NZ Super fund makes climate investment move ahead of Paris Agreement, NZ politicians must step-up as well
Politicians and climate change advocates have made much about the Guardians of New Zealand Superannuation Fund announcement this week of including climate change risk and opportunities into its investment approach.
But sadly, the majority of them have missed the point.
The announcement had nothing to do with supporting a ‘zero carbon, fossil-fuel free world’ or fighting climate change.
It is a response to theParis Agreement, international climate treaty that is coming into force next month, 4th November. The Agreement is the signal that a significant market shift, at the planetary level, towards a fossil-fuel free world – is on.
The Super Fund has seen the signal, and acted without further delay.
But make no mistake, the new approach is not about pulling investments from ‘fossil fuel assets’ or put more into ‘green assets in support of the climate change issue. No, it is about assessing asset portfolios, how they will perform under the new market conditions, and deciding the best investment mix to gain maximum yield.
The bottom line is managing risk, maximizing opportunity, to gain the highest possible returns. It was never about supporting climate change as a humanitarian issue or taking a high moral ground stand. If it was, it would have divested investments from all fossil fuel assets – but the Fund didn’t.
Fund managers are in the business of making the most profit and those who lead them are visionaries of sorts. They would be similar to Oscar Wilde’s description: “A visionary is one who can find his way by moonlight, and see the dawn
before the rest of the world.”
And that is what’s happening here and why the Guardians approach reflects the fact there is no guarantee that the Paris Agreement will succeed. Nor if it succeeds, when will that be? Will the world be fossil-fuel free by 2100, or 2200, if at all? What about the fossil-fuel opportunities available now and the next decades, as evidence show the world will still be highly dependent on cheap fossil-fuels for a good while yet – hence there is still a lot of money to be made in the sector.
It is not buying too much into the global political leaders’ back-slapping and saviour of the world profile the Paris Agreement currently enjoys – that all of that will translate into high yields.
The handbrakes are half-on as the Paris Agreement goals are actually not enough to keep global temperatures below the 2C threshold scientists generally agree will avoid catastrophic climate warming. If all current pledges by 196 countries to reduce their emissions are met, it would actually keep temperatures to at best 2.7C.
Which is probably why the Fund’s CEO, Adrian Orr said, “To walk away from carbon might…make some individuals feel pleased with themselves, but it won’t make a squat of difference with regards to the actual climate change.”
As it stands, to transition away from fossil-fuels, the world needs an estimated US$1 trillion annually in investments to achieve the goals of the Paris Agreement.
Currently, global investment in clean energy is tracking at about US$300 to US$350 billion a year, which is far short of the Clean Trillion target needed to hit every year to 2050 to realize the Paris goals.
So there are still a lot of uncertainties. And that is what the Guardians announcement highlighted. And why it will not implement a ‘blanket exclusion’ of fossil fuel companies, as that would “rule out the possibility of engaging with firms in the sector that may be able to transition, and may have a role to play in transitioning to a low carbon economy.”
The point was underscored by Mr Orr, “Our task is not to create a low carbon world, our task is to manage this portfolio to maximize the return without undue risk.
“In coming years the global energy system will transition away from fossil fuels. Some assets we invest in today may become uneconomic, made obsolete or face a dwindling market.”
However, how fast and how much the Fund, increase its investments into fossil-fuel free assets will depend greatly on clear and positive progress made by politicians and policymakers.
As detailed by the Guardians of the Fund, their analyses so far show that “companies with higher carbon emissions are more at risk of regulatory measures, including carbon pricing.
“Companies owning fossil fuel reserves may see these assets devalue as policies are brought in to reduce emissions. It is not just the energy sector that is affected, however; climate change risk directly and indirectly influences other sectors through revenues, operations, expenses, supply chains and distribution.”
This is the success pathway highlighted by climate advocate Ceres, “meeting the Clean Trillion goal will be a tremendous challenge, but it is achievable if businesses, investors and policymakers join forces.”
Now that the ‘businesses and investors’ are committing to the Paris Agreement, politicians and policymakers need to up their game for the long haul to raise the country’s ambition to reduce further its greenhouse gas emissions. By doing that, the Super Fund, and potentially others, will follow and take advantage of the opportunities while reducing risk to climate change.
The Fund outlined its two-pronged divestment approach to reducing exposure (i) to fossil fuel reserves, and (ii) carbon emissions.
“We will do this by targeting divestment at high risk companies in the equity portfolio, and through tailored reduction of other relevant exposures.
“This will result in the portfolio being divested from high risk companies based on their exposure to fossil fuel reserves and carbon emissions, and potentially to other carbon risk measures as these develop over time.
“This process will be developed in-house and customised to the Fund’s portfolio. We believe we can materially reduce climate risk from our portfolio through this approach. It gives us flexibility, allowing a thoughtful and customised approach.”
The onus of success is now firmly on politicians to drive policies that will increase approaches like the Super Fund.
Policies work and have proven to generate savings.
In a report released this month, the International Energy Agency (IEA) said, “Last year, car and truck fuel-economy standards around the world saved 2.3 million barrels of fuel per day. That’s 2.5% of global oil demand, which is roughly equal to the annual oil production of Brazil.
“Vehicle efficiency standards now cover 74% of car sales worldwide, but progress has varied between countries.
If best-in-class standards had been adopted around the world, oil savings would have jumped to 4.3 million barrels per day in 2015. This matches the oil production of Canada – the fourth largest oil producer in the world.
It is this momentum and commitment to action that policymakers now need to bring to the table in order for the Paris Agreement to have at least a chance of success.
And out of all the politicians that grabbed for the political oxygen, Su’a William Sio was closest to the mark about what the Super Fund was announcing, and the where politicians need to focus to work together with the private sector.
“Climate change is the most defining issue of our time. It requires everyone to get on board and to put our shoulder to the wheel to address it,” he told Pacific Guardians yesterday.
“We need a Parliamentary multi-partisan approach so that we can quickly agree on common ground and work towards achieving consensus on other matters where we differ. A united approach from New Zealand would benefit the Pacific.
“The Pacific needs a strong advocate in the international arena and New Zealand is well position to play an effective role provided we can ensure our integrity in our approach to climate change.”