Page 153 – Top1000funds.com

New Zealand Super just returned its best-ever result of nearly 30 per cent reflecting the souped-up risk profile of the fund. In addition to the gains from its overweight position to equities, the fund under CIO Stephen Gilmore also fully hedged the currency. Amanda White explores the fund’s strategy and the risk budgeting review currently under way.

New Zealand Super’s long time-horizon – it doesn’t need to make payments until 2050 – allows it to take a lot of risk that other investors might not have the luxury of taking. But without the strong governance of the fund, this time horizon alone would not be enough to execute a risk-taking strategy, the fund’s CIO, Stephen Gilmore, told Top1000funds.com in an interview.

“We have a reference portfolio of 80:20 so that does pretty well in environments of rapid gains in equities,” he says of the financial year return. “In addition to that we had fully hedged the currency so we got the benefit of that currency risk premium. And a number of our active risk activities did pretty well too.”

In big picture terms, Gilmore says the whole approach is guided by a number of factors that allow for risk taking. The really long horizon is one, and the strong governance arrangements to facilitate that long view is another important part.

“We have to have strong governance in place to buy when it’s a bit nerve racking.

At time of the COVID shock, when credit spreads widened, we leaned-in to the sell off buying equities and taking greater credit exposure and we’ve got the benefit of that.”

One of the more important discussions at the fund in the past little while has been currency hedging. Gilmore describes this discussion as “rigorous debate on how much to hedge”. In the end the fund decided to fully hedge the currency.

“The considerations were multiple. We have a high level view there’s a currency risk premium associated with NZD, we get paid for taking exposure. We have to trade that with the liquidity implications of hedging, and what that means for diversification in the portfolio.”

Another driver of return recently, and one that has added value over many time periods, is the fund’s dynamic asset allocation, tilting, program (it’s added 1.1 per cent for the 10 year-period to 2019).

Gilmore says the tilting program has a lot of latitude to take risk and “we took a meaningful amount of risk”.

“The tilting program has been extremely successful. Conceptually it’s reasonably simple, we think about where fair value may be and the tendency for markets to move towards fair value, we don’t necessarily have concept of how quickly that will happen,” he says. “We have good risk appetite and decent time horizon.”

But to make that strategy work it is essential to have strong governance to support the sometimes uncomfortable buying opportunities.

“You have to stick with it, it’s a form of volatility harvesting and you need to focus on where you think the value is. We are continually updating those views on where the equilibrium is,” he says.

Risk budgeting

New Zealand Super introduced a formal risk budgeting process in 2014 and conducts that every five years. It’s now going through that process.

Currently some of the biggest sources are internal, the DAA tilting is one of those as well as

credit and funding mandates that lean in when there is a market sell-off.

“Those could change as we go through the current risk budgeting exercise,” Gilmore says.

“There are a few things that are different this time. When we introduced the formal process we didn’t have the history of experience and we didn’t know if we were any good at being active, we now have that information as well as more information on things like correlations. We keep refining the work and improving the information.”

More specifically the fund is doing more work to integrate liquidity aspects.

“We are incorporating information from our experience, some areas turned out to be more successful and some less which may impact the overall level of risk, as well as liquidity and correlation between different investment opportunities,” he says. “The secondary consideration is we do vary risk through time. We will have a target for many of those areas that will vary through time depending on how attractive we think it is.”

The risk budgeting exercise will be completed by June next year.

Scenario planning for the future

Gilmore said that the pace of the COVID-induced market downturn surprised many investors and for New Zealand Super was a conduit to question assumptions.

Scenario testing and the investigation of some possible structural shifts as well the work on risk budgeting ensued.

“We are looking at higher inflation, how transitory is it, how sustained is it, and what’s happening to growth and productivity. We want to think about the portfolio performance in different regimes,” he says.

The fund has a particularly high growth orientation and so when thinking about the future an interrogation into strong growth or weak growth or high inflation or if rates change.

“For a growth-orientated portfolio like ours the worst case is a downturn in growth like depression, but also stagflation where get high inflation and no growth is also bad for the portfolio,” he says. “Given our long horizon we don’t do too much but at the margin we are increasing our exposure to real assets. The real thing is to understand what happens when we come to those environments.”

