NZ Super Fund not aiming for a zero carbon portfolio

Adrian Orr chief executive of the New Zealand Superannuation fund. Photo / Dean Purcell

The NZ Superannuation Fund is not aiming for a zero carbon portfolio and will keep investing in energy companies if they are making significant advances regarding climate change risk, says chief executive Adrian Orr.

"A zero carbon portfolio is something I can't really envision. I don't know what that would actually mean, which is why we have talked about reducing the emissions intensity. We are not talking about going to zero carbon," he told BusinessDesk in an interview.

Orr said the Super Fund has long signalled plans to reduce its exposure as it looks to manage the risks that could impact the fund, given its long term horizon. "Obviously, the environmental, societal and governance risks certainly impact us as we are here for the long term," he said. It defines carbon exposure as a combination of the portfolio's current emissions (emissions intensity) and potential future emissions (reserves).

According to the Super Fund, climate change presents material, uncompensated risks to long-term investors. Assets presently delivering good returns may become uneconomic, obsolete or face a dwindling market due to consumer preferences. Others may face regulatory hurdles, such as the introduction of carbon pricing or carbon limits. "Reducing exposure to carbon-intensive investments will make the Fund more resilient to these risks," it said.

The Super Fund today said it had taken specific steps to reduce the carbon exposure of its $14 billion passive equity portfolio by reallocating $950 million away from 297 companies with high exposure to carbon emissions and reserves into lower-risk companies. As a result, 40 per cent of the overall fund is now low-carbon. As at June 30, the fund's carbon emissions intensity is 19.6 per cent lower and its exposure to carbon reserves is 21.5 per cent lower than if the changes hadn't been made, it said.

Orr noted that a slight change in the portfolio weighting of different sectors had a significant impact on the emissions intensity. For example, its portfolio weight in utilities is now 3.6 per cent versus a prior 3.8 per cent but the emissions intensity has declined 17 per cent. In materials the weight is now 5.3 per cent versus a prior 5.7 per cent but the emissions intensity has declined 14.9 per cent.

While the fund has sold down its stake in some companies that invest in fossil reserves, Orr said it had no plans to exit all energy companies even if they are considered high emitters.

"You can leave some of the energy companies in, or all of them, even if they are high emitters, if they are truly are making significant advances in efficiencies, alternatives energies. They will be part of the future solution to all this," he said. Of the 297 companies it considered to have high exposure to carbon emissions and reserves, it retains stakes in 160 of them via active mandates.