How well are KiwiSaver funds managing climate change risk?

by Rebecca Macfie / 02 August, 2017

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With global investment markets increasingly concerned about the financial impact of climate change and carbon risk, we wanted to know where New Zealand’s default Kiwisaver providers stand on the issue.

We asked the following questions:
  • What actions are you taking to disclose your Kiwisaver fund’s exposure to carbon risk?
  • How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?
  • Will you comply with the TCFD’s proposed voluntary disclosure regime?
  • How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

 We got the following written responses, reproduced here in full:

Fisher Funds

Fisher Funds has made a public commitment to reducing CO2 emissions by furthering our Responsible Investing policy to now exclude thermal coal producers – this is a first as far as we know by a New Zealand fund manager. This exclusion applies across all of our funds, includes any external managers that we engage with, and covers all asset classes, including fixed income and both our KiwiSaver schemes. The point being that clients do not have to opt in – this is an important signal of our view on the importance of this issue and, from our perspective, is a step in acknowledging the risks of investing in the worst carbon emitters.

What actions are you taking to disclose your Kiwisaver fund’s exposure to carbon risk?

At this stage, we have not been disclosing our KiwiSaver funds’ exposure to carbon to our clients – although this may change in time. However, we have been calculating these numbers internally for our own benchmarking purposes. The information is interesting.  We benchmark the carbon footprint of our international share portfolio against the MSCI All Country World index to get a sense of how our portfolio companies compare against the average. Based on our numbers, we have just over half the carbon footprint of the index*. 

*We measure the carbon footprint of our portfolio and the market based on information from MSCI ESG. Carbon metrics are measured from a combination of company reported data and MSCI ESG’s estimates. Carbon emissions measured include all greenhouse gases and are converted to a CO2 equivalent basis for reporting.  Using this approach the international share portfolio in the Fisher Funds KiwiSaver Growth Fund has just 52.8% of the emissions level of the commonly used international share benchmark index, the MSCI AC World Index.

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?

Fisher Funds has always had a clearly articulated investment approach where we focus on companies that have strong, sustainable business models and the ability to grow earnings over time irrespective of the economic environment. Because of this, we’ve tended to steer away from “smoke stack” style industries instead favouring parts of the market with secular growth drivers, like technology, healthcare and more modern industrial companies. Conversely, commodity companies with high carbon risk are typically not highly rated in our investment process. 

Will you comply with the TCFD’s proposed voluntary disclosure regime?

Right now, we have not determined our stance with regard to the TCFD voluntary disclosure regime although, as we highlight above, we have built a framework for considering our carbon footprint relative to the broader market. We are comfortable providing that information to clients or other stakeholders on an ad hoc basis.

How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

Carbon risk is just one of the many risks and opportunities that we consider when investing on behalf of our 230,000 KiwiSaver clients and is a risk we take seriously. We believe there are two ways manage this risk. First and foremost, we exclude investments in thermal coal producers from client portfolios under our Responsible Investing Policy. We believe this was a first for a KiwiSaver provider. This is an important first step and is a key protection for our investors from losses as carbon energy sources are phased out. The second element of protection, while less obvious, is in many ways more important. As an active manager we have the ability to hand pick our investments rather than having to slavishly follow passive benchmarks. This means we are selective. Our investment process seeks to identify high quality, growing companies with robust business models that will be sustainable over time. Companies with high levels of carbon emissions will likely fail this test and not be considered as portfolio candidates. The proof of this is in the pudding – our international share portfolio has just over half the level of carbon emissions as the MSCI AC World Index, a commonly used passive benchmark. 

AMP

“AMP incorporates environmental, social and governance (ESG) issues in the same balanced way we do with other key components which impact an investment’s performance, while at the same time we recognise the need to provide a range of investment options within our AMP KiwiSaver Scheme that reflect, support and balance the financial goals, values and investment beliefs of all our members. That’s why we offer AMP KiwiSaver Scheme members the choice to invest in a range of funds so they are able to choose the investment options that best suit their individual needs and savings goals. This includes access to AMP’s Responsible Investment Leaders Balanced (RIL) Fund, which was created for members who are particularly concerned with socially responsible investing. AMP is one of only three default KiwiSaver providers to offer members access to a responsible investment fund.

