NZ Super Fund: ‘It’s hard for us to invest with somebody that has any fossil fuel exposure’

Josie McVitty, who assumed the newly created role of senior adviser, infrastructure in March, explains to Daniel Kemp how NZ Super Fund is looking to be more strategic in building its infra programme

In 2020-21, the New Zealand Superannuation Fund achieved its best-ever annual return: 29.63 percent before tax. This took the fund, established in 2001 by the New Zealand government to create a pot of savings to help pay for universal superannuation costs, to NZ$59.8 billion ($42 billion; €37 billion) in assets under management. It added around NZ$15 billion in the 12 months to the end of June.

The fund is forecast to reach more than NZ$330 billion by 2050 – one of the milestones by which most countries have agreed to reach net-zero carbon emissions. In October, NZ Super Fund joined them by signing up to the Net Zero Asset Owners Commitment. This has committed it to ensuring its portfolio has been decarbonised by 2050, as well as setting interim targets and investing in climate change solutions.

In the same month, New Zealand’s finance minister announced the introduction of a new Crown Responsible Investment Framework, a government-supported commitment to reach net zero by 2050. The NZ Super Fund is taking part in this initiative with three other Crown entities: the Accident Compensation Corporation, the Government Super Fund and the National Provident Fund. In a statement, NZ Super Fund said: “The funds will seek to invest in climate solutions in New Zealand and abroad, consistent with their respective investment strategies and commercial mandates. They will also use their collective influence as asset owners to engage with companies on climate change and emissions reductions, with the objective that all assets in their investment portfolios achieve net zero by 2050 or sooner.”

An important part of the strategy for NZ Super Fund will be an increased focus on the energy transition in its infrastructure portfolio. The fund aims to increase its allocation to the asset class, which stood at 1 percent on 30 June.

Its current portfolio is worth a little over NZ$1 billion, with only a handful of fund commitments listed in its latest annual report: NZ$906 million to Morrison & Co, which includes investments in RetireAustralia, Flow Systems, Longroad Energy and Galileo Green Energy; NZ$110 million to Grain Management’s Grain Spectrum Holdings III; and NZ$100 million to CITP’s China Infrastructure Partners V.

New strategy

Josie McVitty joined NZ Super Fund in March, taking on the newly created role of senior adviser, infrastructure. She was previously strategy and investment manager at Actis, based in London, and has had stints with IHS Investment in South Africa and the World Bank in Indonesia. McVitty has been leading a strategic review of the fund’s infrastructure strategy from London before her planned return to her native New Zealand in 2022. “We’re resetting where we want to take this portfolio going forwards and be a bit more focused on building out specific sectors and areas of exposure,” she says. “Historically, it’s been a bit opportunistic in how capital was deployed – now we are looking to be more strategic.”

The energy transition and digital infrastructure are the two priority sectors that NZ Super Fund has identified. This reflects the macro trends supporting the sectors’ growth and the fact that there are opportunities to invest in what McVitty terms “growth assets” in those spaces, rather than lower-yielding core infrastructure. “We are more focused on value-add greenfield development in infrastructure, rather than core,” she says. “Pension plans are liability-matching, whereas we have a bit more flexibility with our capital and our reference portfolio is more growth-oriented as a whole. Anything related to decarbonisation is a central focus, and we’re seeing lots of opportunities in digital because of the capital required to roll out fibre networks, data centres, etc. The risk profile for these types of investments is attractive to us.”

In October, NZ Super Fund announced a commitment of up to €125 million into Copenhagen Infrastructure Partners’ Energy Transition Fund, a vehicle focused on power-to-X investments targeting €2.25 billion.

Although McVitty does not rule out direct investments overseas, they are likely to come as part of “club deals with peers”. She emphasises that building up relationships with peers and finding ways to invest alongside them in assets will be a key focus, as well as pursuing new GP relationships.

“North America and Europe are the deepest infrastructure markets, and we haven’t much of a presence there,” she says. “We only have an office in Auckland, so we are looking at fund manager relationships [in those regions] – either global sector specialists or managers with diversified exposures.”

