The Guardians of New Zealand Superannuation believe that “climate change is one of the most significant intergenerational risks we face, and ourresponse to it poses a number of challenges and opportunities for lawyers,” and speak to LawTalk about how they are investing for a greener future.
“Climate change is one of the most significant intergenerational risks we face, and our response to it poses a number of challenges and opportunities for lawyers,” says Craig Douglas, General Counsel at the Guardians of New Zealand Superannuation, the Crown Entity that manages the $60b NZ Super Fund.
The Guardians has established a strong track record as a responsible investor. It has been included in the United Nations Principles for Responsible Investment Leaders group, named one of the most responsible asset allocators and won a host of awards for its climate change investment strategy, responsible investment practice and transparent public reporting.
Responding to climate change
Since 2017 the Guardians has significantly reduced the Fund’s carbon exposure, to the extent that the Fund no longer has any material, long-term holdings of fossil fuel reserves. Importantly, it has been able to make these carbon reductions without compromising financial performance.
Empirical evidence suggests that the link between financial performance and environmental, social and governance (ESG) performance may be neutral or positive but it is unlikely to be negative. In fact, last year the Fund was recognised for being the top performing Sovereign Wealth Fund globally between FY2015-21 with annualised returns of 11.79% during that time (9.5% since inception).
The shift to sustainable finance
Global investment practice is evolving from a responsible investment model, which is focused primarily on managing ESG risk, towards a sustainable finance focus.
Craig says, “The Guardians has thought hard about where we need to take our approach to responsible investment over the next decade. The shift to sustainable finance has required a change in mindset, from considering the impact of ESG risks on our portfolio of assets we manage, to considering the impact of our investments on society and the environment.”
The Guardians has recently undertaken a strategic review of the approach to ESG to position its investment strategy for the future. This broad-based review covered investment theory and practice, ESG trends, market and legal and regulatory developments.
“It’s clear that stakeholders’ expectations are growing; the bar for good ESG practice is rising and increasingly being reflected in regulatory requirements, ‘soft laws’ and governance practices,” says Craig.
In light of the review’s findings, the Guardians has adopted a sustainable finance strategy. This strategy seeks to deliver positive environmental and social impacts while continuing to deliver strong financial returns. In broad terms, it is built on three core pillars developed by Toitū Tahua | New Zealand Centre for Sustainable Finance:
Changing mindsets – through 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
How lawyers can influence sustainable investment decisions
Sustainability and ESG reforms are challenging for lawyers. The pace and breadth of reform is swift, regulation is not always consistent and cohesive globally and the relevant issues can vary greatly by sector and business. The role of the lawyer, and the boundary between legal and other commercial or practical dimensions of sustainability themes, is not always clear.
At its core, the Fund adds to Crown wealth, improves the ability of future governments to pay for superannuation and reduces the tax burden of the cost of superannuation on future generations of New Zealanders
However, sustainability and ESG are certainly areas lawyers need to be familiar with as they become ever more mainstream. This requires active tracking and monitoring of trends as they emerge – often as best practice or ‘soft laws’ which evolve into regulation. Toitū Tahua’s pillars are a useful lens to classify how interested lawyers can become involved in sustainability/ESG initiatives, and how the Guardians have applied them is outlined below.
Lawyers are closely involved with governance practices and settings, and have an opportunity to promote discussion and engagement on sustainability issues. For instance, Chapman Tripp has published an opinion on director duties as they relate to climate change.
At an investor level, the Guardians was a founding signatory and sponsor of the development of the New Zealand Stewardship Code. This supports New Zealand asset owners establishing principles of effective and sustainable investment stewardship.
Stewardship concerns investor practices by responsibly allocating and managing capital to generate value for current and future generations, and sustainable outcomes for the environment and society.
There are opportunities for lawyers to transform finance through contributing to effective and well considered regulation, and also understanding more broadly how that regulation is likely to evolve based on emerging trends.
The Fund has reported under the Taskforce for Climate Related Financial Disclosures (TCFD) climate reporting framework on a voluntary basis for the last three years. It is now implementing the new External Reporting Board (XRB) climate reporting standards for the next financial year.
However, climate reporting is likely to be the tip of the iceberg for ESG reporting. One of the themes arising from the work in developing the Guardians’ sustainable finance strategy was a clear trend towards investors and corporates reporting on their broader environmental and social impacts.
The Guardians is reviewing broader best-practice ESG reporting and, in particular, reporting on natural capital and nature-related disclosures, building on the work of the Task Force for Nature-Related Financial Disclosures.
Lawyers play an important role in identifying and removing barriers to sustainable investments, such as the work in better enabling on green bonds and green finance initiatives.
The Guardians legal team was involved in the conceptual design and structuring of a new impact investment programme.
The Guardians’ legal team was involved in the conceptual design and structuring of a new impact investment programme. This will scale up the Fund’s investment in opportunities that deliver measurable environmental or social benefits
This will scale up the Fund’s investment in opportunities that deliver measurable environmental or social benefits. Over time these benefits will be reported with increasing sophistication.
The legal team has advised on several innovative transactions under the programme, including significant investments into a range of climate and sustainability funds. One is the Fifth Wall Early-Stage Climate Technology Fund. Towards the end of 2021, the Guardians committed US$100 million to the fund, which seeks to invest in new tech to decarbonise the global real estate industry.
About the same time, the Fund committed €125 million to the Copenhagen Infrastructure Partners’ Energy Transition Fund. This focuses on developing large scale sustainable energy infrastructure, primarily in markets throughout Western Europe, North America and the Asia-Pacific region. Among the recent projects underway is the exploration of building a large-scale offshore wind energy plant in Taranaki.
More recently, the Fund invested US$97 million in Generation Investment Management’s Sustainable Solutions Fund IV. This fund is a sustainable investment managed with a commitment to invest globally in companies and teams driving a sustainable future.