“The RIL fund is managed by AMP’s sister company and primary underlying fund manager AMP Capital, and incorporates ESG and ethical considerations into the investment process, with the overall objective of generating competitive returns for members within a sustainable and responsible framework. Some of the key ESG considerations are fossil fuels, including excluding high emission fossil fuels, and climate change, human rights and supply chain issues, unconventional gas, improved ESG disclosure and corporate governance. The RIL fund has been certified by Responsible Investment Association Australasia (RIAA) according to the strict operational and disclosure practices required under the Responsible Investment Certification Program.”

What actions are you taking to disclose your KiwiSaver fund’s exposure to carbon risk?

“AMP, through AMP Capital, has undertaken significant and extensive work to understand any potential risk, which is a complex and critical step requiring careful consideration to inform how it is best disclosed to members. In other words, while the long-term savings of members are best protected, we are well advanced on this journey and in taking action to disclose any exposure to carbon risk, and in the meantime we have enabled appropriate choice in that members who are particularly concerned with socially responsible investing have access to AMP’s Responsible Investment Leaders Balanced Fund. All members of the AMP KiwiSaver Scheme benefit from the efforts and work we continue to do to through our partnership with AMP Capital to address these global issues through proactive policies and initiatives (as outlined below). Some of the work is available at www.ampcapital.co.nz.”

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?

“Our primary underlying fund manager, AMP Capital, utilises a carbon footprint model to assess the potential value at risk as a result of carbon price, and a number of carbon prices are used to assess the sensitive of value at risk to the carbon price, which contributes to ensuring the long-term savings of AMP KiwiSaver Scheme members are best protected from any potential carbon risk. In addition, AMP Capital has sought to extend its analysis to assess the impact of ‘stranded assets’, or a substantial decrease in company valuations, as the result of significant change to fossil fuel use. The assessment of the impact to NZX50 was presented by AMP Capital to the RIAA conference in 2015, and they have undertaken similar analysis for the ASX200 and MSCI World Indices (http://www.ampcapital.co.nz/ampcapitalnz/media/contents/articles/investment%20insights/2016/2016-february_carbon-footprinting.pdf?ext=.pdf & http://www.ampcapital.co.nz/ampcapitalnz/media/contents/articles/investment%20insights/2016/2016-february-15_paris-climate-change-agreement.pdf?ext=.pdf).

“While the focus has been on risks that sit within equity portfolios, AMP Capital has also examined the risk in credit portfolios on a company-by-company basis, and has undertaken work considering the physical risk exposure, e.g. increased flood risk, and the potential for adaptation.”

Will you comply with the TCFD’s proposed voluntary disclosure regime?

“We are currently assessing how to best disclose any potential climate change risk, and through AMP Capital, we are working with the Investor Group on Climate Change (IGCC), of which AMP Capital was one of the founding members, to determine the most appropriate approach to do so, including in-depth consideration of the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD’s), which it’s important to note are still in draft form and therefore yet to be finalised.”

How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

“Backed by the strength of AMP’s overall proposition, members are well positioned to reach their retirement income goals. Specifically in regards to any potential risk arising from carbon pricing, AMP, through AMP Capital, is well advanced on its journey compared to most other KiwiSaver providers and fund managers, and has been engaging and leading on the issue of managing and governing climate change for over ten years, and set up the Australia New Zealand Investor Group on Climate Change (IGCC) in 2005. One of the objectives of the IGCC is to coordinate engagement with government on climate policy to ensure outcomes that are in the best interests of the investment and retirement aspirations of members and the security of their long-term savings. In addition to the range of responsible investing, proactive climate change and carbon risk policies and initiatives completed and being undertaken, and the overall services and benefits available to AMP KiwiSaver Scheme members, the strong governance of AMP’s Investment Committee (which oversees all asset allocations and investment decisions related to the AMP KiwiSaver Scheme) is another contributing factor which ensures that members can expect to enjoy the retirement they dream of.

