A Clean Capitalist Strategy for Norway s Government Pension Fund Global (GPFG) Will Moniz Ivana Lochhead Sana Hanif

Transcription

1 $32,900,000,000

2 A Clean Capitalist Strategy for Norway s Government Pension Fund Global (GPFG) Will Moniz Ivana Lochhead Sana Hanif

3 There is a tremendous opportunity for economic growth, for jobs, for success, by countries that get that the environment and economy go together. 3

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5 The GPFG s industry exposure does not proportionally correspond with its carbon footprint Sector Weights Basic Materials 5.23% Utilities 2.36% Oil & Gas 9.75% Consumer Services 5.31% Consumer Staples 18.37% Financials 25.60% Health Care 13.06% Telecommunications 4.11% Technology 11.31% Industrials 4.89% % 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% -5% Basic Materials 85.16% Utilities Oil and gas Consumer Discretionary Consumer Staples Financials Weighted Average Return Health Care Telecommunication % of CO2 Technology Industrials 5

6 The Fund is facing increasing pressure from external factors, risking stranding fossil fuel assets Increase in Climate Change Regulation Fall in the Price of Oil Advances in Clean Energy Technology Diminishing Norwegian Oil Reserves 6

7 Our analysis and strategy addresses the following four objectives for the Fund Minimize the carbon footprint Reduce risks that might strand assets Maximize returns and engagement impact with companies Position the fund to thrive in and drive a world that does not exceed an average 2-degree temperature increase 7

8 The Fund s responsible investment goals and company expectations are not aligned Uneven carbon accounting practices and weak engagement Uneven carbon reporting across companies and sectors Use of climatefriendly metrics Non-binding engagement strategy 8

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10 ROAD to 2020 Assess Divest Engage AIM FOR Harmonize Collaborate Create

11 We believe the solution should engrain the following conditions Precise Circular Selfreinforcing Adjustable Replicable Enforceable 11

12 GFPG s investments need to be financially and environmentally desirable Potential Investees Norges Bank Investment Management Not Approved Financially Desirable Equities DISQUALIFIERS Lack of transparency on GHG emissions Long-term risk from operations Weak accounting and reporting of ESG issues Disregard for international principles Approved Financially and Environmentally Desirable Equities Evaluate Performance and Adjust Investment Commitment Re-Evaluate Risks and Fund s Objective 12

13 ROAD to 2020 Assess Divest Engage

14 Assess 14

15 Due to variation in accounting of Scope 1 and 2 emissions, use multiple data suppliers (in addition to Trucost) to verify Supplier 1 Scope 1 Emissions Scope 2 Emissions Problem: Variation in scope of GHG accounting, self-reported and amongst suppliers. (Direct) (Indirect) Primary Data Supplier Data Suppliers for Verification Supplier 2 Scope 3 Emissions (Indirect) 15

16 To further analyze company performance, use emissions intensity metrics during screening Problem: Emissions intensity as a representative measure of carbon performance for all sectors. Sector (Sample) Emissions Intensity Common Variable Basic Materials Emissions / unit of material refined Utilities Oil & Gas Emissions / kilowatt of power produced Emissions / joule of oil and gas produced 16

17 In addition to carbon accounting, apply climate-friendly metrics during equity analysis Problem: Limited use of climate friendly sector-specific metrics in equity analysis. Basic Materials Oil and Gas Sector Utilities Share of zero-carbon in refinement process (Green) Share of carbon capture and storage (Green) Estimated remaining lifespan of power plants (Brown) 17

18 Divest 18

19 With inadequate response or lack of commitment to reporting expectations, NBIM will divest Problem: i) Weak response rates from companies to provide data on carbon performance Companies invested in and potential investees Binding Commitment with signatures from company Boards Companies subjected to evaluation criteria ii) Considerable variation in the quality of reporting No response Refusal to commit Companies are divested from 19

20 The full divestment will occur over three years offering time for companies to comply Problem: Non-compliance from companies on the new reporting standards. 3-Year Divestment Plan for Non-Compliant Companies Year 1 Year 2 Year 3 25% 60% 100% Divestment Outflows (% of Ownership) Consideration: High yield sectors will be exposed to a more cautious divestment plan (see next slide). 20

21 For the highest yield sectors, a partial divestment strategy should be implemented to protect the Fund s returns Problem: Reconciling stranded asset risks and protecting the Fund s returns. 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 4.40% 1.70% 1.93% Dividend Yields 3.01% 2.87% 2.51% 4.45% 1.87% 4.42% 2.89% 3-Year Divestment Plan for At-Risk Companies (asset stranding) Year 1 Year 2 Year 3 25% 40% 60% Divestment Outflows (% of Ownership) Consideration: Based on market cap (> 5 billion NOK), the divestment period will extend to 6 years. 21

