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.
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