“More broadly, we have also engaged, via AMP Capital, with companies on climate change risks, either directly, or through being a signatory to the Carbon Disclosure Project. In recognition that climate change is a global issue and requires a global response, the CEO of AMP Capital has also been a signatory to a number of international investor statements calling for clear long-term international and domestic policies, which will facilitate a smooth transition of the global and local economies so that global warming will be limited to less than two degrees Celsius. Moreover, there are a number of aspects to how AMP Capital is helping to manage climate change risks, including:

  • Assessment of the risk that sits within portfolios and engaging companies within these portfolios to ensure they are managing their climate change risk.
  • Working with governments in climate change and related policy to ensure that policies are put in place which facilitate a smooth transition of the domestic and global economies to a low carbon future.
  • Engaging with external managers and industry peers to learn and share respective insights on how best to assess and respond to climate change risks.”

Booster

David Beattie, Chief Investment Officer and Joint CEO:

What actions are you taking to disclose your Kiwisaver fund’s exposure to carbon risk?

“We are always happy to disclose our KiwiSaver funds’ exposure to carbon risk and any other risks if requested by our investors.  Interestingly to date however, no-one has asked us specifically about carbon risk exposure. We do regularly disclose our KiwiSaver funds’ exposures to a number of arguably more significant risks (eg currency exposure risk and return volatility risk) and will continue to monitor and respond to demand for more disclosure on emerging risks.  As a guide to investors, our Balanced Fund currently has exposure to companies involved with fossil fuels (the primary source of direct carbon risk) of around 3% (by comparison, the Fund is exposed to around 15% foreign currency risk).”

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?

“Every company that we actively focus investments on has been through our proprietary qualitative assessment framework.  This framework scores (prices) each company on a range of metrics and gives a good starting point for selecting companies that have the potential to deliver higher levels of long-term capital and dividend growth.  It also identifies companies that face significant risks, such as being exposed to structural shifts like those that carbon risk represents.  Importantly though, just because a company is involved in one of the fossil fuels sectors (oil, coal or gas), this does not automatically imply they are destined to be wiped out due to “stranded assets”.  Some of the companies best equipped to respond to the challenges of carbon risk and to determine alternative commercial energy sources, will in fact come from these very sectors.  We are therefore continually assessing how these companies seem to be responding to these challenges (through their actions (or inactions) and shareholder communications), with a view to supporting or divesting accordingly.”

Will you comply with the TCFD’s proposed voluntary disclosure regime?

“Booster has always believed in transparency for our investors, who can at any time see a full list of all of the direct investments held in their funds.  We have found that investors in our Socially Responsible Investment (SRI) funds particularly value this.  The TCFD’s disclosure regime is primarily aimed at companies, rather than investment managers. However, we are very supportive of increased transparency by companies on a wide range of metrics and as investors we welcome access to more information and transparency from the companies we invest in.”

How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

“Booster will continue its well-documented history of a careful and thorough focus on downside risk assessment and risk management on behalf of its KiwiSaver investors.  Carbon risk is definitely one of the risks we include in our on-going risk analysis framework. For those Booster investors who are very deeply concerned about carbon risk, we offer a range of SRI KiwiSaver funds that exclude all direct investments in companies associated with fossil fuels, one of nine excluded investment sectors.  These KiwiSaver SRI funds have been certified by the Responsible Investment Association of Australasia. We also offer a specialist (non-KiwiSaver) investment fund that only invests in companies associated with Sustainable Global Resources, such as clean energy and water resources.”

Kiwi Wealth

Simon O’Grady, Kiwi Wealth chief investment officer

“Kiwi Wealth incorporates environmental, social and governance (ESG) issues into investment analysis and decision-making. This includes carbon risk.  We take ESG credentials into account when investing, so tend to have reduced allocation to companies with high carbon risk.

We monitor and incorporate a range of industry trends, including those sensitive to carbon pricing and related shifts in demand, such as the energy and utility sectors.

