The New Zealand Superannuation Fund will start getting rid of its investments in fossil fuel companies, it has announced.
The sell-down is part of the Super Fund's climate change strategy, which includes measuring its carbon footprint, engaging with companies and investing more in low carbon or renewable businesses.
The $31 billion fund will not be getting rid of all its fossil fuels investments, however, focusing instead on where it could reduce climate risk "as quickly and easily as possible".
Superannuation Fund chief executive Adrian Orr said the plan would most likely improve the Fund's performance.
"In coming years the global energy system will transition away from fossil fuels. Some assets we invest in today may become uneconomic, made obsolete or face a dwindling market."
"Reducing the Fund's exposure to these risks, and to the physical impact of climate change is good for the portfolio, and consistent with our mandate to maximise returns without undue risk.
Around 5 percent of the Fund's total assets were invested in companies with fossil fuel reserves.
The Fund's climate change strategy would be implemented in four parts and be applied across its entire portfolio.
It would start by getting rid of its investments in the global companies with the biggest carbon exposure. This divestment was expected to be completed by the end of financial year in June 2017.
It would not be introducing a blanket ban on fossil fuels because the focus was on reducing the Fund's overall exposure to carbon, rather than eliminating it completely.
"Blanket exclusions rule out the possibility of engaging with firms in the sector that may be able to transition, and may have a role to play in transitioning to a low carbon economy," a spokesperson said.
The focus would also be on direct investments rather than passive ones in pooled fund such as collective investment vehicles (CIVs).
"Less than 3 percent of the Fund is invested in CIVs with exposure to global equities - so at this stage they are not a high priority in our implementation plan," a spokesperson said.
The strategy also included a commitment to significantly reduce exposure to both fossil fuel reserves and carbon emissions, but it would not be setting a specific target.
Mr Orr said the reduction would be achieved by engaging with companies directly and incorporating climate change considerations into its investment decisions.
The Fund would also publicly report its carbon footprint annually from next year.
It would also seek to invest more in alternative energy, energy efficiency and transformational infrastructure.
Move to divest welcomed
The strategy was being welcomed by the ethical investment industry.
"It's pleasing to see the Fund acknowledging and committing to use the full suite of available tools to comprehensively respond to the risks posed by climate change in the Fund's portfolio: measuring carbon exposure, selective divestment, engaging with companies, voting shares, and seeking new low carbon investments," Responsible Investment Association of Australasia chief executive Simon O'Connor said.
"Leading funds all round the world are taking practical steps to measure the risks in their portfolio, engage on the issues and invest for the low carbon future.
"NZ Super are to be congratulated for taking a significant step forward with a thoughtful and multifaceted approach to making their business more resilient to climate change impacts," said Investor Group on Climate Change chief executive Emma Herd.
The Super Fund, which was set up in 2001 to help to pay for future superannuation costs, is the second largest government investment fund after ACC's $33bn fund.
It is not known whether ACC or other government funds will follow suit.
Norway's state pension fund - the largest sovereign wealth fund in the world - started pulling out of its investments in coal companies earlier this year and has been progressively divesting from companies that posed a risk to the environment or human rights.