McVitty adds that NZ Super Fund is looking at ways it might invest alongside peer funds or other asset owners in those markets. Managers that can offer co-investment opportunities alongside their funds are of particular interest.

The fund’s net-zero commitments are likely to narrow its list of potential manager options. “Climate change is a major focus for us,” McVitty says. “The philosophy of the fund is that climate change presents a major risk to our investment portfolio returns and ensuring that our portfolio aligns with a 1.5C net-zero future is best practice.

“What’s clear is that [our] expectations on managers are increasing, which involves the types of reporting we’re asking from managers, carbon footprinting, the roles we want to see managers play in actively putting in place decarbonisation plans with management teams, aligning portfolios to decarbonisation targets and assessing the impact climate change might have on valuations.

“We would also like to see managers making similar commitments to net zero, and that is more of a focus in our due diligence now when we’re establishing new relationships. We’re trying to minimise or avoid any exposure to fossil fuels. Frankly, even in a diversified portfolio it would be very hard for us to invest with somebody that has any fossil fuel exposure, including gas.”

Domestic focus

In New Zealand, there is greater scope for NZ Super Fund to make direct investments and focus on other types of nation-building infrastructure, such as transport or social infrastructure assets.

The fund has developed a new financing model to do this: SuperBuild, which it describes as “an end-to-end investment and delivery solution”. “As a sovereign wealth fund, we have a long-term investment horizon, so we are well-positioned to invest behind some of the long-term transformative infrastructure that New Zealand needs,” says McVitty. “We’re using SuperBuild to engage with central and local government, and other private-sector organisations, to identify major infrastructure needs and build partnerships to find solutions. The model has a few benefits. All the returns generated will go back to New Zealanders, ultimately. We can provide committed, long-term capital that will accelerate infrastructure delivery in the market. And we can partner to bring international expertise into New Zealand.

“The main focuses will be on large-scale urban development, where we’re looking at acquiring large tracts of land and re-zoning that for new communities and urban settlements with affordable housing, as well as clean energy and decarbonisation, which can help New Zealand meet its net-zero targets.”

The fund tried to do a version of this in 2018 when it partnered with Canadian pension CDPQ to present an unsolicited proposal to the government to finance, build and operate Auckland Light Rail. The project would have linked the city centre with Auckland Airport in one direction and Waimauku to the northwest. Consideration dragged on for many months before the government cancelled the procurement process. After getting through a general election in 2020, the government has restarted the process. So might NZ Super Fund be looking to come back to the table?

“We’re waiting to see what the new government working group decides to take the project forwards,” says McVitty, who will not be drawn further.

She also cannot state the potential size of SuperBuild or the ultimate asset allocation that NZ Super Fund wants to reach with its infrastructure portfolio, as neither figure has yet been made public. However, she does say: “We are looking to scale it up significantly.”

Wherever the portfolio ends up, NZ Super Fund is looking to make more infrastructure investments outside its home market. It is also looking for managers with the right sector expertise, and the right targets around climate change, to help it get there.

NZ Super Fund’s climate change strategy

The SWF joined the Carbon Disclosure Project more than 10 years ago, its first step towards understanding how climate-related risks could affect investment returns.

The fund formed a view that carbon risk was underpriced, partly because the timeframe over which its effects will be felt is too long for most market analysts – though, crucially, not for the fund, given its lifespan.

This led to the fund’s formal climate change strategy, announced in 2016, which has four parts:

Reduce: This element involves measuring the fund’s carbon footprint and targeting a reduced exposure to carbon relative to its reference portfolio

Analyse: This element integrates climate change considerations into the fund’s investment framework across the portfolio, particularly for active investments

Engage: This involves the fund working with key investments and assets to help them actively consider climate change in their strategies

Search: The fund actively looks for investments that will benefit from a changing climate or the transition to a low-carbon energy system.

NZ Super Fund also set targets in 2016 to reduce its emissions intensity by 20 percent and its ownership of fossil fuel reserves by 40 percent by 2020. It says it met these targets a year early, primarily by adjusting holdings in its equity portfolio. New targets were then set to reduce emissions intensity by 40 percent by 2025 and to cut fossil fuel reserves by 80 percent from 2016 levels.