22 100% divestment from carbon-intensive sectors does not yield higher returns Impact on CO 2 Emissions Expected Portfolio Return % MT of CO % Decrease 10% +1.12% Increase Current With Divestment 5% Current With Divestment Notes: Assuming two most carbon intensive sectors (Basic Materials and Utilities) are completely divested from Analysis based on top 100 equity holdings 22

23 Engage 23

24 Carbon-efficient companies should be rewarded with additional capital, redirected from companies that are carbon-intensive If 35% (carbon-intensive), redirect 25% of capital to carbonefficient companies. *As long as returns of the companies are comparable Problem: Nascent strategy for investing in carbon-efficient companies. Redirecting Capital Carbon-Intensive Carbon-Efficient 0% 50% 100% 35% % Reduction in Emissions Intensity from Base Year (Scope 1 and 2) Consideration: This redirection plan should be conducted on an annual basis. 24

25 Targets should be set for at-risk companies to avoid divestment Binding Targets for Cleaner Performance Year 1 Year 2 Year 3 Year 4 Year 5 Problem: Lack of common environmental performance goals for companies atrisk (ie. stranded assets). % Exposure to Green Technologies % CO2 Emissions Decarbonisation Compared to 2015 % of Capital Expenditure with Green Bonds 15% - 20% - 30% 20% - 30% - 50% 5% - 15% - 30% 25

26 Clean Consulting is a business opportunity to work with divested companies or current investees to transform operations Problem: Lack of rehabilitative engagement policy with at-risk or divested companies. Clean Consulting is a division of Norges Bank that provides sustainability strategy and lowcarbon transformation services for current investees and recently divested firms. 26

27 There is an incremental return of $38.7bn from a cleaned portfolio Source: Corporate Knights 27

28 AIM FOR Harmonize Collaborate Create

29 Positioning the fund for the future AIM FOR STRATEGY Investors pledge on Portfolio Decarbonisation Coalition (PDC) Harmonize Mandatory investor disclosure vs. climate targets (2016 onwards) G20 / Financial Stability Board Climate Disclosure Taskforce Collaborate Create 29

30 Harmonize Collaborate Create 1. Screen based on Scope 3 (in addition to Scope 1 and 2) 2. Integrate GHG emissions data with other environmental metrics 3. Screen based on potential emissions for fossil fuel reserves and locked-in emissions 4. Audit suppliers and companies for accuracy and reliability in GHG emissions 1. Form coalitions among institutional investors for the wider adoption of climate agreements 2. Use the portfolio s decarbonisation strategy and coalitions with other investors as a way to signal the market towards achieving critical mass 1. Engage with companies through knowledge sharing regarding the changing environmental landscape 2. Create a progressive annual devaluation scheme for stranded assets 3. Create government lobbying strategy to encourage clean technology development through implementation of subsidies and tax breaks 30

31 Taking action and setting targets Phase 2 Phase 1 Phase 3 Action: Immediate engagement with the Fund s stakeholders on decarbonisation objectives Research, develop and test new exposure metrics Set up and pilot Clean Consulting Set new standards for accounting and reporting and collaborate with stakeholders for alignment Targets: 90% implementation of new standards amongst companies in equity portfolio Verify accounting for Scope 1 and 2 emissions from additional data suppliers Fully deploy sector-specific carbon and green/brown exposure metrics Harmonize (Target) o Achieved with at least 70% of all equity holdings Collaborate (Target) o Achieved with at least 50% of all sovereign funds with assets in excess of 1 billion USD Create (Action) Forum to engage with experts and taskforce established to achieve objectives 31

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33 APPENDIX 33

34 Costs of Not Decarbonizing AUM (in $mn) Cost of not decarbonizing(in $mn) Cost as % of AUM Australian Government Future Fund 83,152,631,000 1,546,602, % Australian National University Endowment Fund (ANU Fund) 686,980,602 53,850, % Canadian Pension Plan Fund (CPP Fund) 199,825,920,000 7,025,528, % Ontario Municipal Employees Retirement System (OMERS) 54,374,400, ,153, % Ontario Teachers' Pension Plan (OTPP) 115,081,907,200 Already decarbonized University of Toronto Asset Management Corporation (UTAM): Long Term Capital Appreciation Pool, Pension Master Trust fund, and EFIP 5,588,480, ,418, % McGill University Endowment 990,520,320 32,330, % London School of Economics 147,939,674 3,062, % Wellcome Trust 27,448,424, ,680, % Bill & Melinda Gates Foundation Trust 40,564,000,000 1,897,962, % Harvard Management Company Incorporated: Harvard Endowment 37,600,000, ,290, % New York City Employees' Retirement System (NYCERS) 54,451,000,000 1,618,154, % Vermont Pension Investment Committee (VPIC) 4,020,000,000 79,387, % Algemeen Burgerlijk Pensioenfonds (ABP): "Dutch Civil Servants Pension Fund") 382,344,000,000 9,366,211, % Average Cost: 3.18% Analysis for GPFG Market Value of the fund as of Sept-15 in NOK 7,019,000,000,000 USD/KOR Exchange Rate as of Sept Market Value of the fund asof Sept-15 in USD 824,261,640,538 Cost as % of AUM 1% 2% 3% 4% Cost of not decarbonizing (in USD bn)

