NZ Super sets 3°C base case scenario and ups climate monitoring of external fund managers

Fund starts work on a range of climate scenarios and expands manager due diligence

The New Zealand Superannuation Fund says it has developed a “base case” global warming scenario of 3°C and expanded its monitoring of external asset managers’ commitment to its climate change aims.

The NZ$44bn (€25.3bn) fund explained it has started work on a common set of climate change scenarios: a central/base case of 3°C, a high case of 4°C and a low case of 2°C. These are “intended to span the range of outcomes to which most experts would assign a meaningful probability of occurring” and are intended to supplement its climate change valuation framework.

“An assessment of each external manager’s ability and commitment to adhering to our climate change objectives.”

The fund explained in its annual report released today (October 22) that, within each scenario, it distils the range of policy choices down to a single metric – the global carbon price (USD/tonne of CO2 ).

They’re not a forecast but represent the price of carbon needed to implement the change in energy mix that is required in order to achieve the specified climate outcomes.

Key assumptions underpinning the price are the adoption rates of new lower carbon technologies such as renewable power generation, electric vehicle uptake and carbon capture and storage.

It says the central case scenario is approximately in alignment with the global aggregation of current Nationally Determined Contributions (NDCs) – countries’ climate plans under the Paris Agreement.

It has also raised its scrutiny of its external fund managers, saying: “We also expanded our due diligence and manager monitoring processes to incorporate analysis of climate change factors, including an assessment of each external manager’s ability and commitment to adhering to our climate change objectives.”

In June 2017, NZ Super transitioned its NZ$14bn passive global equity portfolio (constituting 40% of the Fund) to low carbon, selling its passive holdings in 297 companies worth NZD950 million.But one climate focused investment, its US$100m backing of alternative energy firm Bloom has been “disappointing”. “Although the company has achieved growth in sales, its performance has lagged market expectations, and the investment performance has been disappointing,” NZ Super said.

In May, it hosted a climate change investment seminar with its New Zealand-based investment managers where it presented “deep dives” into its climate change scenario analysis and case studies on how it integrates climate change considerations.

The report also notes the response to the fund’s engagement with social media providers in the wake of the Christchurch attack in March has been “overwhelming”. The group has 89 participants, representing more than NZ$13trn. The engagement is being led by Senior Investment Strategist, Responsible Investment, Katie Beith, formerly of the PRI; NZ Super says the engagement will be undertaken in confidence and that milestones will be reported in future annual reports.

Also covered in the report is the introduction, in March 2019, of a new online platform providing full disclosure of all voting decisions.

It said: “Our voting, which we brought in-house last year, is guided by international standards such as the ICGN Global Governance Principles, the G20/OECD Principles of Corporate Governance and, for New Zealand listed companies, the New Zealand Corporate Governance Forum Guidelines and the NZX Code.” It is advised by proxy firm ISS and uses BMO for engagement.

The 225-page report also details the costs of managing its investments during the year: NZ$109.5m (or 0.27% of net assets); of this, external manager fees were NZ$31.3m.

The fund also announced that it has ended its legal action against the Bank of Portugal to recover its investment in Banco Espirito Santo (BES). While it believes it has a sound case it has decided to stop pursuing the case as to make a more “efficient use of the Guardians’ resources and capital”.