So what if something has changed? For some time the team has been looking at a “structural shifts assessment” where it has investigated a lot of possible contenders for shifts which has been narrowed down to five core possible shifts.

The first of those is income and wealth distribution inequality, and whether there are shifts from capital to labour, what that means for margins and equities and redistribution and the confluence of monetary and fiscal policy.

“We’re thinking about a world of fiscal dominance, the attitudes to budget deficits and public debt levels, and if rates are at zero what does that do to the allocation of capital and efficiency of market, and to growth.”

Gilmore says the team has questions around how this plays out the long term and a world in which more is determined by policy action rather than prices.

Geopolitics, the relationship between China and the US and the implications for globalisation, capital of markets and technology, is also a key consideration.

Other key topics include work flexibility and digitalisation, including crypto and smart contracts, and how that changes the investment universe. Climate change of course is also on the agenda.

“We are looking at all those things and asking so what? Does it have any impact on the way we do things? We’re unsure at this moment.”

Asset owners increasingly encourage their asset managers to improve diversity, but both owners and managers report the need to grow diverse talent coming into the investment industry, according to recent research from asset managers and owners including Unilever and the New York Presbyterian Hospital for Russell Investments conducted by Cerulli Associates, the global research and consulting firm.

Asset owners and managers says their efforts to recruit and hire diverse employees is limited by small pools of talent. Solutions include broadening the group of universities from which they draw talent or specifically targeting certain Historically Black Colleges and Universities.

For entry-level roles, asset managers have traditionally targeted certain universities, falling in line with “you hire who you know” thinking. Some have addressed this by expanding the group of universities from which they draw talent. Others have implemented “blind” hiring processes, where they don’t target any specific universities.

Some participants (both asset owners and managers) said that their companies have begun to broaden their focus on academic majors as well. For experienced candidates (non-entry-level roles), organizations are broadening their focus to roles outside the asset management space. Notably, for some positions that require asset management experience, this is more challenging and highlights the reason why industry participants are putting efforts into growing the pool.

Survey respondents also cited challenges in retaining diverse talent at the mid- level career point. Measures meant to address this problem include the provision of career development and mentorship programs, while employee engagement surveys help investors identify areas of “flight risk” as well as the ability to assess their level of inclusivity. Self-evaluation surveys are used to measure an organization’s level of inclusivity. Other tools used are alternative meeting formats, where employees are given the opportunity to speak their mind both before and after meetings.

The survey found firms are competing for the same limited pool of candidates for roles requiring experience in the asset management industry. This especially applies to roles requiring investment management experience.

By including diversity inquiries in their RFPs, asset owners encourage managers to consider diversity at their own organizations and adopt measures to improve. Many asset owners questioned spoke of efforts to select woman- and minority-owned firms as asset management partners. However, others say that looking at diversity at the ownership level within an asset manager is an incomplete approach, as it does not consider the diversity of the employee base.

Asset managers tend to be larger than asset owner investment offices which has several implications for their D&I approach. Namely, they are able to evaluate diversity more granularly and can gain exposure to more demographics and absorb the corresponding costs more easily.

Factors driving owner and manager’s diversity efforts include both internal and external demand. Internal demand refers to demand from within the organization – either top-down or grassroots bottom up. For institutional investors, external demand comes from end-beneficiaries and, in the case of corporates, clients that their sponsoring organizations serve.

We just need more

Some asset owners and managers told Cerulli that they do not have specific diversity benchmarks or targets. These organizations are more directional, taking the approach, “We just need more.” While they are not necessarily behind in considering diversity measures, these organizations tend to be further behind in achieving results.

“Changing the makeup of your employee base is not something that you can do quickly. You want it to happen naturally over time. That departure of early career hires is something we’ve tried to fix through development and mentorship programs. The jury is still out on trying different things. Large firms have the resources to do those things. Do smaller firms have the ability to do that? I don’t know,” said one asset owner respondent.

In addition to forming their own peer-to-peer partnerships, asset owners and managers look to partner with third-party organizations specifically formed to address diversity. Examples of these third parties include non-profits such as Girls Who Invest, The Robert Toigo Foundation, and Invest in Girls.

COP26 has had many critiques and my review, in this article, gives it just over half marks. The phrase ‘good COP, bad COP’ summarises it well and how to view it depends on framing and context.

