NZ Super Fund seeks to put a market price on climate change with new risk rules

The New Zealand Superannuation Fund says it will devise a set of rules to assess investment winners and losers under climate change, a strategy that could rule out fossil fuels or producers such as current portfolio member Exxon Mobil.

Guardians of the Fund chief executive Adrian Orr was at pains not to name names. The strategy didn't mean NZ Super would avoid sectors per se but would assess investments on a case by case basis to see whether they needed to be risk-weighted for the effects of climate change.

Still, there were difficult choices ahead for some of the world's biggest companies, Mr Orr said. "Some of the largest multinationals are fossil fuel driven. They need to be thinking very hard about what they are doing with retained earnings."

"Economics is one of the ultimate expressions of the consumer and society's wants and needs," Mr Orr told BusinessDesk. "Some assets we invest in today may become uneconomic, made obsolete or face a dwindling market."

At August 31, some 41 percent of the funds were in North America, followed by Europe, then New Zealand and Australia – the four making up 84 percent of NZ Super's investments by value.

Its largest offshore equity holdings are Apple, at just 0.6 percent of the fund, followed by Alphabet, Microsoft and Exxon. Metlifecare was its biggest New Zealand exposure at 0.8 percent, followed by Fisher & Paykel Healthcare and Auckland International Airport. The top 10 include Meridian Energy, Contact Energy and Z Energy.

As at June 30, 2015, 7 percent of its equity portfolio had fossil fuel reserves while across all its investments, 5 percent by market cap had reserves.

NZ Super says most of its carbon exposure is in its global equity portfolio and an early step will be to target "high-risk" companies for divestment. There would be continuing assessment using quantitative rules that would see some holdings sold and others underweighted.

"Our focus is on reducing overall exposure to carbon emissions and fossil fuel reserves as efficiently as possible," Mr Orr says. "We aren't divesting from entire sectors as there is considerable divergence within sectors to climate risks."

The new investment risk policy was separate from its ethical investment rules, which rules out industries such as tobacco.

Mr Orr said within fossil fuels, NZ Super could improve the environmental footprint of its portfolio by moving down the emissions scale, such as migrating away from coal and oil in favour of natural gas.

"Our challenge is to make sure we remain open-minded to the opportunities and try to minimise the worst possible outcomes," he said. It's important to be concerned about the future. In the absence of that concern the change will not happen."

"It's really difficult to assess the costs and get agreement" for a concerted response, he said."We have to transition. It's about trying to get the combination of incentives and pricing right."

(BusinessDesk)