CalSTRS runs more than $246bn for our beneficiaries. Here’s how we’re managing climate risk
Kirsty Jenkinson explains how the US pension giant deals with everything from data and engagement to asset allocation and private markets
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Look no further than California and the American West to see the devastating impacts of climate change on our environment and our communities. Recent fires across the state resulted in the destruction of entire towns, eerie orange skies, noxious air quality, and loss of life. Unfortunately, apocalyptic fire seasons are a new normal in California. Data shows us that 10 of the 20 most destructive wildfires in California’s history occurred in the past five years.
Our team at the California State Teachers’ Retirement System (CalSTRS) sees climate change as one of the most significant risks facing investors today. Established in 1913 - the same year Earth’s ozone layer was discovered - we have nearly a million members and more than $246bn in assets under management, and we’ve made a promise to provide a secure retirement for our members many decades into the future. Our view is that adjusting and adapting to a low-carbon economy is the best way to fulfill that commitment.
Staff developed an educational programme and invited climate policy specialists and asset managers with expertise in low-carbon investing to present at our board meetings
To prevent the types of impacts we see in our state, CalSTRS supports local and international initiatives to decarbonize our economy, like Governor Newsom’s recently announced Climate Investment Framework and the UN’s Sustainable Development Goals. In May 2019, we introduced a low-carbon transition work plan across our entire portfolio.
The first step of our work plan was to build consensus and educate our team and board. Staff developed an educational programme and invited climate policy specialists and asset managers with expertise in low-carbon investing to present at our board meetings. The educational sessions paid off. In January 2020, our board unanimously adopted a new investment belief affirming that risks associated with climate change and the related economic transition will materially impact the value of the CalSTRS investment portfolio. This action was significant because CalSTRS’ nine investment beliefs reflect our views on global investment markets and our vision for participating in the markets to secure the financial future of California’s educators.
With our low-carbon investment belief in mind, CalSTRS is expanding low-carbon investment strategies across asset classes. Our $2.2bn dedicated sustainability-focused public equity portfolio has delivered resilient financial returns amid a rapidly changing landscape. For the period ending June 30, 2020, this portfolio beat its benchmark over one-, three-, five-, and 10-year time periods. These investments are in addition to our $2.5bn low-carbon equity index, which we are currently evaluating and leveraging to better understand low-carbon transition risk in public markets.
For private markets, we are currently developing a governance framework, investment policy and benchmark for a new sustainability-focused portfolio with an emphasis on climate solutions. We are seeking attractive renewable energy and energy efficiency investments to leverage high-quality deal flow that will be additive to the total CalSTRS fund.
We are also working to identify which companies will be the most resilient in a low-carbon future. To do this, we are analysing the low-carbon ‘transition readiness’ of our portfolio and deepening our understanding of climate-related physical risks and transition risks across asset classes, geographies and strategies. Our Sustainable Investment and Stewardship Strategies (SISS) team is collaborating with CalSTRS total portfolio risk team to explore the data we need to properly understand and price physical and transition risks in our assets and make appropriate investment decisions.
For private markets, we are currently developing a governance framework, investment policy and benchmark for a new sustainability-focused portfolio
Because we know physical climate risks can impact real assets, not least real estate, we are identifying a preferred partner to supply physical risk data that will provide the missing information needed for a deep dive into the financial implications of physical climate risk on real estate investments.
CalSTRS also supports improved and enhanced disclosures consistent with the Task Force on Climate-related Financial Disclosures (TCFD). Last year, we released our first TCFD-aligned environmental risk management analysis as part of our long-standing Green Initiative Task Force report.
In addition to sustainable investment and risk management, CalSTRS has a long history of stewardship and engagement with companies and policymakers on climate change. We regularly comment on regulatory and legislative proposals and advocate for good governance and transparency around ESG issues. We vote more than 8,000 proxies each year and engage carbon-intensive companies individually and through collaborations with other like-minded investor groups like CERES and Climate Action 100+ (CA100+). CalSTRS serves on the CERES Carbon Pricing Policy Working Group and Valuing Water Task Force, and we support CERES’ Blueprint for Responsible Policy Engagement on Climate Change. Ultimately, real change on climate also requires government action, so we advocate for more thoughtful policy at the state, national and international level. Recent initiatives include an effort to reduce flaring in Texas and a campaign to urge the Department of Labor to incorporate ESG factors such as climate in their policy amendments.
This autumn, we will press for net zero or reduced carbon commitments from Torray Industries, Nippon Steel and Phillips 66
After engagement, some portfolio companies commit to reducing their greenhouse gas emissions and provide clarity on how they are shifting their business models to be resilient in a low-carbon economy. Within CA100+, CalSTRS is the engagement lead on eight companies, and our coalition successfully secured net zero commitments from Southern Company, Duke Energy, Dominion Energy, Daikin Industries and ENEOS. This autumn, we will press for net zero or reduced carbon commitments from Torray Industries, Nippon Steel and Phillips 66. On a quarterly basis, CalSTRS reports on current and ongoing engagements to influence public policies and corporate practices that support long-term value creation.
As our members prepare for retirement, we ask them how they will spend their future. Today, educators and their students are demanding we invest for humanity’s future, and that means being good stewards of the environment. We believe that our ultimate responsibility is to provide for the financial futures of California’s educators and beneficiaries across multiple generations. Sustainable value creation through a decarbonised economy will fulfill our duty to our members who depend on CalSTRS for their retirement security.
Kirsty Jenkinson is the investment director of Sustainable Investment and Stewardship Strategies at CalSTRS.