CalSTRS changes guidelines to promote climate expertise on corporate boards

The California State Teachers’ Retirement System (CalSTRS) will start targeting the appointment of board members with specific expertise and experience in climate change risk management strategies at investee companies, as the fund makes changes to its corporate governance principles to reflect the growing risk of climate change.

The change comes after California State Controller Betty Yee and Treasurer John Chiang wrote to both the investment committees of both CalSTRS and its state peer CalPERS in February to ask them to encourage corporate leadership to recruit board members that had the skills necessary to address the impacts of climate change risks on their companies. They also highlighted the important of the “impacts of likely regulations and rules”, such as emissions reporting or carbon pricing.

Though CalPERS already amended its corporate governance code in April, as well as calling on companies to assign oversight responsibility on climate change to a board member or full board, CalSTRS’ investment board unanimously agreed to amend its board director attributes to include climate change risk management skills under Yee’s leadership after meeting this week.

Yee, who sits on the CalSTRS and CalPERS boards as well as serving as California’s chief fiscal officer, said: “Climate change risks will have a material impact on our pension funds’ returns if not well-managed and addressed. Due to CalSTRS’ continued focus on global greenhouse gas emission reduction, today’s vote ensures that corporate boards have the expertise and competence to adequately understand and address the challenges and risks imposed by climate change.”The CalSTRS corporate governance principles document, which establishes a framework for the pension system’s proxy voting activities, now set out that supported board members should provide “a diversity of skill sets and experience to properly oversee management, business strategy and risk mitigation” and that corporates should establish a mechanism to disclose such information about existing board members.

It then supplies a non-exhaustive list of the skills and experience it considers necessary, which include industry expertise, governance, strategic planning and, as of Yee’s announcement, climate risk management.

The updated document also requires that board members should maintain such expertise “either through continuing education or some other mechanism and be subjected to a periodic outside evaluation, with both measures to ensure they are carrying out their fiduciary duty and properly overseeing management on shareholder’s behalf”.

Other changes to CalSTRS’ corporate governance principles include a new guideline to vote against directors if they do not act to remedy a lack of board diversity, the ability to hold directors accountable if they make any changes to bylaws or charters that impact shareholder rights, and language clarifications concerning executive pay data and the ‘one share, one vote’ principle.

Controller Yee also said she supports CalSTRS’ move to commit $2.5bn to an MSCI low-carbon index in order to align itself with “market realities” surrounding climate change as begins on a journey to move all of its investments to low carbon options by 2020. Link