for around one-quarter of the possible insolvencies. These prices are rising for British businesses in intervals of several hundred percent at a time and sometimes with steep deposit requirements from utilities that fear precisely a wave of bankruptcies."
https://www.wsj.com/articles/the-coming-global-crisis-of-climate-policy…
The more I think about it I don’t believe there can be an orderly transition from where we are today to where we need to be globally by 2050 in the first world economies with regard to climate change. There has to be some very large economy threatening or destroying events along the way. The comment above about energy prices leading to the liquidation of 100,000 businesses in the UK will be the beginning of further ‘restructuring’ of the economic framework of many more advanced economies at risk of very high energy prices. Especially in Europe. The next 9 months will tell a grim tale of what advances economies are facing as we look to wean ourselves off burning fossil fuels.
If the comment above about new and planned coal fired power stations and mines is even partially true I have even less confidence in being able to turn the tide against climate change. Let’s hope in Aotearoa at least we can mitigate against the future effects.
Biofuel its anti inflation in disguise ,another tool the RB hasnt considered ..if you can keep transport costs down you are winning the battle... I dont imagine the fund managers will be keen on it...even if your blending it your reducing prices...as we can see already with some outlets...
Because the price of tallow went form $ 400 /tonne to $ 2000 tonne. Because of biofuel use overseas.
to me , it seemed quite convienient for Z to say they tried it and didn't work .
The plant should be brought by a meat company , or fonterra , and tallow recovery increased to make it economic. I don't know about now ,but in my time at the meatworks , I could see tallow recovery could easily be doubled. then there are all the butcher shops / restaurants , etc , that currently pay to have their fat traps go to septic tank disposal . Or maybe just haul the fatbergs out of the sewers.
Biofuel is inevitable , Building a plant at Wiri was probably a lazy thought. Still much to be done and break throughs to be made but emission reduction targets wont be met by doing nothing. Construction costs wont be cheaper tomorrow either. Plenty of industries that could offset their emissions by embracing biofuel production. Reducing dependence on fossil fuels wont be an option at some point in time.
"Policymakers around the globe are seriously considering the risks that climate change could pose to banks and the financial systems they anchor.
How Bad Are Weather Disasters for Banks?
Abstract
Not very. We find that FEMA disasters over the last quarter century had insignificant or small effects on U.S. banks’ performance. This stability seems endogenous rather than a mere reflection of federal aid. Disasters increase loan demand, which offsets losses and actually boosts profits at larger banks. Local banks tend to avoid mortgage lending where floods are more common than official flood maps would predict, suggesting that local knowledge may also mitigate disaster impacts."
Is the backtest merely measuring a recursive function? Over the test period you would expect the "green" companies to do better if the concept of "green" investing was increasing in fashionability at the time.
Usually in financial markets, a price move generates a narrative story about why it happened. This appeals to brainy types who fall for well reasoned stories. They then buy some of the relevant asset and it goes up further, the narrative gets strengthened and eventually blossoms into an entire social philosophy. The finance professionals then fall for it sequencially, until the last fool has bought. Like Raoul Pal and crypto.
Isn't that probably where we are now? Have you controlled for the fashionability of "green" investing? What if it becomes unfashionable pdq?
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