We are also likely to remain underweight in carbon-intensive industries based on expected investment performance.”

What actions are you taking to disclose your KiwiSaver fund’s exposure to carbon risk?

“We disclose all holdings to clients in their individual monthly reports.”

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?

“We assess carbon risk both in terms of ESG ratings scores and sector trends and risks. We currently allocate low weight to the energy and energy-intensive utilities sectors relative to global benchmarks.”

Will you comply with the TCFD’s proposed voluntary disclosure regime?

“We’re already an industry leader in disclosing full investment information to members. If this proposed disclosure regime is able to improve our transparency even further, we’ll certainly consider using it.”

How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

“We look at a range of financial risks, including carbon-related risks, in managing the long-term retirement savings of members.  Carbon-related risks are important to manage in long-term investments.”

ANZ

Ana-Marie Lockyer, General Manager Wealth Products, ANZ”

What actions are you taking to disclose your Kiwisaver fund’s exposure to carbon risk?

“We disclose all our exposures .The investor can see exactly what they are invested in. Carbon risk is one of many market risks around industry or commodity sustainability and long-term value. Both market and liquidity risks are disclosed to members in our Product Disclosure Statement.”

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments? 

“Carbon risk is one of many risks we take into account when assessing the suitability, sustainability and value of an investment.  The market is an efficient pricer of risk in asset prices – and will take into account issues such as ‘stranded assets’.  For example, today’s oil price will reflect the impact of the electric car on the demand for oil. 

The question will always remain whether the market price of an asset is an accurate reflection of its long term value. That is what makes a market. We are currently using third party research tools as well as our in-house analysts to assist us with a range of measures around carbon emissions and risks and how companies are dealing with them.”

 Will you comply with the TCFD’s proposed voluntary disclosure regime?  

“We are looking into this. We have formed a Responsible Investment Advisory Group as part of a Responsible Investing Framework that we anticipate implementing later this year. That Group will consider our approach to the proposed voluntary disclosure regime.”

 How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk? 

“Carbon risk is but one of many risks we take into account when assessing the suitability and value of an investment.  We scrutinise every investment that goes into our portfolios, whether locally or offshore. 

Responsible investing is something we take seriously, and ANZ is playing its part to support the transition to a low carbon economy. ANZ’s KiwiSaver schemes have less than 2% of their portfolios invested in oil, gas and coal companies. 

Investors also have the choice to invest in our OneAnswer Sustainable International Share fund which invests in companies with a sustainable development policy.”

ASB

What actions are you taking to disclose your KiwiSaver fund’s exposure to carbon risk?

A complete list of all the underlying investments for each of the ASB KiwiSaver Scheme funds can be found in the annual disclosure statements on our website. The underlying funds then, in turn, disclose their individual investments. 

ASB’s responsible investment commitments include understanding the needs of our customers; which takes into account transparency around exposure to environmental, social and governance (ESG) considerations in their portfolios.

We are actively investigating ways to provide greater customer insight into the ESG characteristics of our portfolios.

How are you assessing and pricing the carbon risk carried by companies currently in your portfolio, and how are you assessing and pricing the carbon risk of potential investments?

The ASB KiwiSaver Scheme uses an index-tracking investment management style. This means we do not make decisions on individual stocks.

Will you comply with the TCFD’s proposed voluntary disclosure regime?

ASB will be carefully considering TCFD’s recommended disclosure regime over the next 12 months.

How can your KiwiSaver investors be assured that you are governing and managing their long-term retirement savings to protect them from losses arising from carbon risk?

Here are a few assurances:

MIS licensed manager: ASB Group Investments has been granted a licence by the Financial Markets Authority to act as a manager of managed investment schemes (MIS), which include KiwiSaver schemes. The licence supports our commitment to strong governance and compliance, and the capabilities of our experienced team.

Governance:  The ASB Investment Committee has been established to be responsible for making decisions for the ASB KiwiSaver scheme.

ASB has a responsibility as a KiwiSaver scheme provider to consider a wide range of factors when developing investment strategy and managing money on behalf of our customers. Carbon risk is simply one of the factors we must take into account. 

