- NZSF plans targeted divestments in carbon reduction plan
- IFSWF meeting of sovereign funds to run Nov. 8-11 in NZ
- Infrastructure investments remain difficult to source
New Zealand's sovereign wealth fund plans to protect its portfolio from climate change risks by cutting fossil fuel exposure and seeking greener investments, its chief executive said.
The NZ$31 billion ($22.71 billion) fund, established to support New Zealand's retirees, is hosting an annual meeting for some of the world's biggest sovereign funds in Auckland on Nov 8-11.
Climate change policy risks are expected to figure high on the agenda of the meeting, which will be attended by International Forum of Sovereign Wealth Funds (IFSWF) members such as China's CIC, Singapore's GIC and the Gulf's Abu Dhabi Investment Authority.
Adrian Orr, chief executive of the New Zealand Super Fund (NZSF) and chair of the international forum, said that by end-June 2017 his fund would have a target in place to reduce its carbon footprint. This would represent a "meaningful reduction in the tens of percent".
"We want to make the portfolio as climate resilient as we can," he said, speaking to Reuters by phone from New Zealand.
Climate change poses material risks for long-term investors if regulations to tackle global warming negatively impact asset valuations, such as those of fossil fuel producers, Orr said.
Along with targeted divestments of high-risk companies, the fund will engage with companies on their use of fossil fuels, and seek investment opportunities in alternative energies such as solar and wind, or energy-efficient technologies, Orr said.
"Exclusion isn't a panacea – fossil fuels will be a key part of any transition to sustainable energies," he said. "But you don't have to exclude a lot from the portfolio to dramatically change your carbon footprint."
Companies with fossil fuel reserves made up about seven percent of the fund's equity portfolio by market capitalisation at June 2015, whilst those with coal reserves represented another 1.2 percent by market cap.
Norway's SWF is already divesting from companies that get more than 30 percent of their business from coal. It has sold out of 52 firms this year and is looking to pull out of dozens more by the end of 2016.
Saudi Arabia is also stepping up efforts to diversify its economy and has made some bold investments in technology, to reduce its dependence on oil.
Orr said that whilst SWFs funded primarily by fossil fuel production were under pressure to diversify as quickly as possible, ultimately even index-tracking funds would have to act.
"Whether it comes through the voting population of a country or more likely through ongoing relative price changes because of industry and consumer demand, even the passive index providers will have to think very hard around their engagement with companies and their pollution exposure," he predicted.
LOW RETURNS Unlike SWFs in Russia, Norway or Kazakhstan, the NZSF is not facing drawdowns to close budget gaps as the government is only expected to start withdrawing money from around 2032-33 to support the ageing population.
Its returns have also remained resilient, delivering 13.6 percent over the 12 months to Sept. 30 after costs and before New Zealand taxes. The fund has diversified into assets such as forestry, rural farmland and catastrophe bonds. These securitise risk from the insurance market and can pay attractive yields.
However, most SWFs are struggling to hit their target returns in the current environment of lacklustre economic growth and low yields, another theme on the IFSWF's meeting agenda.
"The first challenge for SWFs is to communicate to the people who are dependent on their returns that this is a global phenomenon and if they are budgeting on 7-10 percent per annum nominal returns in the near term, they have to reconsider that," Orr said.
In recent years SWFs have been raising exposure to unlisted assets such as private equity and debt, infrastructure and real estate. Such investments often pay an illiquidity premium.
The NZSF has about three percent in infrastructure and five percent in private equity, but Orr said infrastructure investments remained difficult to source.
"Never have I seen such a global infrastructure deficit particularly in the OECD countries at a time when a lot of these governments are struggling financially, yet third party capital is struggling to get access," he said.
"The political will is needed to make it happen … but I don't see the world becoming more open to capital movements – quite the opposite." ($1 = 1.3652 New Zealand dollars)
