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RI Interview: Matt Whineray, CEO, NZ Super, on climate and the One Planet SWF initiative

The New Zealand fund is leading from the front on green investment with its bigger sovereign wealth fund peers.

When six of the world’s leading sovereign wealth funds (SWFs) with combined assets of more than $2 trillion dollars announced at French President, Emmanuel Macron’s One Planet summit in December 2017, the creation of a working group to look at climate change issues in their long-term investments, interest was high.
It was sparked as much by the names involved. Alongside the usual suspects on long-term sustainability: Norges Bank Investment Management (NBIM) and the New Zealand Superannuation Fund, came lesser associated SWFs: the Abu Dhabi Investment Authority, the Qatar Investment Authority, the Public Investment Fund of the Kingdom of Saudi Arabia and the Kuwait Investment Authority. They named their group the One Planet Sovereign Wealth Fund Working Group in homage to the conference where it was unveiled.
RI caught up with Matt Whineray, new CEO at the NZ Super Fund, at the International Forum for Sovereign Wealth Funds (IFSWF) conference in Marrakesh, to talk about the legacy of NZ Super’s own decisions on climate change during 2017, and get a sense of where that could lead the One Planet Group.
Whineray, the former CIO at NZ Super, took up the top spot after Adrian Orr resigned as CEO to become Governor of the Reserve Bank of New Zealand. The aimable Kiwi, a former investment banker, oversaw a series of potent returns for the fund as CIO, including a 19.8% tally for 2017.
Notably, returns held up through a sweeping new strategy announced in October 2016 to reduce its exposure to climate change risk and take advantage of investment opportunities presented by the energy transition, notably through engagement with companies, integrating carbon measures, targeted divestment of high-risk companies and reduction of other relevant portfolio exposures.A year later, in August 2017, the fund ditched 297 companies worth NZ$950m (€588m) to hedge its carbon exposure and announced that its entire NZ$14bn global passive equity portfolio, 40% of its overall assets, was now low-carbon. Whineray says that while NZ Super has transparency in its DNA as a state entity, there is a self interest in publication of its RI framework and climate response: “It means we don’t have to constantly repeat it all the time, and that we are having a debate around the right things. RI is deciding what you care about, what standard you need to care about it to, and then documenting the evidence that’s relevant to that. We want to make it really explicit how we make these decisions. Our job is to interpret the role of the people of New Zealand in the investment of the fund and then set out the framework so that people can understand what we do and why. We aim to be ‘principled’, although there’s pragmatism in there also, especially when it comes to exclusions, because you have to draw a line somewhere otherwise it doesn’t work.”
He says exclusions get all the media attention, but they are far from the most important part of its response to climate change: “What’s writ large in our climate strategy is to make the portfolio more resilient to climate change risks via four work streams: reduce, analyse, engage and search. The ‘reduce’ work, he says, is about lowering its exposure to what it thinks is ‘mispriced’ and where the fund is not getting paid for the risk it’s taking: “We’ve gone through two annual portfolio resets where we’ve taken carbon heavy stocks out of the listed equity portfolio, and applied that to emerging markets and equity factor mandates, so we’re progressively decarbonising the liquid listed part of the portfolio.”
However, he acknowledges that this will not change the global carbon outcome: “It might do something in terms of changing a company’s cost of capital a little bit. But in
reality, if you decarbonise a portfolio, you sell the shares, and they get bought other investors. What changes outcome is when new capital is directed to adaptation and transition to a low carbon energy system.”
To this end, the ‘search’ workstream is about market opportunities: “We have been active in developing wind and solar in the US, not just existing assets, but new ones. Anne-Maree O’Connor, our Head of Responsible Investing, is looking at how to think about financial returns with positive sustainability premiums.”
When One Planet was launched, its aim was to “accelerate efforts to integrated financial risks and opportunities related to climate change in the management of large, long-term asset pools”. It committed to developing an ESG framework to address climate change issues, include methods and indicators “that can inform investors’ priorities as shareholders and participants in financial markets” that it published in July based on three principles: alignment, ownership and integration.
A question that begs is whether SWFs could be financial instruments of the political climate commitments (Nationally Determined Contributions) made by their governments in Paris back in 2015.
