Investment
Climate change investment strategy
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The New Zealand Superannuation Fund was established to help reduce the future tax burden of universal pensions for New Zealanders.

We began considering the implications of climate change more than 10 years ago. Over time our analysis, supported by independent research, determined that climate change is an investment risk and, as a prudent investor, that we needed to address that risk. We therefore developed a climate change investment strategy. This paper sets out our strategy, how we have implemented it and some of the frameworks we have used.

Matt Whineray, chief executive officer, NZSF

Why we started to think about climate change

Climate change represents one of the largest economic and political challenges of the 21st century. Nations, individually and collectively, are developing policy responses to mitigate or manage the risks posed to society.

The context has moved on from debate about the science of climate change to action. As international policy commitments have strengthened, discussions about the implications of climate change for investors and asset owners have deepened.

The combination of policy commitments, technological advances, and societal preferences mean that global energy systems will change over coming decades. The world will become less reliant on fossil fuels. When and how these changes occur is uncertain.

At the Guardians, we began to consider our responsibilities in relation to climate change more than 10 years ago when we joined the international Carbon Disclosure Project, which encourages business to measure and understand their environmental impact. In following years our focus was on considering how climate-related risks might affect the fund and future returns. We considered climate change from a thematic perspective, which led to a strategy to invest in alternative energies. We also worked from first principles, considering our obligations under our investment mandate and what an analytical approach to the impact of climate change on global investment would reveal.

Along with a group of other investors, the Guardians commissioned global investment consultants Mercer to provide an analysis of climate change scenarios on portfolio risks and returns. The model looked at the impact on returns over a horizon of 35 years, to 2050, based on different scenarios.

Based on this and other academic and industry research, we concluded that the market currently underprices carbon risks-a shorthand for the various risks posed by the impact of climate change-over the long time horizon that matters for the Guardians' investment purposes. As a prudent investor that avoids undue risk, we need to address these climate-related risks.

In 2016, we announced a strategy with a goal to make the portfolio more resilient to these risks. One element of the strategy meant we reduced our holdings in some segments of the market through which we were most exposed to climate change risk. Specific targets were set to reduce the carbon emissions intensity of the fund and potential emissions from reserves by 2020. The result is that the fund's carbon foot-print is measured each year so that we can track progress against our targets to reduce its exposure to emissions and carbon reserves.

 

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