One of the leaders of this year’s assessment is the New Zealand Superannuation Fund (NZ Super), which has for the past two years achieved a perfect score and is usually cited as an example of best practices globally.
NZ Super sets very high governance standards: it keeps double-arm’s length independence from government and impressive transparency practices, by disclosing its returns monthly and its holdings, biannually.
NZ Super is also a champion in sustainability: its low-carbon portfolio has outperformed the reference portfolio (“climate alpha”) and, in 2023, it reduced its carbon footprint by 60% as measured by emissions intensity.
Lastly, NZ Super is very focused on resilience over the (very) long-term: it projects its balance sheet to year 2119, when it expects to reach US$ 1.7 trillion despite government withdrawals, which will start in 2035/36.
We had the pleasure of sitting down with Anne-Maree O’Connor, Head of Sustainable Investment, to discuss the GSR scoreboard’s results, the keys for NZ Super’s success, and the future ambitions of the institution.
[GSWF] In the past decade, NZ Super has been the world’s best performing SWF, with 10.8% annualized return – what would you say your organization’s main success factors are?
[NZSF] We have been around for about 20 years now and our long horizon has allowed us to take advantage of short-term volatility and the lack of withdrawals, while staying long-term in our objective. We also believe our governance structure with double arm’s length and our operational independence allows us to operate in a prudent but commercial manner. In addition, since 2010, we have adopted a total portfolio approach, which aims at constructing a portfolio that meets our overall objective and generates a collaborative culture and expertise across the different asset classes. Lastly, our sovereign status gives us access to opportunities that may not be necessarily available to other investors.
[GSWF] Two thirds of NZ Super’s portfolio is invested in line with an 80/20 index-link reference portfolio. In what asset classes or situations does the fund try to invest more actively?
[NZSF] The benchmark mainly signals our risk appetite, but the actual portfolio is both active and passive. Around two-thirds of the Fund is invested passively, and we only undertake active investment when we have a high level of confidence that it will be, over the long term, better than investing passively. These include direct arbitrage, event-driven opportunities, active equities (NZ), tactical credit and strategic tilting, which has added US$ 2.8 billion in value since inception. We also invest in less liquid opportunities including real assets – infrastructure, real estate, rural and timber – and in private equity. We continuously review where we can add value and what we can invest actively in.
[GSWF] Over half of your actual portfolio is invested in the US, and less than 4% is invested in China. How do you see the current tensions, and how does NZ Super look at geopolitical risk?
[NZSF] We do not really allocate by country, just in the way we do not allocate fixed amounts by asset classes. If you compare our actual portfolio with the reference portfolio, you can see that we are a bit overweighted in New Zealand and Australia, and underweighted in North America and Asia, excluding Japan. Geopolitics is an important risk factor and we are monitoring the situations in the Middle East, Ukraine, etc. We have an economics team that sits within asset allocation and looks at it quite closely. Our exposure to emerging markets is mainly via multi-factor, on the liquid side.
[GSWF] In the past five years, NZ Super’s staff has grown 53%, from 139 to 213 – why such significant growth? Do you think that personnel will or should keep growing at the same pace as the portfolio?
[NZSF] We don’t think the personnel should grow at the same pace as the portfolio, but it is true that it has grown significantly in the past few years. We are looking at building a robust platform for a portfolio of NZ$ 300 billion (US$ 184 billion) by year 2050, with capabilities around technology systems, risk management, etc. We have also internalized some of the investment to teams where we thought it made commercial sense in terms of cost efficiency, although we expect to continue our partnerships with external parties and co-investors, too. In sum, it is all about building for the future, including some increase in insourcing.
[GSWF] Let’s now look at the three different aspects of the GSR Scoreboard for NZ Super:
Governance (“G”):
[GSWF] NZ Super maintains a strong governance mechanism, with a Board of Guardians that is independently chosen and that operates at “double-arm’s-length” – what does this entail?
[NZSF] The first arm is that the Board of Guardians is selected by an independent nominating committee; and the second arm is that the investment decisions are taken independently. In other words, we are accountable to the government, but operationally independent. The Minister of Finance can give directions to the Guardians regarding the risk-return balance or performance expectations – but these must be non-binding and consistent with the duty to invest the funds on a prudent, commercial basis. The Board of Guardians consist of five to seven members, all chosen for their experience, training, and expertise in the management of financial investments – and appointed for a term of up to five years.
[GSWF] NZ Super one of the very few SWFs publishing monthly returns and portfolio holdings every six months – why is transparency and accountability so important for a sovereign fund?