The Santiago Principles signed by many SWFs commit them to invest on a commercial, not political basis. Whineray says an overt political stance could be inconsistent: “That said, we think that these investments are commercially viable and that’s why we allocate capital. The reality though is that investors need to come to these as commercial investments. The real issue is scale, and making these investments genuinely incremental in impact as opposed to dressed up and ‘feel-good’ for the annual report.He says the point of One Planet was to provide this practical application on climate for SWFs and actually make a difference to their investment: “So often these things end up being nice proclamations, but it doesn’t do anything. We are fortunate in a sense with our membership of One Planet that we’ve already done a lot – alignment, ownership, integration – but it’s a ‘forever’ strategy, a ‘growth of the future strategy’ and we will always be thinking about we incorporate these risks into the investment analysis as they change, and how we invest with companies as a result.” Whineray says NZ Super’s role within One Planet, is, as a result, ‘elucidation’ of what the alignment, ownership and integration intentions actually mean: “When we launched the Paris framework I did a session with the other heads of the funds to outline what we are doing. I created a climate change decision tree, for investors to make systematic decisions based on policy/data and to question whether a particular climate issue is an investment risk – in relation to all other risks – and whether that climate risk is in the price. Most people believe that markets are relatively good at pricing, using all available information. We think that’s right, but not 100% of the time. And, particularly in relation to climate change we don’t think that the market does a good job. We think it underprices the risk, and we think that is because there’s lot of different facets to those risks and a big time lapse issue akin to Mark Carney’s Tragedy of the Horizon. The next question is whether you can get a grip on this from a quantative perspective to actually do something. Markets may be ineffecient, but you may not always be able to take advantage of them. However, we think you can, and as a result we have gone down a particular path.” He says the decision tree can take a
fund down a different route: “Some investors may think that it’s all in the price, but they’d still want companies to be reporting to the Taskforce on Climate Related Financial Disclosure (TCFD) because they want to see that information in the market.” In turn, he acknowledges that there are many reasons ‘not’ to do something: “You might think the data is a bit ropey, or that carbon emissions accounting is not including Scope 3 data. But you can’t sit and wait for the data to be perfect.”
He compares the debate to that of the equity risk premium: “Why does it exist? What’s its range over time? There’s a massive amount of uncertainty over that. Yet, everyone is relying on it for their portfolios. If you said, I’m not going to invest based on the equity risk premium without a clear knowledge of its bounded range of outcomes, then you’d be waiting for a long time. It’s the same with climate in our view.”
In terms of One Planet, the funds have met several times in the last year, but Whineray acknowledges that the two trillion dollar question is ‘so-what?’ to the activity so far: “The key, of course, is getting the investment people internally thinking about this in terms of making a difference to investment decisions, whether that’s in portfolio construction, engagement with managers or with companies. It takes quite a bit of effort.”
Looking closer to home, Whineray points to examples where policy is shifting quickly: “New Zealand is consulting on its Zero Carbon Bill (to get New Zealand tozero carbon by 2050), and part of that is about how you create pathways to get there. i.e. chunk it up into 5-yearly pieces and set some carbon budgets. Of course, then as a country you have to have a hard look at what your CO2 emissions profile is: for us in NZ it’s mostly transportation and agriculture. The vast majority of our electricity is renewables – geothermal and hydro.” He points also to the Australasian initiative to match the European Sustainable Finance Action Plan as a potential route for clearer policy settings.
The biggest risk, however, he says is what Mark Carney called “proper pricing of pollution”. “Adrian Orr puts it nicely: if we could talk about ‘pollution’ rather than climate change, then we’d see quicker action. You can’t be ‘for’ pollution and we’ve got that right now.”
On the subject of emissions pricing, Whineray says one difficulty could be whether in times of economic difficulty policy makers hold the line: “Either way, extreme weather events are certainly focusing people’s minds! You have physical climate change risks, tech and policy/pricing risks; and you don’t know which of those is going to manifest the soonest. We think policy could change quickly. Technology also is certainly getting quick boosts by cost/pricing isues; and then people innovate to avoid/exploit cost. Look at the cost of solar in Africa and what that’s meaning for energy provision there. We are at the point where high awareness of these issues is now critical to long-term institutional investors.”