Crown funds have a green light to keep investing in coal, oil and gas – despite New Zealand pledging to stop financing fossil fuels.
Analysis: Last week the Government signed up to a COP26 pledge to end international support for fossil fuels next year. This week, it confirms to Newsroom that its big ACC, National Provident and Government Superannuation funds are free to keep investing in fossil fuel producers far into the future.
On advice last night from the Ministry of Foreign Affairs, Climate Change Minister James Shaw's spokesperson said the pledge to stop “direct public support" of unabated fossil fuels, by the end of next year, did not rule out public investment by Crown funds.
The Ministry of Foreign Affairs is well-placed to seize on such nuance. It, too, will keep providing international aid funding to support diesel electricity generation in the Pacific. That aid money is, in the terms of the COP26 pledge, "limited and clearly defined" and few would begrudge it to vulnerable archipelagos like Kiribati – but it does highlight the range of exceptions to every pledge, every promise, that the world's leaders sign up to so grandly.
When James Shaw takes on a key role at the climate summit in Glasgow this week, co-chairing negotiations to make countries' emission promises under the Paris agreement transparent, he should make sure New Zealand is looking in that mirror.
New Zealand was one of the first 20 signatories to last week's pledge to align international public support towards the clean energy transition and out of unabated fossil fuels.
It says: "We will end new direct public support for the international unabated fossil fuel energy sector by the end of 2022, except in limited and clearly defined circumstances that are consistent with a 1.5°C warming limit and the goals of the Paris Agreement."
One can see the wriggle room. Does a new tranche of funding constitute new support? Is investment through a Crown Financial Institution like ACC considered to be direct support? Is coal power company Genesis, 51 percent owned by the Crown, considered to be part of the international unabated fossil fuel energy sector? If the Government funds a biofuel transition for Z Energy and Refining NZ, is that supporting fossil fuel, or an end to fossil fuel?
These are tough questions, because right now the New Zealand Government is closely entwined with big petroleum producers and users. It's finalising details of a clean fuel mandate with Z Energy, Air NZ and others that will allow those firms to continue in the fossil fuel business for years longer. It owns most of Genesis Energy and indeed, questioned why the company was not quicker to turn on its additional coal generation capacity in the August 9 power outages.
According to today's Newsroom Pro analysis of Environmental Protection Authority emissions reports, fuel companies Z Energy, BP, Mobil, Todd and OMV are among New Zealand's seven biggest greenhouse gas emitters after Fonterra. Genesis isn't far behind.
David Tong, the Wellington-based global industry campaign manager for Oil Change International, expressed dismay.
"Thursday's pledge to end new international fossil fuel finance was largely focused on export credit agencies and development finance institutions, but it does commit our Government to ending all direct public finance for unabated fossil fuels overseas from the end of 2022," he said.
"Reading that commitment down to allow New Zealand's Crown Financial Institutions to keep fuelling the climate crisis undercuts our commitment to 1.5ºC. Why should it matter whether public finance for fossil fuels overseas comes from MFAT or from a Crown Financial Institution?
"And why should the Government let ACC fund fossil fuel projects overseas that would be unlawful here?"
The International Energy Agency has concluded twice this year that there was no room for any new fossil fuel finance beyond fields and mines that were already under development, Tong said. Finance Minister Grant Robertson's latest Crown Responsible Investment Framework had failed to engage with this reality.
The pledge comes just a week after Finance Minister Grant Robertson announced a new responsible investment framework for the Crown Financial Institutions: the ACC, Government Superannuation Fund, National Provident Fund and the New Zealand Superannuation Fund.
Tong said that to be consistent with the pledge it signed last week, the Government should update the responsible investment framework before the end of 2022, to reflect the reality that there was no room for new oil, gas, and coal expansion and finance if the world was to limit warming to 1.5ºC.
"Failing to do so would undercut the promise we made on Thursday, and risk our international reputation," he said.
The Crown fund managers would argue the new pledge is a blunt tool; that a better strategy is to support coal, oil and gas companies to transition to low-emissions fuels – as the Government is doing in its work with Z Energy and others on a biofuel mandate.