[NZSF] Culturally, New Zealand does place a high value on transparency, and as a crown entity, we must abide by the freedom of information requirement. Transparency has been very helpful for us to maintain confidence with our stakeholders, and it is a quid pro quo, as the confidence has also been placed on us to manage the money. It also makes our life easier by minimizing the questions we receive, and it also allows us to attract and retain employees, as it allows us to publicize our activities and inspire young professionals. Lastly, we are a high growth fund that may have volatile results, and in those times, we need to spend time preparing and walking our stakeholders through any negative result.
Sustainability (“S”):
[GSWF] The fund managed to reduce its emission intensity and its fossil fuel reserves by 60% and 99% in 2023 – can you please share more about NZ Super’s approach to decarbonization?
[NZSF] We have had a climate strategy in place since 2016 and we started by setting up targets gradually. One objective is to reduce the risk of carbon in the portfolio but also to encourage reduction in emissions by our portfolio companies. In 2022, we decided to shift from internally customized indices to off-the-shelf Paris-aligned indices for our benchmark, especially for passive investments in global equities. In this way, we reduced our carbon footprint but retain our weighting in high-carbon intensity sectors through companies that demonstrated that they would take action against climate change through transition plans – for example in the materials sector building out opportunities in green steel or green aluminium. In fact, New Zealand has produced green aluminum for decades due to our high renewable energy mix.
We also invest in assets that facilitate the transition to a low-carbon economy, including renewable energy and real estate. We engage with companies globally, and we have a lot of conversations around their transition plans. Shifting to Paris-aligned indices sends a strong message to the market and encourages active change as companies track their inclusion. The underpinning principle is that we would take undue risk as an asset owner if we didn’t take any action against climate change. Therefore, we engage with businesses, leaders and policy makers, to assess the economic damage that would be done if we didn’t engage in the climate change transition to a global low-carbon economy. The runway for action is running out and we are pleased that renewables is performing better than anyone thought back when we first focused on investing in those opportunities.
[GSWF] Your exclusion list grew to 243 companies and 15 territories in 2023 – can you please share more about the decision of engagement vs exclusion, and how does the process work in practice?
[NZSF] Our exclusion list is quite comprehensive because it includes products that may be illegal or prohibited in New Zealand and by international treaties or are the focus of significant national and international policy to phase out use such as with tobacco. On the company side, we are a universal owner, and we really believe in active stewardship, so we monitor our portfolio companies on their environmental and corporate governance practices through providers such as MSCI and ISS. We try to apply change through our engagement efforts, whenever possible but it can be a long process. So, sometimes we would consider how likely the company is to respond to our feedback or suggestions, and consider the size of the holding before we decide whether to engage or to divest. We don’t exclude countries except for those sanctioned by the UN Security Council and our government.
Resilience (“R”):
[GSWF] NZ Super has recently changed its Chair and its CEO, and is in the process of changing its CIO, too. How will you ensure continuity of current policies and resilience to changes in leadership?
[NZSF] Our new Chair, John Williamson, has been on the Board for eight years, so he does provide continuity, and our leadership team has been around for on average a decade or so, so there is plenty of institutional knowledge within the management. Our organisational strategy, which our new CEO has been involved in launching, is also important from a continuity point of view – it aims to build on what has made us successful while ensuring we make decisions that will keep us moving in the right direction. There is a very formal process to any change, as we have a statement of investment policy, standards and principles, which is signed by the Board every year. We also have an excellent induction programme so, anyone coming into the Fund will have a strong sense of our journey so far and will be brought up to speed rapidly. Finally, we have a very strong purpose which has allowed us to meet our mandate.
[GSWF] We are often questioned how we define Resilience in the context of Sovereign Investors. Can you please share how NZ Super looks at resilience and at new, potential “black swan” events?
[NZSF] We are always looking at our liquidity strategy and at tail-risk events. Recently in our investment committee there has been a strong focus on liquidity risk, and we utilize all types of reverse tests to see how liquidity plays out, and we go back to our Board to assess our risk appetite. Therefore, when looking at investment opportunities, we do not only look at risk and return, but also at how we allocate our risk capital or budget, thanks to those stress tests.
The other element of resilience is about sustainable finance and climate change in particular, and we look at transition risk and physical risk. We believe adopting a sustainable approach makes our portfolio more resilient, too. The discipline of testing different climate and economic scenarios are also fundamental to our resilience as an organization.