35 Details on Solution Elements Precise > Steps are clearly defined Circular > Clear connections in a repeatable process Self-Reinforcing > Each component of the process strengthens the effectiveness of others Adjustable > Flexible to changing environmental and regulatory conditions Replicable > Strict measures to maintain investment Enforceable > Can be used by other institutional investors to create a critical mass 35

36 As a recap Short-term Strategy ROAD to 2020 Assess Divest Engage Reduce risks that might strand assets Maximize returns and engagement impact with companies Long-term Strategy AIM FOR Harmonize Collaborate Create Minimize the carbon footprint Position the fund to thrive in and drive a world that does not exceed an average 2- degree temperature increase 36

37 Saving for future generations of Norway The Government Pension Fund Global (GPFG) is for the people of Norway with its mandate set by the Ministry of Finance. 1. To maximize realized value of the fund while maintaining acceptable levels of risk 2. To integrate environmental, social and governance issues into investment process 3. To establish investment best practices that have a long-term approach 37

38 Mitigating potential risks Risk Benchmark indices become invalid for tracking Active management can increase expense ratios due to greater efforts required to examine investments Fiduciary duty varies by region and according to common or civil law jurisdiction Mitigation Use benchmarks that are suitable to the Fund s new investment process or support the creation of new indices Active engagement should be pursued such that information ratio (on net return basis) is maximized Introduce Information Ratio on carbon footprint Active management should then seek to maximize return information ratio while minimizing carbon footprint information ratio Engage policymakers on long-term performance issues, such as strengthening corporate reporting Report to beneficiaries on how ESG commitments are implemented and outcomes produced 38

39 Projections for the future 50% decrease in carbon footprint by 2030 Increased exposure to Financials, Health Care, Clean Technology sectors ensuring portfolio tracking error<1% Transformation of over 40-50% of divested companies by 2020 Life-cycle carbon accounting achieved in 30-40% of invested companies by % of institutional investors commit to our investment mechanisms to achieve critical mass by

40 Current Environment Investors are facing increasing risk of stranded assets in the context of fossil fuels (ie. assets that lose value or turn into liabilities before their expected economic life). Three drivers for fossil fuel asset stranding are the increase in climate change regulation, fall in energy prices and advances in energy systems. Climate Change Regulation External Drivers Over the last two decades, there has been a dramatic increase in the number of policy introductions The carbon budget tool was introduced which tracks levels of carbon levels against the probability of the 2 degree Celsius target In recent years, there has been an increase in regulation aimed at protecting human health (coal and oil) Impact on GPFG Policy signals and target setting will continue to be important More accurate metrics available for measuring environmental impact for investment decisions Lower Energy Prices The recent fall in the price of oil is forcing producers to continue operating at a loss or shut down (ie. stranded) There is the risk of higher volatility and lower returns for oil Innovation in Energy Systems Many sectors are experiencing improvements in energy efficiency in terms of buildings, industrial processes and transportation There is ongoing advancement in technology in the space of renewable energy, energy storage and oil recovery Increased efficiency will result in stronger revenue performance and therefore overall portfolio strength Increasing importance of green bonds 40

41 Potential Impacts Legal & Political Social & Environmental Level of Technology Financial Increased pressure to pass legislation that supports critical mass Harmonization of policies, such as carbon pricing, across nations Employees of divested companies lose jobs Regions heavily dependent on fossil fuels enter recession Demand for clean energy technologies not met by supply Carbon capture storage receives increased investment to maintain status quo Weaker shortterm growth Benchmark, indices become invalid for tracking 41

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44 Aggregate Market Value by Sector GPFG s Top 100 Equity Holdings 50,000,000,000 45,000,000,000 Aggregate Market Value (USD) 40,000,000,000 35,000,000,000 30,000,000,000 25,000,000,000 20,000,000,000 15,000,000,000 10,000,000,000 5,000,000,000 0 Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecom Utilities 44

45 Ownership Position by Sector GPFG s Top 100 Equity Holdings 3.5 Ownership Position (average) Basic Materials Consumer Goods Consumer Services Financials Health Care Industrials Oil & Gas Technology Telecom Utilities 45