But if the COP26 pledge lacks satisfactory strategic direction, New Zealand shouldn't have signed it. The alternative of signing it then finding ways to circumvent undermines both the Government's credibility and that of the pledge.
Robertson and ACC Minister Carmel Sepuloni, in their letter of expectations to the Crown financial institutions on October 28, said climate change was one of the greatest challenges of our time. Quoting the recently Sixth Assessment Report from the Intergovernmental Panel on Climate Change, they said there was "unequivocal evidence" that the global economy’s reliance on fossil fuel consumption was causing temperatures to rise, leading to drastic changes in the atmosphere, ocean and land.
"Our national wellbeing is vulnerable to the economic and environmental impacts of climate change, both locally in our communities and internationally through New Zealand’s reputation on the world stage and ensuring our national commitments are met."
The funds should measure and report carbon footprint metrics for their investment portfolios clearly, the ministers wrote, and in the case of fossil fuel reserve owners, also account for emissions from the end-use of their products.
In a joint response, the four Crown funds expressed their commitment to Paris-aligned investment portfolios, with investment strategies consistent with achieving global net-zero emissions by 2050 and limiting temperature rise to 1.5C.
The responsible investment framework does not prohibit them from investing in fossil fuels. Instead, Robertson said that in the case of fossil fuel reserve owners, reduction targets should also address emissions from the end-use of their products – which would mean, for instance, reducing emissions from transport, not just from the petrol companies that fuel it.
ACC chief investment officer Paul Dyer told Newsroom last night that the fund's strategy was consistent with the new responsible investment framework, and in fact progressing ahead of those targets in reducing emissions. But he had not seen the Government's COP26 pledge, and said ACC had not signed up to that. "It's the Government that signed up to it," he said. "So that's a matter for them, not for ACC."
ACC Fund
ACC’s ethical investment guidelines discourage investing in coal mining companies with more than 30 percent of their revenue from the sale of thermal coal. And the ACC Board’s Investment Committee has just launched a $50 million climate change impact investment fund.
But in responding to the responsible investment framework on October 28, ACC chair Steve Maharey gave a clue to the fund's position on investing in high-emitting businesses and infrastructure. “Institutional investors have enormous influence globally and an important role to play as the world transitions to net zero,” he said.
ACC has committed to new interim targets, committing to a 60 percent reduction in in the carbon intensity of our listed equity portfolio by 2025 compared to a 2019 baseline, and a 65 percent reduction by 2030. But, in a statement to Newsroom, ACC indicates it has no plans to stop investing in fossil fuels by the end of next year.
"Since climate change involves all industries the framework does not prescribe that carbon reductions must be achieved by reducing exposure to a single industry, such as fossil fuel producers.
"Rather than targeting a complete exit of these companies, we believe our decarbonisation strategy – which accounts for end-use emissions of the production of fossil fuel reserve owners – is aligned with a just transition which is economically sustainable. This is because there are countries and communities which require fossil fuels to maintain basic living standards and renewables are not yet able to meet the world’s growing energy demand."
ACC also warns that from the perspective of its portfolio’s financial objectives, the divestment of entire industries could reduce the fund's ability to mitigate risk since industries react differently to economic, social and geopolitical events. "Divestment of entire industries also fails to distinguish between companies with different strategies, meaning we may also miss investment opportunities in the energy transition."
And, picking up on Maharey's comments, the statement says: "We also believe that companies are more likely to raise their climate ambitions and deliver on undertakings if held to account by responsible investors, rather than being controlled by entities who are less climate-conscious and/or less transparent. We are encouraged that green shareholder resolutions at global company AGMs finally appear to be gaining critical mass."
Government Super and National Provident funds
Simon Tyler is the chief executive for both the Government Superannuation Fund Authority, which provides pensions for public servants, and the National Provident Fund.
He confirmed the two funds had committed to reducing the carbon intensity of their portfolios by 50 percent by 2025, but said fund managers intended to do that without compromising investment returns.
"We note in our view fossil fuel owners themselves are not big emitters: it’s the downstream use of their products for power generation, manufacturing and transport that causes emissions so our focus has to be across the whole spectrum of emissions," he said.
"Fossil fuel companies will be supplying energy needs profitably for many years yet which means they will be attractive investments at certain times."
