California's Landmark Climate Change Bill?

Gail Moss of Investments & Pensions Europe reports, Biggest US pension funds ‘must consider climate-related risks’:
The US state of California has passed a landmark bill requiring two of the country’s biggest pension funds to consider “climate-related financial risk” when making investment decisions.

Senate Bill 964 was passed last week. It requires the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS) to identify climate risk in their portfolios and report on that risk to the public and to the legislature every three years. The first report is due before 2020.

The two funds – which oversee $590bn (€508bn) between them – must also report their portfolios’ carbon footprints and their progress towards meeting the goals of the 2015 Paris agreement on climate change, as well as California climate policy goals.

They should also include a summary of engagement activities undertaken by the pension funds in connection with climate-related financial risks.

The bill was the first of its kind passed in the US, according to campaign group and co-sponsor of the bill Fossil Free California, and provided a statutory definition of climate-related financial risk.

Under the state’s new definition, climate-related risks include material financial risk posed to the fund by the effects of the changing climate. These included intense storms, rising sea levels, higher global temperatures, and economic damages from carbon emissions.

The bill also covered other financial and transition risks emanating from public policies to address climate change, shifting consumer attitudes, and the changing economics of traditional carbon-intense industries.

The bill must get the approval of California governor Jerry Brown before it can become law.

Fossil Free California, which campaigns to end financial support for fossil fuels, co-sponsored the bill with environmental advocacy organisation Environment California.

“The risk the changing climate poses to the solvency of large institutional investors, including pension funds and insurance companies, is both inevitable and unpredictable,” said Janet Cox, director at Fossil Free California. “Fund beneficiaries need and deserve the peace of mind that comes from knowing their future security is protected from that risk.”

CalPERS and CalSTRS are actively involved in a number of climate change initiatives, including Ceres and the Investor Network on Climate Risk.

Most recently, both funds were part of a coalition of investors voting for improved governance at Rio Tinto’s annual general meeting, relating to the company’s membership of lobbying organisations in relation to climate change – although this resolution was defeated.

However, both CalPERS and CalSTRS slipped down the Asset Owners Disclosure Project’s 2017 ranking of investors’ climate risk management. CalPERS was ranked 28th out of more than 300 pension funds, 19 places lower than a year before.

Investors in Europe and the UK are also facing legislation over climate change and sustainability investment issues. 
You can view the document on the Asset Owners Disclosure Project’s 2017 ranking of investors’ climate risk management by clicking here.

The table below provides you with the global rankings of pensions (click on image):

Australian and European pensions (especially Dutch) scored well but New York State Common Fund also ranked among the very top pensions when it comes to tackling climate-related financial risks.

The report states: "The world’s first law on mandatory climate disclosure for institutional investors took effect in France, setting a model for other countries."

Curiously, and quite disappointingly, none of Canada's large pension behemoths ranked among the global leaders which makes me wonder if they took part in this survey, and if they did, why didn't they rank well?

At the very least, I'd expect to see OPTrust among global pension leaders when it comes to tackling climate-related financial risk. OPTrust is taking climate change seriously and has taken the lead on with its climate change action plan to measure risks of climate change across its public and private portfolios:
Climate change poses risks across industries, governments and countries. Pension plans such as OPTrust – with their large, global investments – are not immune to these risks.

As a long-term investor, our role at OPTrust is to look decades into the future to identify challenges and opportunities that could affect our members’ retirement security. To ensure plan sustainability, we must better understand the risks climate change poses. The transition to a carbon-neutral economy will be increasingly disruptive and we need to be ready to adapt. Waiting for governments and regulators to act will take too long. The impacts of climate change are already being felt. That is why investors need to build climate risk into their investments, starting now.

We recently issued our Climate Change Action Plan. Among other things, the action plan commits us to determine our exposure to industries, geographies and companies that are most exposed; engage with companies on improved performance on ESG factors; and demand better disclosure of the information investors need to properly price climate change-related risk.

We have already made some progress in our climate-change journey. With our 2017 Funded Status Report, OPTrust became one of the first pension plans to report according to the recommendations of the Task Force on Climate-related Financial Disclosures. We have also issued a white paper calling for a standardised climate change disclosure framework.

Through a G7 initiative and groups such as Climate Action 100+, Canadian investors are working with others around the world to develop common standards and encourage corporations to curb greenhouse-gas emissions.

As a global pension citizen, we believe we must use our voice to influence organisations to better manage climate risk. Currently, 7.6 per cent of the OPTrust portfolio is invested in renewable energy and green real estate. This is our direct investment in the transition to a lower-carbon economy, and these are our guiding principles:

Change happens through influence. Fossil-fuel industries are going to be with us for the foreseeable future.We use our ownership position to promote better practices among our investee companies, which has a far greater impact than divestment. We have engaged 235 companies on climate-related issues, leading to improved climate risk reporting, climate-aware boards and emissions reduction.

Measurement matters. We are focused on developing and using measures and tools that accurately support pricing climate change-related risk.

Market forces can promote sustainability. Our job is to prioritise sustainability by balancing sufficient investment returns with appropriate amounts of risk. We don’t believe regulation will happen soon enough. Market forces will be the more effective means of keeping us adaptable so we can thrive in a changing climate.

Innovation has a role to play. Successful investing requires an emphasis on assessing and understanding a constantly changing environment. We understand the importance of having an innovation mindset and recognise that new technologies will be key in better understanding climate change risks and opportunities. The increasingly rapid pace of change is foundational to how we think about climate change.

Work continues

OPTrust is prepared to face these challenges.

Our approach will evolve over time and the same must happen at other companies for them to adapt to the evolving landscape. Companies must be agile to manage climate risk.

Canada is a global leader in so many respects. We can be even more so by working collaboratively with other global investors to improve understanding of climate-change impacts. One example is to bring together climate scientists and investors for thoughtful debate, to assess and analyse how climate risk exposure affects investment portfolios.

We want our plan members and the broader community to know that addressing climate change constitutes good business and contributes to value creation and plan sustainability.
All of Canada's large pensions take climate change risks seriously which is why they have dedicated teams for Responsible Investing but some take it more seriously than others.

As far as California's new bill forcing CalPERS and CalSTRS to identify climate risk in their portfolios and report on that risk to the public and to the legislature every three years, I think it's a step in the right direction, one that we should see everywhere in the world.

Climate change is real and it's increasingly impacting all of us. It's not just an ecological or environmental scourge, it's a financial risk for many pensions that invest across public and private markets.

For example, wildfires ravaging California and British Columbia are due to climate change, something we need to get used to as they impact people and cost billions in damage. They also impact some portfolios directly, like timberland which is a popular asset class for pensions.

One thing that annoys me from the bill in California is it was co-sponsored by Fossil Free California, which campaigns to end financial support for fossil fuels, along with the environmental advocacy organisation Environment California.

I'm on record stating global pensions should not divest from fossil fuels, not that it's even possible, and while I applaud measures from G7 investors to speed up the implementation of uniform and comparable climate-related disclosure, I'm uncomfortable when environmental groups dictate where pensions should and shouldn't invest.

Pension fund managers have a fiduciary duty to manage assets and liabilities in the best interests of their members without taking undue risks. If climate change impacts this mandate un a fundamental way, they need to address these risks. But they first need to get their priorities straight.

That's all from me on this inordinately hot, humid and sticky day in Montreal.

Below, California sees success against climate change, but more is still needed. Researchers say progress is being made, but mitigation efforts have to continue to stop the negative effects of climate change.