One good note was that the marching orders for the investment industry have emerged at least at a high level. The industry is now more broadly committed to a significant role in the implementation of this great transition to a net-zero economy, starting with a halving of carbon in the decade ahead. So, the road from Glasgow now needs its roadmap and some key milestones.

In the 3D investment framework is a gamechanger article I argued that the investment firm of the future must have the 3D investing model, comprising return, risk and impact on its roadmap. Here I argue that something even more significant is lined up for the asset owner of the future in which shifts in convention, collaboration and culture are needed for the transformational changes ahead.

Convention

The investment models – ie the structures, processes and content – used in our industry have evolved over time into a range of best practices. That paradigm is being shifted by large-scale changes to asset owners’ circumstances, particularly relating to sustainability, the prevailing investment macro and governance.

While sustainability and ESG forces have now largely been integrated, there is further to travel into 3D investing and impact. And central to this new model is universal ownership theory[1] and the rise of systemic risk.

We also have a new investment macro. The succinct version of this is the rise of private market investing and the fall of 60-40 as the main responses to lower-for-longer interest rates and returns. This is calling for as much unlearning as new thinking as one shouldn’t use an old map to explore a new world.

The last shift is organisational in nature. Most asset owners have kept to a basic benchmark-oriented model in which their boards have ownership of investment policy via a policy portfolio and implement using outside investment managers. But with more complex goals coming from these paradigm changes (like net zero), the shift to an outcome-oriented model is increasingly attractive alongside making increases to internal capability to manage in a more streamlined, sophisticated and – most of all – holistic way. The test of this approach is at the total portfolio level – where every investment contributes to the joint goals of maximising risk-adjusted returns and alignment to net-zero commitments[2].

These shifts are leading asset owners to contemplate future actions that are substantially dissimilar from today’s actions. Managing real-world impact is the biggest example. That calls for new versions of collaboration and culture.

Collaboration

For this transition, we need a big shift in priorities in the fields of active ownership, engagement with asset managers and in engagement with sustainability NGOs like PRI. This will require asset owners to build new capabilities in leadership and teamwork.

Systems leadership is quite a good marker for the new type of leadership we need to enable the collective action so critical for success. This is collaborative leadership that finds joint solutions to common problems framed by a joined-up understanding of the interconnected, but messy, systems of which we are a part. It is built on respect for the multiple strands to the challenges and the multiple people that have a stake in the problems, and on a realism that the there are multiple facets to any problem requiring thought though and holistic solutions. A systems leader works with the belief that their, and their organisation’s, success depend on co-creating wellbeing within a very large system.

Part of this requires more attention to be given to effective teamwork which is, in effect, the principal way value is created in investment organisations. But the focus on making teams work well is largely absent even though the ways to do so are quite self-evident. That is not to say it is easy. Working with the enablers of cognitive diversity, collective intelligence and organisational culture to enhance team dynamics and engagement requires confident leaders with a high emotional intelligence and systems leaders that walk the talk by empowering deeper collaboration and sustainable cultures.

Culture

In the aforementioned 3D gamechanger article I suggest that culture is symbiotic with sustainability, whereby positive culture supports sustainable investing and vice versa. And that organisational culture has been deepened and enriched in many places by the wider purpose and goals mantra that has emanated from the sustainable-investing model.

The pandemic has reinforced these links with many financial institutions responding to the difficulties experienced by the workforce by taking more humanistic pathways. This has been a differentiator for some, but it obviously does not register for all, with many organisations still seeing sustainability through a business-first lens and not the people-first lens, which I think it requires.

A rapidly changing society is a new factor entering an equation where climate change casts such a long shadow. There is a resultant societal zeitgeist which increasingly reflects the resentments of harms caused and a less-than-just transition. The systemic risk of these social changes is significant. And a conceivable scenario is a world in which investment organisations’ social license to operate is downgraded or even taken away. The key is for asset owners to recognise the rise of systemic risk and build critical strategies to address it.

The different roads from Glasgow stretch out in front of us, with many finishing in dark places. But we can all make brighter choices about the role of our influential industry in a high-stakes transition, if we take seriously the great responsibility that comes with this power.

What did we get from COP26? Doing what we can with what we’ve got
This personal view is through an investment industry lens using a systems-wide perspective.

