NZ Super Fund leads sovereign investor sustainability charge
Despite being one of the younger sovereign wealth funds - established in 2001 - the New Zealand Superannuation Fund (NZ Super) is recognised by industry experts as a sophisticated institutional investor.
NZ Super recently achieved a perfect score on Global SWF’s 2023 GSR scoreboard that assesses the progress of various global investor firms around governance, sustainability, and resilience (GSR) since 2020.
NZ Super was also the best performing sovereign investor from 2013 to 2022, achieving a return of 12.1% in the ten-year period, according to data from Global SWF.
NZ Super
These results have validated the SWF’s investment team’s belief that they can advance sustainability outcomes while fulfilling the fund’s financial purpose and deliver strong returns, according to Lucas Kengmana, senior investment strategist, NZ Super.
“In 2021, our Board decided to move from a responsible investment approach to an approach based on the principles of sustainable finance, which entails explicitly considering the potential impact of our investments on society and the environment,” Kengmana told AsianInvestor.
“We assess the ESG risks of all our investments and engage with our portfolio companies and external managers regarding these issues on an ongoing basis. We also have a climate change investment strategy that seeks to reduce the Fund’s exposure to unpriced/underpriced climate risk.”
Good governance, sustainability, and resilience practices are critical to a company’s long-term success, he said.
“Encouraging companies to adopt best practice in these areas can only benefit their performance over the long term.”
SHIFTING THE BENCHMARK
Last year, the NZ Super Fund shifted about 40% of its overall investment portfolio to market indices that align with the Paris Agreement, the international climate change treaty.
The changes apply to the fund’s index-tracking Reference Portfolio benchmark and its corresponding $25 billion of passive investments in global equities.
“Shifting our passive global equity benchmark to new MSCI Paris-aligned indices last year was a very significant change for us,” Stephen Gilmore, chief investment officer, NZ Super told AsianInvestor.
NZ Super
In addition to helping the fund meet its net carbon-zero commitments, Gilmore expects that moving to the new indices will improve the environmental, social and governance profile of NZ Super’s global equities portfolio.
“Reducing the number of stocks we hold will make it cheaper to manage our portfolio effectively, and easier to identify and engage in sustainable investment issues. We’re happy with how the shift has gone to date,” said Gilmore.
NEW APPROACH
The $40 billion fund invests significantly overseas and in some complex asset classes such as private equity, timber and infrastructure and has grown by $3 billion in assets over the last three years.
The significant increase in the size of the fund and the related growth of its investment teams has also led to some changes in its approach to the approvals required for individual investments, according to Gilmore.
“For example, directors in the direct Investments team can now approve follow-on investments into existing assets and investment opportunities, up to a certain level,” he said.
Approval for investments into a new company or platform, however, remains with the chief investment officer.
“Follow-on investments into, and co-investments alongside, incumbent collective investment vehicles and investment management agreements can now be approved up to a certain value by directors in the external investments and partnerships team,” he said.
These changes are intended to empower members of NZ Super’s investment teams and increase their accountability while improving the fund’s scalability as an investor as its assets under management grow and ensure the decision to invest is being made by the person with the relevant knowledge and expertise, said Gilmore.
“Directors must ensure investments undergo the usual diligence process, including for sustainable investment considerations.”