The NZD47 billion NZ Super Fund has released a Climate Change Report into how it manages and assesses climate-related risk and opportunities in its portfolio.
The report is based on reporting recommendations from the Taskforce on Climate-related Financial Disclosures (TCFD) and also updates the Fund's emission reduction targets through to 2025.
"Climate change is an immensely challenging issue for investors, businesses, governments and communities all around the world," says NZ Super Fund CEO Matt Whineray.
"The NZ Super Fund operates with a long-term horizon, meaning we must factor in the impacts of climate change on the markets we invest in and the businesses we own. As the global energy system transitions away from fossil fuels, some assets might become obsolete, uneconomic or lose value. Similarly, changing weather patterns and extreme events might expose other investments to increased physical risks."
Recently the New Zealand government announced the country would become first in the world to require the financial sector, publicly listed companies and Crown Financial Institutions (including the NZ Super Fund) to report on climate risks, based on the TCFD framework.
NZ Super Fund's Climate Change Report follows this framework and is one example of what a disclosure report could look like for a large institutional investor (although legislative details are still being developed meaning future reports will be subject to refinement).
"We welcomed the Government's climate risk reporting requirements. The materiality of climate risk is accepted and therefore it is absolutely reasonable to seek better disclosure," says Whineray.
"Currently there is not enough information in the public domain about how entities in New Zealand are identifying, managing, governing and reporting on material business risks and opportunities related to climate change to enable investors to make informed decisions on this systemic issue."
NZ Super Fund's Climate Change Report covers the four main areas of the TCFD recommendations:
- Governance – including the board's oversight role and how management assess and manage climate-related risk and opportunities;
- Strategy – what climate-related risks and opportunities the Fund has identified over the short, medium and long-term, and their impact on strategy, financial and scenario planning;
- Risk Management – how the Fund's processes for identifying, assessing and managing climate-related risks are integrated into overall risk management, and;
- Metrics and Targets – the metrics used to assess climate-related risk, and the emission reduction targets set for the Fund.
One of the core elements of the NZ Super Fund Climate Change Investment Strategy is to reduce the carbon intensity of the Fund's investments and its exposure to fossil fuel reserves. In 2016, targets were set to reduce the Fund's emissions intensity by 20 percent and its exposure to potential emissions from fossil fuel reserves by 40 percent by 2020.
"We're proud to say we met our targets early. The aim of this strategy is to lower the entire Fund's exposure to investments that are most at risk from climate change policy, and to mitigate the risks during the transition to creating a low-carbon economy. We do this by removing from our portfolio those investments with the highest emissions intensity and potential emissions from reserves.
"Although still in an early stage, it's positive to note that after running the strategy for several years we haven't seen an adverse effect on performance. In fact, 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. So not only has this approach reduced what we considered to be an insufficiently rewarded risk, it has also added return.
"Having met our 2020 targets we have set new, more ambitious targets and now aim by 2025 to reduce the emissions intensity of our portfolio by 40 percent and fossil fuel reserves by 80 percent," says Whineray.
In addition to releasing the Climate Change Report, NZ Super Fund has announced it is being included in the UN Principles for Responsible Investment (UNPRI) Leaders Group 2020. This acknowledgement showcases the leadership of 36 top entities amongst UNPRI 3,500 signatories, with this year's recognition coming for climate reporting.
"I am delighted to congratulate the New Zealand Superannuation Fund for qualifying for the 2020 Leaders' Group, and to formally recognise your excellent disclosure and advanced efforts in this year's Leaders' Group theme: climate reporting," says UNPRI CEO Fiona Reynolds.
"I hope this recognition can help the New Zealand Superannuation Fund and our entire signatory base to keep raising the bar in responsible investment."
Click here to download a copy of the NZ Super Fund Climate Change Report 2020 and see a breakdown of the 2020 carbon footprint. https://www.nzsuperfund.nz/how-we-invest/balancing-risk-and-return/climate-change/
Click here for more information on the UNPRI Leaders Group initiative. https://www.unpri.org/the-pri-leaders-group/4771.article