For super funds and their advisers

NZS’s less carbon adds 60bps, BNP on green hydrogen

Matt Whineray and Mark Lewis

The New Zealand Superannuation Fund (NZS) is overhauling its 10-year old responsible investment (RI) strategy to stay on track with global best practice, after recording a 60bps gain due to its old policy.

In its ‘Climate Change Report’ published last week, the NZS says the fund had launched a project dubbed ‘Resetting the Responsible Investment Compass’. According to the report, the RI rethink – steered by chief investment officer, Stephen Gilmour, and head of responsible investment, Anne-Maree O’Connor – would consider whether its current strategy “(including climate change) is future-proofed given ongoing global and domestic developments”.

A NZ spokesperson said over the last decade “RI approaches have evolved, new tools and methodologies are emerging, and expectations regarding the role of investors on social and environmental issues are changing”.

“The project objectives are to develop an RI strategy that is fit for the future, feasible to implement, and to set forward-looking expectations based on new developments that have been happening around the world.”

Last year’s Willis Towers Watson (WTW) review of NZS also recommended the fund should allocate more resources to RI. While the NZS kicked back against some WTW recommendations, it had adopted many, as outlined in an updated response to the review this July.

“We have increased the size of the Responsible Investment team, with recruitment of an additional full-time RI professional, increasing the RI team to four (recruitment is still under way),” the NZS response says. “In addition, we have had a summer internship, which has been extended part-time basis for six-months to September 2020. Resourcing requirements for RI will continued to be monitored.” Under new measures outlined in the NZS climate change report, the NZ$47 billion (A$44 billion) fund would double its carbon reduction targets over the next five years.

Matt Whineray, NZS chief executive, says in the report: “In 2016, we set targets to reduce the Fund’s emissions intensity by 20 per cent and its ownership of fossil fuel reserves by 40 per cent by 2020. Having met these targets, we have set new, more ambitious ones: to reduce the Fund’s emissions intensity by 40 per cent and fossil fuel reserves by 80 per cent by 2025.”

To date, the NZS has re-sized the portfolio carbon footprint primarily via its equities exposure (which represents about 80 per cent of the total) – both through the passive global shares mandates and third-party managers.

“… however, we do not currently consider bonds, positions which are market neutral over the long term or investments which have no clear carbon footprint like life settlements and natural catastrophe insurance,” the report says. “We recognise that our methodology is not perfect and will review this if it is appropriate to include our other investments as carbon accounting methodologies evolve.”

Despite the imperfections, the NZS decarbonisation approach had spiced up portfolio returns since the policy was introduced in 2016, Whineray said in a release. “… the carbon exclusion policy has added approximately NZ$800 million to the fund and about 60bps per annum to performance since it was brought in,” he said. “So, not only has this approach reduced what we considered to be an insufficiently rewarded risk, it has also added return.”

Meanwhile, BNP Paribas Asset Management has published a research paper examines the road to achieving net zero emissions by 2050, the prospects for green hydrogen as a new clean source of energy and the future of the EU Emissions Trading System (EU-ETS) as the place where carbon emission allowances (‘EUAs’) can be bought and sold.

The paper, ‘Deep Decarbonization: Green Hydrogen, Net Zero and the Future of the EU-ETS’, shows the potential impact of ‘green hydrogen’ on carbon pricing across Europe. It was written by Mark Lewis, BNP Paribas’ chief sustainability strategist, who joined the asset management business in January 2019.

The European Union plans to make green hydrogen a key pillar of its sustainable development and emissions reduction efforts, which could result in the cost of carbon allowances doubling. It also has significant implications for the EU’s decarbonisation pathway.

The paper says: “The EU-ETS differs from other commodity markets in that the regulator can modulate supply to engineer the desired policy outcome. In other words, whereas in any other commodity market supply and demand are in a continuous feedback loop between one another as the price fluctuates in response to the market balance, in the EU-ETS the regulator sets the level of supply at the level expected to achieve the targeted emissions reduction by the targeted date. Indeed, that is the whole point.”

The pre-requisite for achieving the 2050 hydrogen vision is to make green hydrogen commercially viable as an industrial feedstock by 2030. This is because green hydrogen will be competitive with ‘grey hydrogen’ as a feedstock well before it will be competitive with fossil-fuel energy carriers such as natural gas or petroleum products as an energy source for space heating or transport or power generation. The fossil fuel-based grey carbon produced today is carbon intensive, whereas green carbon, based on renewable energy and using a process of electrolysis, is less so.

The paper says that replacing today’s production with green hydrogen by 2030 would reduce EU-ETS emissions by the equivalent of 6 per cent of total the 2019 EU-ETS emissions. “This would already be a significant achievement but the real prize for the EU is much greater,” it says. “This is because making green hydrogen commercially viable as an industrial feedstock by 2030 is the pre-requisite for achieving the EU’s overall 2050 hydrogen vision.”

– D.C. Investment News NZ and G.B. Investor Strategy News

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