Marks

Overall COP26 assessment:

1½/3

§ Glasgow was never the place to solve the climate crisis but it has been a place to get better alignments in place – science, politics, civil life, rules and principles. And signal some marching orders. We have made progress

§ There has been improved holistic understanding and to some extent inclusion of nature-based solutions (carbon sinks, forestry, oceans intact) and of financial commitments and solutions

§ A version of the Stupidity Paradox* among nation-state administrations is holding back progress. In Glasgow communications were over-simplified, over-optimistic and under-authentic. The saying-doing gap (greenwashing) was everywhere (as Greta Thunberg pointed out) as was political correctness (except remember Tuvalu)

World leaders coming together with appropriate seriousness & collaboration:

1½/3

§ The absence of systems leadership in Glasgow was omnipresent, we got myopic leadership. At no time have we needed systems leaders more because we face a host of systemic challenges beyond the reach of existing institutions and their hierarchical authority structures

§ This is the first COP where we did not debate the direction of travel, just the speed. But we are doing that with a lack of urgency

§ We have been given a road from Glasgow just as we had a road from Paris

Passing the baton – support for a wave of initiatives; battling new conventions

2/3

§ Glasgow signalled the considerable progress in the finance community with capital an increasing force in tackling the climate emergency

§ The rainbow aspect of the climate coalition was evident – activists, academics, NGOs, lobbyists, business and government all part of a wide stakeholder ecosystem addressing the planetary ecosystem

§ Climate challenges are producing peak complexity and a messiness with considerable challenges to convention which those with the baton are not yet in great shape to address

Collaboration – with influence through soft power and systems leadership:

1½/3

§ Relationships across the value chain and with peers are starting to be deepened and sharpened with industry collaboration groups (PRI, GFANZ, etc) much more significant

§ The market infrastructure in climate investing (regulation and standards, data and practices, etc) is really immature and is leading to a logjam of ten years of work needing to be squeezed into one or two. Glasgow confirmed a few areas of progress, notably financial market sustainability disclosures

§ Countless collaborative initiatives have started in the past decade but failed to foster systems leadership within and across organisations

Culture and change in investment private sector:

2/3

§ This is a great commercial private finance opportunity that can galvanise much more energy and creativity but to exploit this investment organisations must step up a lot in their sustainability credentials and edge

§ Glasgow has helped signal to actors in the financial sector to come on board and has directed the focus on where capital should be moving and what standards are needed

§ The main factors supporting the winning business models are true commitments to net zero, change capabilities and strong culture which makes this tough for most organisations – only some will make it. As prevailing industry cultures remain overly self-interested, they may find it easier to avoid the challenges and occupy the boltholes** like free riding and greenwashing that are more about looking good than being authentic

Overall marks

COP26 has been moderately successful, particularly in terms of how it has mobilised thinking and action, but it will be seen as a missed opportunity

8½ / 15

*Stupidity paradox – source Alvesson and Spicer. Organisations encourage a degree of stupidity through a misplaced faith in classic leadership (not more progressive systems leadership versions), addiction to branding, thoughtless attachment to conventional rules, and overly upbeat cultures because it seems to work in the short-term. The application to nation state administrations is that they use the same over-simplifications, over-optimism and myopic orientation that are politically expedient and work short-term but are not good with long-term issues

**Boltholes – source TAI. Systems exhibit patterns like freeriding, tragedy of the commons, arms races, winner takes all and greenwashing. Understanding these is particularly important given a tendency of organisations and nation states to use them as ‘boltholes’ – ie places that are comfortable because they avoid long-term challenges with neat-looking short-term fixes that also reduce career risk

[1] Universal ownership combines the large-fund mindset of seeing themselves as long-term owners of a slice of everything – the world economy and market and its implied dependency on the market beta; with the large-fund strategy of leveraging collective action to build better beta to address systemic risk through active ownership, systemic engagement and allocations to more sustainable betas. ‘For universal owners, overall economic performance will influence the future value of their portfolios more than the performance of individual companies reor sectors’. (Urwin | Universal Owners | Rotman Journal of Pensions Management 2011)

[2] The total portfolio approach methodology (TPA) has been developed by a number of leading asset owners. See Total Portfolio Approach | TAI.

Roger Urwin is co-founder of the Thinking Ahead Institute

Pension funds positioning for growth should prioritise building technological capacity, according to chair of Alberta Investment Management Company Mark Wiseman who led CPPIB through a significant growth period.

