New Zealand Super Fund is New Zealand’s sovereign wealth fund, established to help finance superannuation for future tax payers. The NZ Super Fund is globally recognised as a leader in responsible investment, driven by the belief that responsible investing is good for the portfolio, a source of opportunities and a way to control risk. We spoke with Anne-Maree O’Connor, Head of Responsible Investment, about the fund’s approach, achievements to date and eye to the future.
- What drives NZ Super’s interest in responsible investment?
At NZ Super Fund we have a number of core beliefs that underscore all of our investment decisions. One of these beliefs is that environmental, social and governance (ESG) factors are material to long-term returns, both as a source of opportunity and as a means of managing risk. As we see it, these benefits derive from avoiding the poor performance and enterprise failures that can arise from lax governance, and weak environmental and social practices. Put short, we are interested in responsible investment because we believe it is good for our portfolio.
Alongside this belief sits our responsibility as a sovereign investor. Our governing legislation requires us to invest the Fund in a manner that avoids prejudice to New Zealand’s reputation as a responsible member of the world community.
- How has your responsible investing engagement and strategy evolved over time?
The biggest change has been in how we conceive of the responsible investment function at NZ Super Fund. We realised that our responsible investment approach was less likely to succeed if it was regarded as a separate activity. Rather than being treated as a policy providing guidance that fed into investment decisions, responsible investment needed to be integrated into every step of our analysis and decision-making processes.
As part of this evolution in approach, we moved our responsible investment team into our investments business unit. We also changed its focus; rather than “doing” most of the RI work itself, the team now acts as an advisory unit or “centre of excellence” to the rest of the organisation. It works to set the frameworks, provide research, train and assist other teams, and provide the intellectual leadership to push RI out into all our activities, both internal and external. Our Responsible Investment Framework is updated as part of our formal policies and procedures approved by the Board. In this way we maintain a strong governance approach whilst embedding responsible investment into the DNA of the investment process.
- You have strong track record in shareholder engagement. Can you tell us about your approach and where it’s proven to be successful? Are there circumstances where it hasn’t been successful? Why?
Engaging with companies helps us to understand how they are managing ESG issues that may affect their business. It is a tool we can employ, as a share owner, to influence a company’s management if we identify that it is not adequately mitigating risks or adapting to opportunities.
Our engagement objectives are to monitor, identify and engage with companies which breach international standards of good practice, in particular the UN Global Compact. Our engagement can happen proactively, when we identify issues we believe companies should be aware of, or reactively, when we believe a company already has a problem.
Reactive engagement begins with screening the Fund to identify companies that have breached, or are reported to have breached, internationally recognised ESG standards. Our key source of information on potential or active breaches is our external research provider.
Our engagement activity then progresses to analysing company performance in problem areas, and investigating broader sources of information about the company’s activities. Where there is evidence that companies have breached international standards, or where there is a high risk of them doing so, our research provider adds the company to a “red list”. We prioritise engagement with companies on the red list by seeking further information to enable us to understand the nature, severity and possible duration of the breach. We look at the credibility of that information, and assess how successful we might be at getting the company to change the behavior underlying the breach. We also assess how much time, effort and money will be required to achieve that success.
Effective engagement can be hard; you need the resources, skills and language to make a difference in local markets. Appointing our external engagement provider, BMO, in May 2015 has expanded our engagement reach and allowed us to have an input into engagement activity that we would have been unable to carry out alone. We also rely on internal and external managers for some of our engagement.
More details on our engagement can be obtained from the RIAA engagement case study.
- How is the growing consumer awareness and demand for ethical and responsible investment impacting your organisation?
The NZ Super Fund is in a strong position to raise awareness of responsible investment issues among other fund managers and corporates, especially in New Zealand. Doing so can improve the performance of our investments by raising standards across the market, including through working with other investors in the area of corporate governance. Integration of ESG performance into company analysis has been evolving and growing in the market. This includes amongst fund managers in the listed and unlisted markets. The New Zealand Super Fund’s performance has helped to build an understanding that responsible investment can add value.
This includes around the use of exclusions, which was the focus of some of our earliest decisions at the Fund. A focus on using exclusions has recently been re-ignited in the New Zealand market, driven by customer expectations, much of which has come has a knock-on consequence of the New Zealand media’s KiwiSaver investigation of 2016 into investments in companies involved in cluster munitions. A number of KiwiSaver funds are now also applying exclusions.
- Given the obligations that institutional investors have as universal owners and their influence as a result of size, what do you believe is the significant action they can take to shift capital towards a safer climate?
Climate change presents material, uncompensated risks to long-term investors. Down the line, we expect the policy and technology response to be significant, with major impacts on sectors and economies. Assets presently delivering good returns may become uneconomic, obsolete, or face a dwindling market due to consumer preferences. This will create winners and losers over the long-term. By reducing exposure our to carbon-intensive investments now, we believe we have made the Fund more resilient to these risks. The Fund is actively focused on the investment opportunities that arise from the transition to a low-carbon economy. There will be an opportunity cost for those that do not pay sufficient attention to this transition.
- What are the biggest challenges you face in being a responsible investor?
The multiplicity of different types of investment and the degree of influence we have across different timeframes and for different levels or types of ownership. Integrating RI across our investments requires good governance frameworks, discipline, and teamwork.
- What emerging trends are you seeing in responsible investing and of relevance to institutional investors?
A convergence of business, financial sector, policy makers and action groups working together on long-term challenges such as climate change and sustainable development. Institutional investors have a role to play in these initiatives and should also be alert to the impact of these trends on the companies in which they invest and the expectations of those who invest with them.