The Green Party has called for the New Zealand Superannuation Fund to quit its investments in companies producing fossil fuel.
The fund's chief executive, Adrian Orr, said it took the issue of climate change seriously and expected its exposure to fossil fuels to fall over time, and investment in renewables to rise.
"But a simple divestment call? The world is just not that straightforward," he said.
The fund, set up by the previous Labour Government to partially pre-fund future New Zealand Superannuation payments, had $676 million invested in companies directly involved in fossil fuel production as of last June. That represented about 2 per cent of the fund's assets.
Greens co-leader Russel Norman, in a paper released yesterday, makes an ethical case for not investing in companies whose activities are literally fuelling potentially catastrophic climate change.
He also points to a financial risk of stranded assets, citing analysis by the International Energy Agency and other bodies that the world's coal, oil and gas companies already have in their proven reserves at least three times as much carbon as can be burned without exceeding the internationally agreed target of limiting global warming to 2 degrees Celsius.
Norman argues it is irresponsible for a long-term investor such as the fund to assume, in effect, that Governments will never get their act together and act to avert a climate catastrophe.
If there are practical difficulties with immediate divestment, it could start with coal companies, followed by those involved in fracking and tar sands, and then conventional oil and gas producers.
Divestment by the Super Fund would set a precedent for all other government-managed funds to divest, including ACC which has investments of $26 billion, Norman said.
Orr said the guardians of the fund did not see a reputational risk to New Zealand in continuing to invest in the fossil fuel industry.
"Our stance on issues such as this is informed by the policy stance of the elected Government as the best way of interpreting the will of the New Zealand public," he said.
The Government had not chosen to ban the use of fossil fuels, or exploring for them or producing them.
The Super Fund is part of a group of institutional investors, with a collective $1.5 trillion of assets under management, backing a Mercer-led study of investment risk and reward under various climate-change scenarios.
"The Mercer research project, which will be completed in 2015, will inform our future thinking on climate change risk," he said.
At this stage the fund was not confident the markets were mispricing the political risks around climate policy.
Orr argues that long-term investors have to consider not just an expected or desired end point - such as a low-carbon world - but how to get there from here. That might, for example, involve greater reliance on gas as a transitional fuel, at least preferable to coal.
"Since 2012, where a strong investment case can be established, we have actively sought to further incorporate active investments in alternative energy, and energy forms with lower carbon intensity, into the fund," Orr said. "We expect that, if we are successful in implementing this strategy, our portfolio will become more heavily invested in renewable energy and less carbon-intensive over the long term."
But investments in renewables technology were often highly risky, he said.
And the fund had to consider the risk that oil prices would climb over the next 20 years. "How would pensioners feel about it if we had no exposure to that?"