“Really, if you have much less than $1 trillion in assets it’s almost impossible to compete globally, as big as the pension plans are, they’re not big enough to compete with the private sector,’’ Wiseman told delegates at Conexus Financial’s Fiduciary Investors Symposium in Australia.

“People, processes and systems – all of those things are incredibly important. If you’re playing catch up, you’re building your tech from behind and you’re never going to get it right,’’ he says.

“It’s a bit like a war; when you’re at war it’s great to move troops ahead but if you don’t have the supply lines then they can’t be effective at the front lines.”

Wiseman, who after leaving CPPIB as CEO also held senior executive positions at Blackrock including Chairing its investment committee, says the manager’s arrival at $10 trillion in funds under management was realised through technology and a “maniacal” focus on automating as many functions as possible for operational leverage, elimination of errors in the system, and use of data and IT systems to make investment decisions.

“Blackrock spends $100 million a year just on data. Not processing or analytics. Alternative data sources, satellite imagery and specificity around shipping costs,’’ he says.

AustralianSuper chief investment officer Mark Delaney says the Australian “mega fund” is now in Model 3.0 of its growth phase which means a more internally managed portfolio with a large investment team operating on a global platform.

“As we get larger the proportion of assets we have invested overseas will increase,’’ Delaney says.

“Australia is a very tough time zone to run global assets from and global investment is what we’re looking to build. We need to be in those markets closer to the assets.”

He predicts AustralianSuper will have 1000 staff in front and back office roles beyond two years, but says recruitment takes time and “bandwidth” from people doing the hiring from within the fund.

“In building 3.0, we looked at others who were $400 and 500 billion and saw what they were doing, the same way we developed 2.0. We’re following the same tried and true strategies with a bias towards private markets,’’ Delaney says.

“We looked at capability and you need a large office, you need a global footprint, you need access to good deals, good partners and highly skilled portfolio managers and you need a very efficient implementation so you don’t give up much in leakages within the portfolio,’’ Delaney says.

Technological change is “coming slowly” to Australia’s super industry with fund managers still using spreadsheets and data which has not changed much since the 1980s, he says.

“There won’t be many fund managers who don’t know how to use AI in the future,’’ Delaney says.

“Data matters, but comes at enormous expense to the business. Already it’s very large for us and alternative data costs even more money. We need to watch data expense to make sure we’re getting value for money.”

McKinsey partner Eser Keskiner (the consultancy recently advised Aware Super on its five-year plan) says culture is central to sustainable growth for super funds.

“… as you expand how do you make sure the culture you build over time is not changed and is unique,’’ he says.

“One thing that’s worked well is mixing homegrown talent with overseas talent that blends; usually the secondees come back to their home country and culture is well established in overseas offices.”

Keskiner says artificial intelligence and data usage is also in a “nascent” phase for pension funds.

“The part that is still nascent is the usual AI, big data and tech in investment decisions,’’ he says.

“There’s this fear of: ‘where will tech fit in with investment decision making? Will it displace human decision making? Is it complementary? Where do we draw the line?

The big area is to what extent can we automate and take away analytical data analysis that will free up investment professionals to add quality on top.”

A recent survey conducted by the International Forum of Sovereign Wealth Funds (IFSWF) and One Planet Sovereign Wealth Funds (OPSWF) finds that SWFs have become more systematic in their approach to addressing climate change but need to do much more regarding disclosure and reporting of climate risk.

In a 2020 survey, only 24 per cent of SWF respondents said they incorporated ESG considerations into their investment processes and only 18 per cent had a dedicated ESG team; 48 per cent said they did not take a systematic approach to climate change. Twelve months later, 71 per cent of respondents have adopted an ESG approach and less than 10 per cent said they didn’t consider climate change in their investment approach at all. Only 20 per cent of respondents considered climate change in an unsystematic manner.

The latest survey was distributed to 46 SWFs with total assets under management of more than $5.75 trillion – over 90 per cent of total assets under management, according to the IFSWF’s database. The survey elicited a 74 per cent response.

