Climate Change Ngā panonitanga ā-Taiao
In late 2016, we announced a climate change strategy for the Fund, the result of several years’ work to identify:
- where carbon emissions and carbon reserves were concentrated in the Fund;
- how best to reduce exposure and carbon risk in the Fund; and
- where to focus our efforts in seeking additional low-carbon and climate-resilient investments that meet our risk-adjusted return requirements.
An important foundation for this work was the 2015 Mercer-led research study, Investing in a Time of Climate Change, which we co-funded.
We found that the bulk of the Fund’s exposure to carbon emissions was contained in our global equities portfolio. This is the largest part of the Fund and one with significant exposure to carbon-intensive sectors. Within this, we found that carbon exposures were highly concentrated in a relatively small group of companies.
Why did we need a strategy?
It is becoming increasingly clear that in coming years the global economy will transition away from fossil fuels for energy needs. Governments, technology and society are driving an energy transformation. The forces for change include national and global policy, investments in new energy technologies and pressure from society at large.
These forces are likely to disrupt all industries to different degrees, as energy is an input for all industries.
For investors, the shift to a low-carbon global economy creates investment opportunities and presents material risks. Some assets we invest in today may become ‘stranded’, rendered uneconomic by proper pricing of the carbon pollution externality, made obsolete by new technologies or face a dwindling market as consumers vote with their feet. Investors also need to consider the potential unpredictability of national and global policy initiatives.
Reducing the Fund’s exposure to these risks and to the physical impact of climate change is consistent with our mandate to maximise returns without undue risk to the Fund as a whole.
We believe that financial markets currently under-price carbon risk over the horizon that matters for the Guardians’ investment purposes. This gives long horizon investors like the Fund an advantage, as we only need to believe that changes will occur and can be less concerned with when they will occur.
We will report each year in our annual report on our progress towards meeting our 2020 targets and, from next year, against the guidelines published by the Task Force on Climate-Related Financial Disclosures.
For further information, including the Carbon Footprint, a Q&A and videos explaining the strategy and the transition to a low carbon passive equity portfolio, see our website.
Read our Climate Change case study (PDF 553KB)