B.21 Invested in New Zealand and the world Kaingākau ana ki Aotearoa me te ao ANNUAL REPORT 2017 1 We invest locally and globally to deliver greater certainty for New Zealanders in their retirement. Ka haumi pūtea mātou i te motu me te ao, e māoriori ake ai te noho a ngā tāngata o Aotearoa hei te ahungaruatanga. NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 2 With nearly $5 billion invested in New Zealand the Fund spans core industries like agriculture, farming, banking and aged care right through to emerging sectors like technology. We’re proud of our investment track record and the key role the quality and breadth of our local portfolio has played in delivering it. NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 3 NZD INVESTED NZD INVESTED IN NEW ZEALAND GLOBALLY 4.9b 29.6b NZD INVESTED NZD COMMITTED COMPANIES ENGAGED Environmental Standards 39% IN NEW ZEALAND TO NEW ZEALAND BY ESG ISSUE GLOBALLY* LISTED EQUITIES EXPANSION CAPITAL* Corporate Governance 29% Labour Standards 10% Social and Environmental Governance 7% 1 b m Business Ethics 6% .7 454 Public Health 5% * since inception Human Rights 4% * conducted on our behalf by our engagement service provider, BMO NUMBER OF NEW ZEALAND FARMS OWNED 22 NZ EQUITIES NZD REALLOCATED INTO BY SECTOR Consumer 33% LOW-CARBON COMPANIES GLOBALLY Industrial 19% Utilities 17% Telcos, Media & Technology 16% Financial 8% Energy & Materials 7% 950m NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 PERFORMANCE SUMMARY 4 OUR MISSION: Maximise the Fund’s return over the long term, without undue risk, so as to reduce future New Zealanders’ tax burden. 2016/17 MAJOR ACHIEVEMENTS: PRIORITIES FOR 2017/18: • Climate change – finalised and implemented • Generating domestic proprietary deal flow – the first stage of our strategy to deal with progress development of the domestic the risks and opportunities associated Investment Hub to help drive direct with climate change. investment opportunities in New Zealand. • Collateral optimisation – implemented a • Climate change – continue implementation securities lending programme to generate of the strategy to make the Fund more returns and help manage collateral in the resilient to the risks posed by climate change. most efficient manner possible. • Data management – build a single • Concentrated portfolio – investigated the multi-purpose data warehouse to implement use of a concentrated portfolio to implement our target information architecture and the Fund’s passive global equities allocation. support end-user data queries and analytics; improve our data governance to ensure our key portfolio and market data remains well- governed, defined and understood. NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 PERFORMANCE SUMMARY 5 FUND SIZE $35,373,065,000 (AFTER COSTS, BEFORE NZ TAX) 2016/17 RETURN INCREASE IN FUND SIZE 2016/17 20.71% $5.27b (AFTER COSTS, BEFORE (BEFORE NZ TAX) NZ TAX) VALUE ADDED IN 2016/17 VALUE ADDED $1.28b $6.25b (VS REFERENCE PORTFOLIO, (SINCE INCEPTION) AFTER COSTS) FUND RETURNS As at 30 June 2017 ACTUAL FUND RETURN VALUE ADDED BY GUARDIANS NET RETURN (after costs, before NZ tax) (compared to passive Reference Portfolio (returns over and above the Treasury Bill benchmark) return – the Government’s marginal cost of debt) 20.71% 4.37% 18.88% 8.63% p.a. 1.69% p.a. 5.23% p.a. 10.22% p.a. 1.45% p.a. 5.99% p.a. 1 Year 10 Years Since Inception 102–7 201–1 NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 CONTENTS 6 SECTION 01 02 03 OVERVIEW OF THE INVESTMENT REPORT GOVERNANCE GUARDIANS AND THE FUND This section provides high-level Following on from the information This section provides detailed information information on the purpose and provided in the Overview, the Investment on the Guardians’ governance structure Report provides details on the Fund’s and principles. We discuss our risk mandate of the Guardians and the Fund, performance, and comparisons with management and provide detail on including a snapshot of our performance previous years. This section also contains our remuneration and discretionary and key highlights from the 2016/17 investment case studies, a feature on our incentive scheme. financial year. In addition, it provides climate change strategy and a insight into future priorities. Responsible Investment Report. Overview .................................................................... 60 Overview .................................................................... 10 Performance Report ................................. 26 Principles .................................................................... 62 Chair’s Statement .......................................... 12 Our CIO on Active vs Case Study – IFSWF ..................................... 73 Passive Investment .................................... 