Pension pot sceptical of fossil fuel companies' green pledges

22nd Sept. 2022

Two-fifths of the $57 billion pot is minimally managed, or passively invested, in an index fund. But that became harder to do when managers wanted to invest responsibly.

This article was originally featured on Stuff and was written by Olivia Wannan. 

Your pension will put less strain on the planet, after the NZ Super Fund began to exit investments in fossil fuel companies.

Two-fifths of the $57 billion pot is minimally managed, or passively invested, in an index fund. But that became harder to do when managers wanted to invest responsibly.

The Super Fund has now switched to index funds aligned with the goals of the Paris climate accord. However, managers went a step further: ensuring they put no pension cash into fossil fuel producers and owners of oil, gas and coal reserves.

The Super Fund will help pay for the rising costs of superannuation, particularly as the Baby Boomers enter retirement. The cash is invested in stocks and bonds, to achieve a healthy rate of return.

The $25b in the index fund brings good returns for low fees, said Super Fund responsible investment head Anne-Maree O’Connor​. Index funds allow cash to be efficiently invested across thousands of the world’s largest listed companies, offering relative financial safety, she added.

Before the July shift, the Super Fund invested with standard index funds run by MSCI. Super Fund managers then used environmental, social, and governance criteria to exclude certain companies – from high emitters to weapons manufacturers – and adjust the spread of their investments accordingly. “That’s a little bit complex.”

The launch of MSCI’s Climate Paris Aligned index funds – including one investing in global companies and another in emerging markets – reduced this vetting process.

The screening has been reduced, but not abandoned. For example, the MSCI index funds include some fossil fuel companies that have published net-zero, Paris Agreement-aligned goals. But the Super Fund decided to exclude these from its index portfolio.

Climate change posed a “tremendous, systemic” risk, O’Connor said. Fossil fuel reserves are particularly problematic, because their assets may get stranded as countries shift towards renewable energy.

Electricity generators that currently purchase fossil fuels, but have Paris-aligned plans to switch to renewables, remain in the mix, she added.

Barry Coates​ – the founder of responsible investment charity Mindful Money – was pleased to see the extra exclusions on all fossil fuel companies.

“We would encourage the other Crown financial institutions, particularly ACC, to follow the leadership.”

But he’d like to see the Super Fund move quickly into investing in carbon-cutting solutions.

Fossil fuel companies’ earnings have been up and down in recent years. Revenues plunged as the world locked down. After Russia invaded Ukraine, fossil fuel giants recorded record profits.

Over the long term, O’Connor said, the fund expected to make more money out of green investing.

Coates agreed. Mindful Money analysed US data over 10 years, and found oil and gas underperformed other funds. “There might be a short-term sugar hit from fossil fuels, but that’s not a good investment strategy.”

The switch reduced the number of listed companies invested in, from 8500 to 1100. The Super Fund will have a better chance of influencing a smaller number of companies, O’Connor said.

“There’s a case to be made for large shareholders engaging with the building materials sector, the utilities sector and even the oil and gas sector to change… The oil and gas industry is a challenging one to engage with, if there’s not strong evidence of action now.”

In the US, oil and gas companies, including BP and ExxonMobil, are being investigated by the House of Representatives for misleading the public about their commitments to reducing carbon emissions.

The Super Fund’s other $32b is in bonds or actively invested in publicly listed and private companies. The fund managers have been set targets to cut the carbon intensity of their portfolios, while still trying to beat the returns of the index fund.

Responsible investing in bonds is a complicated task, O’Connor said. “It’s something we’ll be working on.”

The new fund’s carbon footprint will be published next month.