ASB’s commitments to responsible investment include that we will reflect public awareness of responsible investment considerations and demand for responsible investment options through the development and delivery of innovative products and services.

Ongoing customer research helps us understand the needs and demands of our members. 

We value engagement and encourage investors to take an interest and ask questions about where their money is invested.

BNZ

BNZ Head of Wealth and Private Bank Donna Nicolof:

In March 2017, BNZ announced its responsible investment policy for the funds it manages, including KiwiSaver.

“We have developed our approach to responsible investing to ensure that we have a robust framework where investment decisions align with both our investment beliefs and the changing attitudes of our investors and society. This is a journey for us.

“As investment markets in New Zealand continue to mature – consideration of Environmental, Social and Governance (ESG) risk factors is becoming increasingly important.”

“We believe that it’s important for listed companies to work towards their own carbon risk disclosures. As more companies accurately disclose carbon and other climate-related risk, investors’ ability to accurately assess carbon risk within investment funds will increase.

“Our investment philosophy spans all investments we make on behalf of customers and includes the investments of the BNZ KiwiSaver Scheme.

“BNZ’s ESG philosophy is based on the following:

  • Consideration of ESG factors links to BNZ’s belief that risk and return are related. Additionally, BNZ believes that incorporating ESG factors when making investment decisions is consistent with its responsibility to act in the best interests of its customers.
  • Effective management of ESG factors (including governance, employee relations, safety, and environmental risks, including climate change) is material to the long-term successful performance of any business.

“Where practicable, BNZ Wealth and Private Bank requires the investment managers it has appointed to consider ESG factors in their investment analysis and decision making. Through its asset consultant JANA Investment Advisers Pty Ltd (JANA), BNZ will assess the extent to which an investment manager incorporates ESG factors (including climate change) into its investment process. The insights from this assessment are considered when a decision is made to appoint a new investment manager or retain an existing investment manager.

“BNZ and JANA’s ultimate parent company, National Australia Bank Limited (NAB), has published a commitment to the disclosure of carbon risk exposure across all NAB Group entities (as part of NAB’s full-year reporting).

“NAB’s commitment to carbon risk disclosure can be viewed on its website: https://www.nab.com.au/about-us/corporate-responsibility/shareholders/esg-risk-management

“Additionally, as part of NAB Group’s approach to climate change, NAB has a working group reviewing the risks and opportunities facing NAB and its customers arising from a 2 degree world. As part of this work, NAB will consider the recommendations made by the Financial Stability Board’s Task Force on Climate Related Disclosures when they are released in late June. BNZ is participating in this Working Group.”

Westpac

“Westpac NZ is very conscious of climate risks and is committed to supporting the transition to a low carbon economy. We are the only New Zealand bank to publish our exposure to both the fossil fuel and cleantech industries. We are also the only NZ bank that has a comprehensive strategy to increase our lending to climate change solutions, such as renewable energy, green buildings and forestry, and reduce our lending to fossil fuels. In the last four years our lending to that sector has increased 17% (to $1.29 billion) while our lending to fossil fuels has decreased by 30%. Lending to fossil fuels is just 0.65% of our overall lending. We expect those trends to continue in the longer term and are focused on how we can help make affordable clean technologies widely available.

“Westpac Group recently released its updated Climate Change Action Plan as part of its commitment to helping limit global warning. You can read more about that here: https://www.westpac.com.au/about-westpac/sustainability/our-positions-and-perspectives/sustainable-lending-investment/

“The Westpac KiwiSaver funds are managed by our subsidiary BT Funds Management NZ (BTNZ). BTNZ has developed a Responsible Investment Policy that establishes how environmental, social and governance risks, including climate risks, are incorporated into the investment decision making process. This policy is in the process of being implemented currently.

“We are watching progress being made by the [international Taskforce on Climate-Related Financial Disclosures] in regards its proposed voluntary disclosure regime for companies and we are supportive of standardised disclosures by companies in this regard which will make it easier for investors to make better informed financial decisions.”

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