28 Risk Management ........................................ 74 Value-Add in 2016/17 ........................... 30 Remuneration Risk-Adjusted Return and Discretionary Performance ......................................................... 31 Incentive Scheme .......................................... 79 Where We Invest ......................................... 32 CEO Remuneration .................................... 82 Investment Activity – CATHERINE SAVAGE New Zealand ........................................................ 34 CHAIR Case Study – Kiwibank .......................... 40 Chief Executive’s Statement ................................................................. 15 Case Study – Global and New Zealand Timber and Progress against our Rural Land ............................................................... 41 Strategic Plan ...................................................... 18 Investment Activity – Global ........ 42 Identifying our ..... Material Topics ..................... ............................ 20 Case Study – Factor Investing 45 Case Study – Climate Change ..... 46 Board Members ............................................... 22 Responsible Leadership Team ............................................ 23 Investment Report ....................................... 48 Q&A with Head of RI: ESG Due Diligence in the Private Markets ................................... 50 Case Study – Palm Oil ............................. 54 HOW TO READ THIS REPORT This Annual Report has been prepared The Overview of the Guardians and An overview of the report and in accordance with the Global the Fund section provides the basics: supplementary information are available Reporting Initiative (GRI) standards core a performance summary; who we are on www.nzsuperfund.co.nz and option. It describes the performance and what we do; key achievements; www.ar2017.nzsuperfund.co.nz. of the New Zealand Superannuation and future priorities. For more depth, The overview includes video interviews Fund (the ‘Fund’) and the Guardians the remainder of the report details with our Chair and Chief Executive of New Zealand Superannuation four important aspects of the Officer. The supplementary information (the ‘Guardians’), the Crown entity Guardians and Fund: investment includes a detailed explanation of ‘How that manages the Fund, over the performance and activities; governance; We Invest’; a GRI Index; and a list of 2016/17 financial year. an overview of operations during the the Fund’s global equity holdings as at year; and financial statements. 30 June 2017. NEW ZEALAND SUPERANNUATION FUND ANNUAL REPORT 2017 7 04 05 06 OPERATIONAL REPORT STATEMENT OF FINANCIAL STATEMENTS PERFORMANCE Information on our operational and This section provides a report on our As well as the financial statements people initiatives, as well as our performance against our Statement for the Guardians and the Fund, this environmental performance, is of Performance Expectations and section provides an overview of key covered in the Operational Report. information on our external managers elements such as tax and the five-year Highlights from Operations and custodians. financial summary. and IT .............................................................................. 86 Statement of Performance ............. 100 Financial Report ...................................... 110 Our People .............................................................. 88 Managers and Custodians ............... 104 Financial Statements and Team Profile – Audit Report – Fund .............................. 116 NZ Direct Investments ............................ 94 Financial Statements and .............. Regulatory Update ..................................... 96 Audit Report – Guardians 178 Environmental Performance ......................................................... 97 07 APPENDIX Where possible, we have tried to avoid the use of industry-specific words and language. In some cases, however, in the interest of brevity and clarity, these words are unavoidable. Industry terms are explained in our Glossary. This section also provides our compliance statements. SIPSP Compliance ....................................... 206 Presentation of the Annual Report ................................................ 206 Glossary ..................................................................... 207 Useful links .......................................................... 212 Corporate Directory ............................... 213 Note: Previous annual reports, including the last report (2015/16), are available on www.nzsuperfund.co.nz/publications/annual-reports. There were no significant changes from previous reporting periods in the list of material topics and topic boundaries. 102–45