The climate change shift
NZ Super is assessing the risks and opportunities posed by climate change.
Two reports released on Wednesday, outline New Zealand’s opportunities and risks in two crucial areas of the global transformation to a low carbon economy.
The NZ Superannuation Fund described how it would apply climate change assessments to its entire investment strategy; and the Parliamentary Commissioner for the Environment detailed our issues with agricultural greenhouse gases.
The two reports are closely related. Agriculture is responsible for half our emissions. Massive investment is urgently needed to turn them from a grave economic risk to a great business opportunity.
Given the complexities of both areas, this column will focus on the Super Fund; and next week’s on agriculture, and the synergy between the two.
The Paris commitment by 193 countries to cut their emissions comes into effect on November 4. This is astonishingly fast. When it was agreed last December, the best guess for implementation was 2020.
A rapid shift to a low-carbon economy could ‘‘materially damage financial stability’’, Mark Carney, governor of the Bank of England, warned recently. Yet, world leaders had a ‘‘historic chance to mainstream climate finance and turn risk into opportunity.’’ His speech is at nz2050.com/CarneyGreen
As chair of the G20’s Financial Stability Board, he pushed for the creation of the Taskforce of Climate-related Financial Disclosures, www.fsb-tcfd.org. It will deliver comprehensive proposals for corporate disclosure of their climate risks and responses in its final report due by year-end.
Some leaders in this burgeoning field are sovereign wealth and pension funds.
NZ Super was in the group of such funds that commissioned analysis on climate risks and opportunities last year from Mercer, the global investment adviser. The report, nz2050.com/ MercerClimate, laid out in broad terms how funds might respond.
This week, the Super Fund described its four-part approach, which it said was ‘‘a significant and fundamental shift’’ in its strategy.
Its first step has measured the carbon footprint of its entire portfolio against a global investment benchmark, available at nz2050.com/NZsuperCarbon
This shows that 83 per cent of the portfolio’s emissions come from companies representing only 16 per cent by value of its investments. Almost all are in utilities, mining and materials, and energy.
The second approach is to reduce the portfolio’s carbon intensity faster than the benchmark does. It has set no goals given the unknowns around decarbonisation but it will report its progress from 2017. Armed with this knowledge of its carbon exposure, the fund will seek to better price risk and reward.
Third, it will divest from a few companies. But it believes its biggest opportunity is shareholder engagement with companies to get them to move faster on carbon reduction. Fourth, it will increase its investment in clean technologies.
While this strategy represents progress, it has major weaknesses. The carbon footprints only count the emissions an oil company or carmaker generates making its products. If doesn’t include the far greater emissions created when consumers use those products.
Such benchmarking has a narrow financial focus that might cause investors to miss the radical shifts that could rapidly destroy the value of an investment, or conversely to miss big opportunities in new technologies.
It seems highly improbable that NZ Super and similar funds, however large, will persuade Exxon-Mobil, for example, to transition from hydrocarbons.
Above all, NZ Super is simply bean-counting. It believes it can fine-tune risk and reward to benefit from climate change.
This is not an ethical approach. NZ Super’s lack of such foresight means it invests in conventional farming and forestry here, when those sectors face some of the greatest disruptions from climate change and new technology.
NZ Super is simply bean-counting.