"We use active managers to determine which investments are financially attractive and are working with them to ensure we meet our emissions targets. The path may not be a steady decline, however, as our managers gauge the pricing and value of the individual stocks.
As of today, he said, the funds still owned shares in some fossil fuel producers.
"Our managers engage with them to understand their transition plans and encourage full disclosure," he explained. "Transition to alternatives will require significant capital investment by some of these firms.
"Selling our shares to others will not change the companies’ transition plans and complete sale now may prejudice our investment returns."
New Zealand Super Fund
Unlike the other three Crown funds, the New Zealand Super Fund says it no longer has any "material, long-term holdings of fossil fuel reserves", and has also already achieved its 2025 carbon reduction targets.
What this means, in actual terms, is that it set a target are to reduce the potential emissions from fossil fuel reserves held by the Fund by at least 80% by 2025 – but this year, it has already reduced the potential fossil fuel reserve emissions by -93.6 percent. Its measures are based on independent third-party data on emissions intensity and fossil fuel reserves, provided by MSCI ESG Research.
On the same day that Grant Robertson announced the new responsible investment framework for the four Crown financial institutions, the NZ Super Fund also signed up to the Paris-Aligned Investment Initiative's global best practice framework to help it achieve net zero carbon emissions by 2050.
When it signed up, chief executive Matt Whineray said getting a large and complex investment portfolio like that of the NZ Super Fund – which is projected by Treasury to be worth in excess of $330 billion by 2050 – to net zero, without compromising long-term investment returns, was a challenging task.
“It’s not possible to get to net zero simply by excluding carbon-intensive companies from investment," he said. "Companies from all sectors will need to make net zero commitments and develop plans to get there by 2050, or sooner. We’ll be engaging with companies and working with our external investment managers to help achieve the ambitious level of systemic change that is required.”
Ministry of Foreign Affairs
New Zealand does not use international development cooperation to support coal, crude oil or natural gas projects in any form, according to Minister of Foreign Affairs spokesperson Fleur Thompson.
But much of its aid work is in the Pacific, which is exposed to natural disasters, especially as the climate changes.
"Because of the region’s vulnerability to humanitarian or emergency events, the number of rural and remote communities, and the fragility of electricity grids New Zealand does occasionally provide support for backup electricity generation, which can include diesel," Thompson said. "This ensures that in the event a renewable energy system is unable to operate, people can still access electricity."
Diesel was used to back-up or supplement renewable energy systems in rural or remote locations, she said, where there was no access to an established electricity grid.
For instance, New Zealand is supporting the development of solar photovoltaic-diesel hybrid mini-grid systems to power four rural villages in the Solomon Islands. "Renewable solar PV generation is expected to meet 80 percent of community electricity demand, with the balance provided by diesel generation to ensure technical and economic viability," Thompson said.
New Zealand was also helping with the urgent repair of one of Kiribati’s main grid-connected diesel generators, which had failed causing disruption to electricity supply on the main atoll of South Tarawa. "The outages have affected critical services including health, education and potable water supply, and put Covid-19 vaccine stocks at risk."
The COP26 pledge specifies that government's may support fossil fuels in "limited and clearly defined circumstances". As the ministry acknowledged, these have not been articulated further, but Thompson said they could be interpreted in the context of the balance of the sentence as being not inconsistent with a 1.5°C warming limit and the goals of the Paris Agreement.
"The goals of Paris Agreement are to be considered in the context of sustainable development and poverty eradication," she said. "New Zealand’s limited exceptional support for diesel generation in the Pacific was therefore assessed to be consistent with the Statement."
NZ Trade and Enterprise
NZ Trade and Enterprise is not supporting fossil fuels, the agency says. Its investment team only supports fossil fuel companies on their transition away from fossil fuels to renewables.
Tim Green, the agency's general manager of strategy, performance and partners, said it had no funding schemes to support the fossil fuel sector, and there were no International Growth Fund grants for fossil fuel exporters. "No funding or financing is allocated to enabling continuing fossil fuel production."
Green said Trade and Enterprise's primary focus was on supporting renewable electricity development and the development of hydrogen ecosystems and decarbonisation in New Zealand.
