Adrienne Alvord contributed to this report
Imagine that you had $650 billion. After you Scrooge McDuck into a swimming pool of gold coins, you’ll probably want to put some of that money into the stock market. But with the ongoing climate crisis, you’ll need to think carefully about what climate-related financial risks your investments might face.
At the end of 2019, the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) pension funds examined and publicly reported on their own climate-related financial risks. Separately the two funds are the largest pension funds in the country (CalPERS = $398.26 billion, CalSTRS = $248.3 billion), and together, they manage that $650 billion for the public employees of California.
This is the first time any state pension fund had made such disclosures, and these reports were required by a California Senate Bill (SB 964) from State Senator Ben Allen. The results of the reports demonstrate that there is significant concern, and reason to be concerned, about the climate-related financial risk facing retirement funds in the stock market.
Overall, the reports have some noteworthy findings but need improvement–improvement that could be supported and accelerated by federal legislation mandating consistent, comprehensive, and comparable climate risk disclosure by publicly-traded companies.
Why are these reports important?
The California pension funds did not come up with the idea to conduct this analysis on their own–the two recent reports are for compliance with SB964, introduced by State Sen. Ben Allen at the beginning of 2018 and signed into law by the California governor in September 2018. In particular, the funds are asked to examine what companies in their holdings might face climate-related financial risks, what those risks are, and how those investments square with California’s ambitious climate goals. The reports have some notable findings.
The investor and public expectations for robust corporate climate disclosure are increasing, both inside and outside of California. The Climate Risk Disclosure Act has made it through the House Financial Services Committee. More companies are reporting in line with the Task Force on Climate-Related Financial Disclosure (TCFD) recommendations. And they should be, because investors and pensioners need to know what climate-related risks are in their portfolios, and how their asset managers plan to mitigate it.
The TCFD, considered the best practice in climate risk reporting, created disclosure guidelines to encompass all types of risk and the impacts they might have. The guidelines break climate-related financial risks into two main categories:
- There’s physical risk, which is the potential damage to operations and infrastructure from climate impacts like extreme weather events and sea-level rise;
- And then there’s transitional risk. Transitional risk covers all impacts that may be associated with the transition to a low carbon economy, such as:
- Legislative risks, like a carbon tax or a global policy to keep warming well below 2 degrees Celsius;
- Legal risks, like the plethora of climate damage lawsuits sweeping the nation;
- Market risks, like the rise of low-price renewable energy displacing fossil fuels; and
- Reputational risks, like a public being aware that the company knew decades ago that the burning of greenhouse gases would lead to climate change and then deliberately sowed doubt in the public’s mind so it could keep on raking in those profits.
To avoid the worst impacts of climate change, we need to make a rapid transition to a low-carbon economy. At the moment, the fossil fuel industry is actively avoiding transition plans and continuing to explore for new fossil fuel reserves, as though the demand for oil and gas will never wane and they’ll be able to rake in that money forever.
Meanwhile, the people with pensions in CalPERS and CalSTRS are battling myriad climate impacts as firefighters, city planners, nurses, and residents of communities affected by climate-related disasters while their earnings are invested in companies worsening climate change.
So, what do the California pension reports say?
The final determination is that the reports are stuck between the desire to clearly lay out the potential climate risks in their holdings and the concern that they’ll be asked to take drastic action to avoid companies with a larger carbon footprint. Each report has a few notable omissions, but they also included many of the issues UCS highlighted as necessary in our recommendation letter.
What did we like? Both reports had an in-depth explanation of their work with the Climate Action 100+, a shareholder group committed to pushing companies on climate change issues (BlackRock just joined last week).
CalPERS included an analysis of its proxy voting strategies and previous votes, and while we may not agree with all their votes, the transparency around the decision-making process was valuable. The fund also disclosed that a total of 20 percent of its investments are in industry sectors most exposed to climate risks and opportunities.
CalSTRS provided a breakdown of investments in high-risk industries compared with an average fund, and the percentage to which each of its holdings contributes to the funds’ emissions exposure.
The reports also (generally) followed the TCFD framework; CalSTRS published its report as part of an annual TCFD evaluation, and CalPERS has promised to follow up the SB964 report with a TCFD report later this year.
Most importantly, both the reports included scope 3 emissions, which sets a precedent for any future reports to include them as well. Scope 1 and 2 emissions come from company operations; for oil and gas companies, they relate to emissions during the extraction, production, refining, and transport processes.
For fossil fuel companies, the vast majority (80-90 percent) of emissions are Scope 3 emissions from the burning of the company’s products. They are the most important emissions to come from the fossil fuel industry and companies that produce fossil fuels need to take responsibility for reducing them.
And what’s not great about the reports?
Well, they include those scope 3 emissions but don’t tie them back to the fossil fuel industry. Because of the historical (and historic) role this industry has had in thwarting climate change progress, it is imperative that companies like ExxonMobil not be allowed to shift the blame for these emissions or the responsibility for reducing them onto the consumer.
Along those same lines, both reports failed to include any more detail than vaguely naming the industry sector. Neither report named specific companies or holdings, or the percentage held—important information for understanding climate risk vulnerabilities in their investments.
Why should other pension funds issue this kind of report?
In our economy, climate-related financial risks are everywhere. It is important to identify what those risks are, where they come from, and what their impacts will be so that we can all be more financially informed.
This transparency is beneficial to pension fund-holders, who likely don’t want to face retirement with a portfolio full of bankrupted coal companies. Identifying these risks early and putting a strategy in place to mitigate them is completely in line with the fiduciary duty of any and all pension funds across the US.
Do you have any investments in the stock market or other markets tied to corporate performance that you are depending upon for your future? Are you concerned about the climate risks of these investments? You should be! And the best way to guarantee the thorough disclosure of climate-related financial risks–from both the companies and the asset managers that invest in them, is to support the Climate Risk Disclosure Act.
If you haven’t already, take a moment to write to your representative in support of the Climate Risk Disclosure Act. We’ve long past the point in climate change where a lack of transparency or preparation will do anyone any good.
Support from UCS members make work like this possible. Will you join us? Help UCS advance independent science for a healthy environment and a safer world.