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Californian pension giant CalSTRS has revealed that both its public equity and fixed income corporate bond portfolios have used well over half the emissions allowances needed to stay aligned with a two-degree climate scenario, following an assessment by Institutional Shareholder Services (ISS).
ISS is more well known as a proxy voting advisory firm but has expanded into the wider ESG space in recent years with a series of acquisitions.
The findings were unveiled in CalSTRS’ newly published annual Green Initiative Task Force report, which this year, for the first time, also fulfils the fund’s responsibility under new Californian state law.
"While climate scenario estimates can provide insights into analyzing and managing climate related risks, they do come with limitations that have to be considered".
The rule, SB 964, which was passed in September 2018 by then Governor Jerry Brown, requires CalSTRS and California’s other giant public pension fund CalPERS to publicly report on climate-related financial risk associated with their public market portfolios, including how they align with the Paris climate agreement. The deadline for the reports was January 1 and CalSTRS published in on December 31.
Earlier last month, CalPERS published its report, revealing that about one-fifth of the $381bn pension fund’s public markets portfolio is exposed to potential losses from climate change.
In the CalSTRS report, which aligns with the Task Force on Climate-related Financial Disclosures (TCFD) reporting framework, it describes ISS’s assessment as a “static, point in time analysis”. It compared the fund’s public market equity and fixed income portfolios in relation to “carbon budgets” estimated for each of the International Energy Agency’s (IEA) two and four degree Celsius climate scenarios.
In its assessment, ISS found CalSTRS’ public equity portfolio to have used 72% of its emissions allowance under the IEA’s two-degree scenario and 68% under the four-degree scenario.
CalSTRS’ fixed income corporate bond portfolio was found to have used 65% of its carbon budget under two degrees and 61% of its budget under four degrees.
Though CalSTRS does cite “significant limitations” entailed with such analysis “currently” such as gaps in corporate data and the static nature of the analysis.
It states: "While climate scenario estimates can provide insights into analyzing and managing climate related risks, they do come with limitations that have to be considered".
In press release, the fund describes its public equity and fixed income corporate bond portfolios as “currently aligned with a 2ºC warming scenario until 2031 and 2033, respectively”.
According to the report, ISS was unable to provide an assessment of how the fund’s emissions profile aligns with a 1.5-degree scenario but would be able to do such an analysis in the future.
The $240bn fund has come under increasing pressure to divest its fossil fuel holdings, including from California State Treasurer Fiona Ma. In the report CalSTRS “acknowledges” “interested parties and stakeholders” calling for divestment. But it describes divestment as “a last resort action” one that “can have a lasting negative impact on the health of the fund”.
The report also reveals that CalSTRS’ board has “approved policy language” regarding its support for a “stable and clear carbon-pricing framework” that “aligns with the Paris Agreement’s goals of reducing global emissions”.
Details of the fund’s Low-Carbon Transition Work Plan, which seeks to “establish a consensus among the board and staff around how the low-carbon transition will impact the Investment Portfolio”, are also given.
The fund also reveals plans to invest $200m in emerging markets as part of the third phase of its $2.5bn internally managed Low Carbon Index.
The index, which invests $2.3bn across US and non-US developed markets, performance was 10.51% in its first year, outperforming its benchmark by 46 basis points.
On the fund’s proxy voting activities, CalSTRS states that between 2018-19 it supported 21 out of 39 environmental shareholder proposals and also reveals that it leads engagement with Duke Energy as part of the Climate Action 100+ investor initiative.
Both CalPERS and CalSTRS will be expected to report now every three years on the climate-related financial risk of its public market portfolio.
A spokesperson for ISS directed RI to CalSTRS for comment.