Sustainable Business: Driven by the goal of global good practice

Karren Beanland. Photo / Supplied

Over the last 20 years the Guardians of NZ Superannuation, the Crown entity that manages the NZ Super Fund, has developed a strong track record as a responsible investor. We've been included in the United Nations Principles for Responsible Investment Leaders Group, named one of the world's most responsible asset allocators and won a host of awards for our climate change investment strategy, responsible investment practice and transparent public reporting.

We've delivered strong financial returns for taxpayers: earlier this year a study by the independent think-tank Global SWF found the NZ Super Fund, with an 11.79 per cent return over the past six years, was the top performing sovereign wealth fund globally.

While our long-standing commitment to responsible investment and early adoption of a climate change investment strategy has served us well, a couple of years ago we decided to take a hard look at our responsible investment approach, and fundamentally reassess what we were doing. We saw shifts in investor behaviour that made us think we'd need to up our game to ensure we kept up with global good practices.

We wanted to understand what we might need to change about our approach, over the next decade, in order to maintain a leadership position in responsible investment and retain the confidence of our stakeholders, while ensuring — and this is obviously critical — that we meet our commercial mandate.

Our peer and stakeholder research found that globally, investor norms are evolving from a responsible investment model which is focused primarily on managing environmental, social and governance (ESG) risk, towards a sustainable finance focus. This is about ensuring the financial system serves the long-term well-being of society, the environment and the real economy.

It is a real mindset shift for professional investors: from considering the impact of these ESG risks on the portfolio of assets we're managing to consider the impact of our portfolio and the assets in it on the world.

Fundamentally, these changes are being driven by changing consumer and stakeholder expectations. They're also driven by an understanding amongst investors that companies that do a good job of managing ESG risks, perform better over the long term. At the same time, the data and tools available to measure and monitor ESG performance are developing rapidly.

Against this backdrop of evolving global best practices, the Guardians' Board approved a new sustainable finance strategy, designed to see us through the next 10 years. It's built around three core concepts developed by Toitū Tahua, the Centre for Sustainable Finance:

• Changing mindsets — through our governance, leadership and communication
• Transforming finance — by improving ESG performance over the long term
• Financing transformation — investing for the impact that delivers positive sustainability outcomes.

In terms of changing mindsets, we recently re-defined the Guardians' organisational purpose to embed sustainability at our core: Sustainable investment delivering strong returns for all New Zealanders.

We're still focused on maximising risk-adjusted returns — that is a bottom line from our legislated mandate — but this new purpose sends a clear message to our staff and stakeholders about the importance of achieving those financial returns in a sustainable way.

In terms of transforming finance, we have joined the Paris-aligned Net Zero Asset Owners Commitment and are on the pathway to having a net zero NZ Super Fund by 2050.

We have already achieved ambitious carbon reduction targets, and no longer hold any material exposure to fossil fuel reserves. Another current focus is on improving the ESG profile of our global equities portfolio, which makes up the single largest chunk of the NZ Super Fund. We plan to hold shares in significantly fewer companies, resulting in a passive portfolio with improved ESG metrics across the board, while retaining sufficient diversification across geographies and sectors.

We are also actively investigating the integration of nature-related risk and opportunity into our investment analysis. The World Economic Forum has estimated that over 50 per cent of global GDP (some $44 trillion) is moderately or highly dependent on nature. As witnessed by the impact of floods, droughts and disruption to wild pollination in some locations, rapid biodiversity loss can have negative consequences for ecosystems, human wellbeing and business models — hitting cash flows, operating expenses and enterprise value. On the flip side, sustainably managing natural resources and ecosystems is a critical component of managing climate risk and direct investment risk itself.

The third facet of our strategy is financing the transformation. We have been looking at how to increase the number and scale of impact investments, with the intention of investing in the solutions needed to drive positive sustainability outcomes.

We are particularly focused on opportunities to invest in climate solutions and transformational infrastructure. While we must always be commercial, the Fund's long horizon means that we can be patient investors. We have committed hundreds of millions to develop renewable energy generation and are exploring large-scale opportunities in New Zealand, such as the potential for offshore wind energy generation in the South Taranaki Bight. We believe this project has the potential to generate not just commercial returns for the NZ Super Fund, but also great benefits for New Zealand.

To embed sustainable finance we not only need a greater level of ambition, but evidence of meaningful progress sustained over time.

This will be reflected in my deeper analysis of investment decision-making processes, measurement and reporting. It will also be carried through to individual performance objectives and targets, flowing from the leadership team through the investments team and the entire organisation.

We work with other Crown Financial Institutions as part of the Crown Responsible Investment Framework developed last year.

The Framework focuses on climate change, but we also work with the CFIs on a range of ESG issues.

We'll continue to engage with companies on climate change — encouraging them to decarbonise and to play part in the global transition to a net zero economy. There are business and investment opportunities here as well as risks.

We continue to have a strong focus on human rights, particularly in relation to supply chain and modern slavery issues, and for companies operating in conflict zones.

Customer, stakeholder and investor expectations continue to increase in this area.

There is no doubt that we are collectively experiencing unprecedented social and environmental challenges that warrant an even stronger response from the global asset owner community. Investors get this. It is time for meaningful change. We look forward to engaging with the Government, our peers, partners, RIAA, Toitū Tahua and others, as we roll out these significant changes to our investment approach.

• Karren Beanland is a senior investment strategist in the responsible investment team at the NZ Super Fund, a $55 billion fund that invests in Government contributions globally to help pay for the increasing cost of universal superannuation in the future.