46 2014 Responsible Investment Report Reporting and Assessment 1. In 2014, 415 companies assessed in six sectors with particularly high climate risks: basic resources, building materials, chemicals, oil & gas, power generation, and transport 2. Assessment based on data provided reported to CDP and supplementary data from Trucost 3. Considerable variation in the level of reporting of climate risk between companies and sectors (range from 49 percent in Oil & Gas to 82 percent in Utilities) percent of companies in selected sectors did not respond to request to provide info OR report to CDP Primary Supplier Comparison Supplier 46

47 2014 Responsible Investment Report Greenhouse Gas Emissions Difference due primarily to risk-based divestments Source: NBIM s 2014 Responsible Investment Report (page 60) 47

48 Interaction with Companies 2,641 meetings with companies in 2014 (ESG issues raised in 623 of these) Source: NBIM s 2014 Responsible Investment Report (page 34) 48

49 Standards of Sustainability Reporting Expectations documents published on climate change management sent to companies Companies regularly evaluated on how they live up to expectations Results used as a basis for contact with companies with weak or non-existent reporting NON-PUNITIVE MEASURES In 2014, 30 companies that had neither answered letters or improved their reporting received a new letter urging disclosure improvements and possible consequences for voting 49

50 Climate Change Strategy Expectations to Companies A. Integrate relevant climate change challenges and opportunities in investment planning B. Integrate material climate change risk in risk management C. Report material climate change risks and greenhouse gas emissions D. Transparency on interaction with policy makers and regulators, and positions on climate change legislation and regulation 50

51 GPFG s Largest and Smallest Single Investments in the Equity Portfolio Source: NBIM s 2014 Responsible Investment Report (page 13) 5 billion NOK ~ 566 million USD Exchange Rate (as of Jan. 17, 2016): 1 NOK = 0.11 USD 51

52 Samples of Green/Brown Exposure Metrics Source: 2 Investing Initiative s Climate Strategies and Metrics Report 52

53 Equity Investments by Size & Distribution of Voting Rights Source: NBIM s 2014 Responsible Investment Report (page 37) Top 50 equity investment by size accounted for 23% portfolio holdings Voting rights between 0-2% constitute 75% equity portfolio holdings 53

54 Risk Management In 2014, broad-based initiative launched by NBIM to collect and structure and quantitative information on environmental, social and regulatory issues emphasis on mining sector. Partners include: 54

55 Environmental Mandates Ministry of Finance requires that environment-related instruments normally amount to between 30 and 50 billion NOK: The Fund s portfolio of environment-related equity investments had a market value of 42 billion NOK and invested in 220 companies (end of 2014) 55

56 Risk-Based Divestment Systematic approach to risk-based divestment Environmental and social factors integrated into broader financial assessment Factors considered Geographical exposure Most relevant sectors If activity accounts for majority of business GHG emissions Deforestation Water use 2014: 49 companies divested from 56

57 Membership and Other Support Program (Participation) CDP Water Program (Lead sponsor) CDP Climate Change Program (Member) Columbia University International Investment Conference on Sustainable Development (Sponsor) Asian Corporate Governance Association (Foundation sponsor) Principles for Responsible Investment (Founding member) Investors Statement on the Extractive Industries Transparency Initiatives (Signatory) Source: NBIM s 2014 Responsible Investment Report (page 19) 57

58 PRI s Six Principles 1. We will incorporate ESG issues into investment analysis and decisionmaking processes. 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. We will promote acceptance and implementation of the Principles within the investment industry. 5. We will work together to enhance our effectiveness in implementing the Principles. 6. We will each report on our activities and progress towards implementing the Principles. 58

59 Estimated Costs for Clean Consulting Full Deployment Cost (US$) Salaries for consultants 2,000,000 Salaries for administrative staff 300,000 Office space rental 19,800 Utilities 13,200 Stationary 5,000 Marketing Materials 18,000 Legal Fees 200,000 Training 160,000 Insurance 360,000 Computer hardware and software 39,000 Travel Expenses to meet companies on-site 80,000,000 Total $83,115,000 59

60 Bibliography (select) Climate change strategy. Norges Bank Investment Management. Consultation Report of the Expert Group on the Government Pension Fund Global s use of instruments and investments in coal and petroleum companies. February 02, Responsible Investment GPFG. Norges Bank Investment Management Environment related investment mandates in GPFG. November 21, 2014 Climate change investment solutions: A guide for asset owners. IIGCC, Investor Network on Climate Risk, Investor Group on Climate Change, Asia Investor Group on Climate Change Ashim Paun, Zoe Knight, Wal-Shin Chan. Stranded assets: What s next. HSBC Global Research. April 16, 2015 Joshua Humphreys. Institutional pathways to fossil free investing. IIGCC. May 2013 Remy Briand, Linda Eling Lee, Sebastian Lieblich, Venorique Menou, Anurag Singh. Beyond divestment: Using low carbon indexes. MSCI. March 2015 Climate strategies and metrics. May 2015 Bloomberg Terminal. October 30, 2015 Norges Bank Investment Management. Website. < > 60