Over the past year, SWFs have rapidly expanded their use of different methods of assessing climate-related risks and opportunities to better understand their portfolio exposure and reduce their climate impact. For example, 34 per cent of respondents have now carbon footprinted their portfolios, up from 23 per cent last year. Similarly, 31 per cent now use climate-scenario analysis versus 17 per cent in 2020. Similar progress can be seen in climate stress-testing, green- and low carbon portfolio analysis and stranded value/assets at risk analysis.

The survey also revealed that while only 9 per cent of respondents reported that they were mandated to address climate change, almost two-thirds of respondents are proactively adopting such an investment approach. Rather than waiting for it to be included in their mandate – many of which were written years or even decades ago and could be bureaucratic or politically challenging to update – SWFs are pressing on. The survey found SWFs are doing this because they believe that it is “the right thing to do” (50 per cent) with 23 per cent saying they thought it would boost returns and 27 per cent saying it would reduce risks to their portfolio.

In 2020, nearly a fifth of respondents reported that a substantial obstacle to adopting an ESG or climate change investment approach was that stakeholders did not believe these issues to be important. This year this proportion had dropped to only 3 per cent. As a SWF’s board is most frequently the body responsible for approving the adoption of these strategies, this transformation of opinion has removed a substantial obstacle to sovereign funds adopting and implementing ESG approaches.

Tooling Up

41 per cent of respondents said they were planning on upskilling their investment teams with ESG expertise, 38 per cent said they were either expanding or establishing a dedicated ESG team. The most pressing issues for the survey respondents were technical challenges such as investment-analysis-like scenarios, as well as carbon foot printing and target setting.

Not only are SWF managing risks. They are also seeking out new opportunities to finance the energy transition and fund technologies that will help the world adapt to climate change. The report found that overall, SWFs continue to favour more established opportunities in these spaces. For example, renewable energy remains the most popular investment sector, with 70 per cent of respondents saying it was the most attractive climate-related sector, broadly in line with our findings last year. However, SWFs are beginning to look at a wider range of climate-related investment opportunities.

The report found that as sovereign funds develop greater knowledge and more understanding of climate-change-related investments, they are engaging more with the issue. Only 14 per cent of SWFs currently divest from companies on environmental grounds (the same proportion as last year), but the survey found a small rise in the proportion that engage with portfolio companies on climate-related issues from 54 per cent to 58 per cent, the share of which has come from the funds that previously did neither.

KPIs and Metrics

SWFs struggle with defining key performance indicators and metrics on which to assess their strategy. Over half of the respondents do not use metrics to assess their climate impact and most SWFs are yet to fully report on their climate approach: 83 per cent of respondents that use a climate change or ESG approach don’t publish their climate change strategy.

Although there has been an improvement in reporting – 35 per cent of respondents still do not report anywhere on how they are tackling climate change, down from two-thirds last year – most sovereign funds are not yet disclosing much information on this topic. Twenty per cent of respondents only report on climate change directly to their stakeholders, a further fifth describes their climate change approach in their annual reports, but less than 20 per cent of respondents have a separate climate change report or use one of the accepted sustainability reporting standards for their publicly available annual report.

Sovereign funds should do more to develop and use metrics and targets for their climate exposure, writes the report. For observers, SWFs disclosure on climate strategies is important as a measure of progress. But for the funds themselves, defining their carbon reduction targets and their exposure to climate change-related investment sectors is essential. “The development of these metrics will depend on SWFs ongoing efforts to develop bespoke methodologies, deepen expertise and engage with their stakeholders to ensure they are comfortable with public targets and metrics that might not be achieved due to circumstances outside of their control,” said the report.

That said, the challenging nature of identifying appropriate data and metrics, developing and implementing methodologies to measure and manage climate exposure and understanding the plethora of different reporting standards and frameworks, should not be underestimated, particularly for the large funds with complex portfolios. The survey concludes that SWFs are not only working on this internally but also engaging with international climate change associations and their peers to engage and make an impact on reducing carbon emissions globally.

“It was a painful process,” says Yoo Kyung Park, head of responsible investment and governance for APAC at APG Asset Management, recalling the largest pension provider in the Netherland’s bruising engagement and ultimate decision to divest from South Korea’s state-owned utility Korea Electricity Power Company (KEPCO).

“Our hope was that if we could change KEPCO even slightly, we would have an impact on South Korea’s scope 2 emissions. But engagement wasn’t going anywhere, and we could no longer call ourselves a responsible investor by continuing to hold shares in the company.”

