Climate Change
Ngā panonitanga ā-Taiao

Given the Fund's long-term horizon and purpose, it is important that the risks and opportunities stemming from climate change are factored into our investment strategies and ownership practices.

In 2016/17, as part of our climate change strategy, we transitioned the Fund’s global passive equity portfolio (40% of the Fund) to a low-carbon approach. We also developed 2020 carbon reduction targets for the overall Fund. Here we provide an update on the climate change activities we undertook during 2017/18 and our progress towards the 2020 targets.

 

CARBON TARGETS

Measured relative to the original Reference Portfolio, by 2020:

  1. Reduce the carbon emissions intensity of the Fund by at least 20%
  2. Reduce the potential emissions from reserves of the Fund by at least 40%
 
Carbon emissions
intensity*
Potential emissions
from reserves**

2018

 -18.7% -32.1%

* Carbon emissions intensity is defined as measured tonnes CO2e/$m sales = tonnes of carbon emissions divided by $m of company sales. This measures the portfolio in terms of carbon emissions per unit of output and provides a measure of the overall efficiency of the portfolio by comparing emissions with the economic activity that produces them. This metric is robust to movements in market valuations.

**Fossil fuel reserves are defined as potential future emissions: measures tonnes CO2e/$m invested = tonnes of carbon emissions divided by $m invested. This measures the carbon equivalent emissions stored in fossil fuel reserves that would be released if those reserves were produced and used in the future, relative to dollars invested. MSCI ESG research calculates the potential emissions should all reserves be produced and burnt expressed as tonnes of CO2 equivalent using the Potsdam Institute methodology. This includes proved and probable reserves.

 

STRATEGY OVERVIEW

The aim of the climate change investment strategy is to improve investment resilience to climate change over the longterm horizon of the Fund. Climate change considerations are factored into the Guardians’ valuation investment decision making processes and governance structures on an ongoing basis. This entails managing and monitoring the Fund’s carbon exposure, managing climate-related risks, and seeking to take advantage of the investment opportunities arising from climate change action.

The Chief Executive Officer at the Guardians is ultimately responsible for the Fund’s strategy. The Chief Investment Officer (CIO) is responsible for the climate change investment strategy, with both the CIO and Head of Responsible Investment overseeing its implementation, and acting as project sponsors. The different elements of the strategy are integrated into the objectives of the relevant members of the investment team, with the heads of each team responsible for ensuring delivery.

Our climate change strategy has four work-streams, which together help to make our portfolio more resilient to climate related risks.

  • Reduce – implement rules and activities to reduce climate change risk in the passive listed equities portfolio and other relevant portfolios;
  • Analyse – implement framework to assist investment professionals in integrating climate change into valuations for active and prospective investments;
  • Engage – implement an engagement programme and voting policy on climate change;
  • Search – progress implementation of climate change opportunities identified.

 

IMPLEMENTATION UPDATE

REDUCE

After initially focusing on the Fund’s passive equity holdings, in 2017/18 our focus turned to reducing the carbon exposure of the Fund’s actively managed equity holdings. A low carbon approach was implemented within the Fund's emerging markets equities mandates. We will continue to work on reducing carbon exposure across other active mandates, focusing next on our factors mandates. We are also focusing on how emissions can be reduced across the Fund's unlisted assets.

ANALYSE

We completed a framework for investment professionals to incorporate climate change considerations into valuations. The objective is to ensure climate change risk for new and existing investments is assessed in a consistent and systematic manner by our investment professionals. This framework was approved by the Investment Committee and introduced to the wider investments team. It will be refined on an ongoing basis.

ENGAGE

The Responsible Investment (RI) and External Investments and Partnerships (EIP) teams together reviewed the engagement work conducted by our listed equity investment managers on climate change. In addition, as part of our ongoing responsible investment monitoring, all managers were asked about their climate change activities through Environmental Social and Governance (ESG) due diligence questions sent out in April 2018.

This year, we also brought our global voting activity in-house (previously, our external managers voted the shares they managed on our behalf). The change will help ensure we vote consistently on climate change related resolutions for the same company and in line with our voting guidelines on climate change. See page 62 of the Annual Report for more detail on our new voting practices.

We also:

  • made submissions to the NZ Productivity Commission Inquiry into the transition to a low emissions economy;
  • provided feedback on Business NZ’s submission to the Ministry of Business, Innovation and Entrepreneurship’s Climate Change Adaptation Options Report 
  • joined the Climate Action 100+’s five year initiative to engage with the world’s largest corporate greenhouse gas emitters to improve governance on climate change, curb emissions and strengthen climate-related financial disclosures; and
  • played a leading role in the formation of the One Planet Sovereign Wealth Fund Working Group. See page 63 of the Annual Report for further detail.

SEARCH

The Guardians' investment research clearing house, the New Opportunities Assessment Hub (NOAH), reviewed a number of climate-related opportunities. We continue to search for investments within our alternative energy opportunity set. This year, we invested in Rubicon Global, a waste management and technology platform, which aims to reduce emissions from waste by increasing recycling rates. More information about Rubicon is available here.

METRICS AND TARGETS

Carbon footprinting is a tool we use to measure carbon exposure across the whole of the Fund and to track our progress towards our 2020 carbon reduction targets.

Our 2018 carbon footprint assessment reported that the total Fund’s carbon emissions intensity is 18.7% lower than our baseline level, and its exposure to potential emissions from reserves is 32.1% lower.

We will report on the Fund’s footprint annually in order to track our progress. Our decarbonisation programme remains on track to achieve our 2020 carbon reduction targets.