Investment Insight |
No more denying the realities of climate change
If left unchecked, climate change will inflict untold harm on people across the globe, devastate economies, and threaten the viability of countries. The effects of climate change will strain the capacities of governments - even those of the wealthiest countries.
According to an article published in Foreign Affairs magazine1, “of all the global threats Trump has neglected, mismanaged, or actively inflamed, the climate crisis is the most dangerous and far-reaching". President-Elect Biden appears to understand the gravity of the crisis, appointing former Secretary of State John Kerry as his cabinet-level climate envoy.
The United Kingdom, the European Union, and many others have committed to reach net zero greenhouse gas emissions by 2050, and China - the world's largest emitter of carbon dioxide - recently pledged to reach 'carbon neutrality' (absorbing at least as much carbon as the country emits) before 2060.
New Zealand is one of the few countries to have a zero-emissions goal enshrined in law, the Zero Carbon Act, but short-term policies are not yet keeping up with that ambition. Methane from agriculture and waste (over 40% of New Zealand's emissions) is exempt from the zero emissions goal, and has a separate target not yet covered with significant policies.
Policy is already forcing change
Other countries are beginning to implement the near-term measures needed to reach their long-term targets.
The European Union is placing action on climate change at the centre of its economic recovery from COVID-19 as well as its overall economic growth strategy.
The United Kingdom will ban new petrol and diesel cars from 2030.
China is building domestic renewable energy infrastructure at breakneck speed.
Still, the world remains far off track from keeping climate change within manageable limits. All countries must do significantly more to curb rising global temperatures.
The economic reality
Think what you like about climate change, the economic reality is climate change, and regulations associated with climate change, are materially impacting many businesses revenue growth, margins and returns, cash flows, capital expenditures and valuation. These impacts arise due to regional and country commitments (e.g. carbon prices and taxes), changing consumer expectations and preferences for lower climate-impact products and services.
NZ Funds' responsible investment policy
NZ Funds' Board, investment and management team aims to ensure that no fund we manage owns securities issued by a company engaged in exploration or production of fossil fuels, generating power from fossil fuels, providing services to the fossil fuels industry or distributing fossil fuels. Furthermore, as with all risks and opportunities, NZ Funds' assessment of environmental issues like climate change begins with in-depth, fundamental company and industry analysis.
NZ Funds manages money responsibly
There is an increasing body of evidence that managing money responsibly improves, rather than detracts from, long-term investment returns. A great example being the poor performance of oil companies in 2020.
However, we go further than just excluding fossil fuels from clients' investment portfolios. We do not believe a manager should be able to promote themselves as being socially responsible when only a fraction of the funds they are responsible for are managed responsibly.
To ensure clients are invested in a socially responsible way, NZ Funds has contracted with ISS ESG2, an independent, globally recognised expert on a wide range of sustainability and responsible investing issues, including climate change, Sustainable Development Goals-linked impact, human rights, labour standards, corruption, controversial weapons, and many more.
Principles for Responsible Investing (PRI) is a United Nations-supported international network of investment signatories who collectively oversee more than US$70 trillion in funds. Its goal is to support and ensure six aspirational ESG principles are put into practice by those signatories. NZ Funds has been a PRI signatory since 2019 and is required to report to PRI annually for assessment.
According to an article published in Foreign Affairs magazine1, “of all the global threats Trump has neglected, mismanaged, or actively inflamed, the climate crisis is the most dangerous and far-reaching". President-Elect Biden appears to understand the gravity of the crisis, appointing former Secretary of State John Kerry as his cabinet-level climate envoy.
The United Kingdom, the European Union, and many others have committed to reach net zero greenhouse gas emissions by 2050, and China - the world's largest emitter of carbon dioxide - recently pledged to reach 'carbon neutrality' (absorbing at least as much carbon as the country emits) before 2060.
New Zealand is one of the few countries to have a zero-emissions goal enshrined in law, the Zero Carbon Act, but short-term policies are not yet keeping up with that ambition. Methane from agriculture and waste (over 40% of New Zealand's emissions) is exempt from the zero emissions goal, and has a separate target not yet covered with significant policies.
Policy is already forcing change
Other countries are beginning to implement the near-term measures needed to reach their long-term targets.
The European Union is placing action on climate change at the centre of its economic recovery from COVID-19 as well as its overall economic growth strategy.
The United Kingdom will ban new petrol and diesel cars from 2030.
China is building domestic renewable energy infrastructure at breakneck speed.
Still, the world remains far off track from keeping climate change within manageable limits. All countries must do significantly more to curb rising global temperatures.
The economic reality
Think what you like about climate change, the economic reality is climate change, and regulations associated with climate change, are materially impacting many businesses revenue growth, margins and returns, cash flows, capital expenditures and valuation. These impacts arise due to regional and country commitments (e.g. carbon prices and taxes), changing consumer expectations and preferences for lower climate-impact products and services.
NZ Funds' responsible investment policy
NZ Funds' Board, investment and management team aims to ensure that no fund we manage owns securities issued by a company engaged in exploration or production of fossil fuels, generating power from fossil fuels, providing services to the fossil fuels industry or distributing fossil fuels. Furthermore, as with all risks and opportunities, NZ Funds' assessment of environmental issues like climate change begins with in-depth, fundamental company and industry analysis.
NZ Funds manages money responsibly
There is an increasing body of evidence that managing money responsibly improves, rather than detracts from, long-term investment returns. A great example being the poor performance of oil companies in 2020.
However, we go further than just excluding fossil fuels from clients' investment portfolios. We do not believe a manager should be able to promote themselves as being socially responsible when only a fraction of the funds they are responsible for are managed responsibly.
To ensure clients are invested in a socially responsible way, NZ Funds has contracted with ISS ESG2, an independent, globally recognised expert on a wide range of sustainability and responsible investing issues, including climate change, Sustainable Development Goals-linked impact, human rights, labour standards, corruption, controversial weapons, and many more.
Principles for Responsible Investing (PRI) is a United Nations-supported international network of investment signatories who collectively oversee more than US$70 trillion in funds. Its goal is to support and ensure six aspirational ESG principles are put into practice by those signatories. NZ Funds has been a PRI signatory since 2019 and is required to report to PRI annually for assessment.
1. A Climate-First Foreign Policy, Steven Herz, Brendan Guy, and Jake Schmidt, 25 November 2020, www.foreignaffairs.com
2. ESG = Environmental, Social, and Corporate Governance.
2. ESG = Environmental, Social, and Corporate Governance.
Source: United Nations Climate Change
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
For more information please contact NZ Funds.
This document has been provided for information purposes only. The content of this document is not intended as a substitute for specific professional advice on investments, financial planning or any other matter.
While the information provided in this document is stated accurately to the best of our knowledge and belief, New Zealand Funds Management Limited, its directors, employees and related parties accept no liability or responsibility for any loss, damage, claim or expense suffered or incurred by any party as a result of reliance on the information provided and opinions expressed except as required by law.
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James Grigor is Chief Investment Officer for New Zealand Funds Management Limited (NZ Funds) and a member of the NZ Funds KiwiSaver Scheme. James' comments are of a general nature, and he is not responsible for any loss that any reader may suffer from following it.
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