"In coming years the global energy system will transition away from fossil fuels. Some assets we invest in today may become uneconomic, made obsolete or face a dwindling market."
Orr said reducing the fund's exposure to these risks and to the physical impact of climate change would be good for the portfolio and were consistent with its mandate to maximise returns without undue risk.
The fund will also invest in alternative energy businesses as part of the strategy.
"Climate change, and the coming transition to a low-carbon energy system, also present investment opportunities for long-term investors that we intend to capture."
The fund will implement a four part strategy of carbon footprint reduction, analysis, engagement and searching for new investment opportunities and will be applied across the fund's porfolio.
Orr said it would significant reduce its exposure to both fossil fuel reserves and carbon emissions.
This would be achieved through ongoing engagement with companies, building carbon measures into the Guardians' investment model, targeted divestment of high-risk companies and reduction of other relevant portfolio exposures.
It would also incorporate climate change considerations into investment analyses and decisions such as valuation models, risk allocation and manager selection.
"We will continue to manage climate risks by being an active owner, including prioritising climate change engagements, developing our voting policy and directing our investment managers to vote according to our instructions on climate change resolutions," said Orr.
"Importantly, we will intensify our efforts to actively seek new investment opportunities in the areas of alternative energy, energy efficiency and transformational infrastructure."
It would report publicly on the levels of reduction in the fund's carbon footprint, for both carbon emissions and fossil fuel reserves, from 2017.
Orr said it would look to achieve a substantial reduction in both measures as soon as practicable, and seek further reductions over time.
The move was welcomed by responsible investment advocates.
Simon O'Connor, chief executive of the Responsible Investment Association of Australasia said the strategy responded to the reality of our changing climate with a strong and prudent set of actions to maintain the fund's resilience and to shore up the long term strength of the fund.
"It's pleasing to see the Fund acknowledging and committing to use the full suite of available tools to comprehensively respond to the risks posed by climate change in the Fund's portfolio: measuring carbon exposure, selective divestment, engaging with companies, voting shares, and seeking new low carbon investments.
"In light of strengthening global policy, the increasingly evident physical impacts of climate change, and the subsequent radical economic transformations underway, this strategy represents a strong beginning for the fund to play its part in New Zealand's climate change response, whilst creating a strong foundation for long term financial returns."