Unable to make any progress engaging the monopoly owner of the majority of South Korea’s 50-odd coal-fired power plants to limit and exit overseas coal and fossil fuel exposure; disclose its own emissions, or put in place emission reduction targets, APG sold its last remaining share in the company earlier this year, already whittled down from an original $138 million stake. The final trigger was KEPCO’s decision to go ahead with the construction of new coal-fired power plants in Indonesia and Vietnam, says Park in an interview from APG’s Hong Kong office.

Her experience offers an illuminating window into the challenges and frustration of engaging with companies unwilling to change in an attitude she links to KEPCO’s state-ownership and the absence of what she calls any “commercial sense” of the climate emergency.

KEPCO’s senior management is constantly replaced resulting in short CEO tenures that prevent any accountability or governance structure for investors to grip.

She found board members at the utility and its subsidiaries unclear of their role, while investor relations teams never passed on APG’s calls for engagement. Requests to meet KEPCO’s CEO, board members and the audit committee (important because APG wanted to see how the company was factoring in risks including carbon pricing and stranded assets into its financials) all fell on deaf ears. Four letters to the CEO and chairman went unanswered, as did any number of emails.

The only long-standing and enduring figurehead at the company was the government, yet Park says it was never wholly clear which government department was responsible for the company. Calls for engagement with 20 different government ministries were all ignored.

“We just hoped that someone would pick up” she says, describing a lack of response that runs counter to President Moon Jae-in’s public espousing of South Korea’s commitment to reduce carbon emissions and show climate leadership.

“We found the part of the government linked to KEPCO ownership doing something very different to the public face; there were different signals depending on which part of government you spoke to.”

APG wasn’t working alone. In a two-pronged approach Park worked on her own and with other investors including Sumitomo Mitsui Trust Asset Management, Church Commissioners for England and Legal and General Investment Management under the Climate Action 100+ umbrella.

Here engagement priorities included putting pressure on KEPCO to limit and exit overseas coal and fossil fuel exposure and disclose its emissions reduction targets with a detailed breakdown of emissions at parent level and from its independent power producers. Other requests included aligning KEPCO’s corporate disclosure with TCFD recommendations and raising emissions reduction targets beyond South Korea’s Nationally Determined Contribution (NDC)

South Korea’s own institutional investors were notably absent from the fight, says Park. South Korea’s $783 billion National Pension Service, which has an estimated 7 per cent stake in KEPCO, is governed by laws that make engagement hard, she says. Additionally, the so-called 5 per cent rule which stops asset owners which collectively own more than 5 per cent of a company’s shares from acting in concert, stalls collective action.

Elsewhere, she observes a cultural resistance to engage.

“In the Netherlands, asset owners that are not active on responsible investment issues will be criticised by society at large. In Asian culture, asset owners don’t want to be seen as too active.”

Moreover, exposure to KEPCO provides sought-after exposure to one of the South Korea’s few, sizeable, defensive companies.

However, she is encouraged by the work Korea’s National Pension Service is doing with local asset managers.

“They are working behind the curtain, tightening their brief with local asset managers around ESG, and whatever they do, will have a big impact on the whole market.” In its latest (2020) annual report, NPS writes that its FMC (Fund Management Committee) had decided to “exit from coal finance to reduce carbon emissions.”

Continuing, “NPS will stop investing in the construction of new coal power plants at home and abroad and plans to establish phased implementation measures as a preparation stage to apply negative screening.” The pension plan has commissioned a study to gather stakeholder opinion to guide implementation.

APG’s KEPCO saga is in marked contrast with her experience engaging with South Korea’s chaebol, the large business conglomerates controlled by founding families like Samsung.

“At least chaebol have one person responsible, and they will be there for ever,” she says. For example, APG’s engagement with SK Innovation, a sprawling holding company with a refining and petrochemicals arm, began from a low base four years ago at the same time as its engagement with KEPCO.

“SK Innovation pushed back, saying they understood what we were saying, but that it was difficult for them to incorporate a carbon strategy because it would affect their main business of refining,” she recalls.

Today the company has a climate strategy, emission reduction targets and management buy-in. “We were able to engage with the long-standing owner of the business. He cared about his reputation, and because the owner of the company moved on climate all the other executives had to buy in. It’s really a governance issue.”