03.15.2021
By Shanny Basar

CalSTRS Close To New Enhanced Passive Low Carbon Allocation

Kirsty Jenkinson, investment director at CalSTRS, said that the $282bn California State Teachers’ Retirement System is close to finalizing a new enhanced passive low carbon allocation.

She spoke on a panel last week on a webinar hosted by FTSE Russell and UN PRI – Setting the ambition: what does net zero mean for investors ?

Kirsty Jenkinson, CalSTRS

Jenkinson explained that 18 months ago the CalSTRS board decided that low carbon transition would be a fundamental focus and added it as a tenth investment belief.

“I can’t emphasise the importance of that as the board only deals with one topic of that size at a time,” she said.

She continued that her team oversees an $8bn public equity portfolio which includes active low carbon strategies and a low carbon index and is close to finalizing a new enhanced passive low carbon allocation to round out the portfolio.

“What’s really heartening is that that overall portfolio is experiencing really strong performance over multiple time periods and the one, three and five year numbers are really positive,” Jenkinson said “That proves our central thesis that we think that by investing in this way in our public equity portfolios it’s really good for us.”

Jenkinson added that last week the CalSTRS board approved a change in her team’s investment policy for the portfolio to expand in private asset classes with a particular focus on sustainability solutions in private equity and infrastructure. The new portfolio will have two components.

“We’ will co-invest alongside our fellow asset class teams to share knowledge and scale the investments that we can make,” she added. “The second component is new opportunities, where my team will have a chance to invest in opportunities that might not fit neatly within other asset classes.”

CalSTRS released its 2019–20 Sustainability Report in March 2021. The report said the pension fund established a new investment belief affirming that public policies, technologies and physical impacts associated with climate change are driving the transition to a low-carbon economy.

“CalSTRS expanded our low-carbon investments across asset classes, engaged carbon-intensive companies and cast more than 8,000 proxy votes,” said the report. “To promote greater diversity on corporate boards, we continued to engage portfolio companies on this topic.”

Liz Gordon, executive director of corporate governance at New York State Common Retirement Fund, said on the panel that the pension fund issued a Climate Action Plan in 2019 which has five components – comprehensive risk assessment, robust engagement, strong policy advocacy, sustainable investment strategies and targeted divestment as a last resort. The New York State Common Retirement Fund is the third largest U.S. public pension fund with assets of approximately $248bn.

Liz Gordon, New York State Common Retirement Fund

Gordon said: “We need the entire economy to decarbonize in order to protect our fund, and our net zero commitment reflects our expectation that we will decarbonize our investments in tandem with the real economy. That’s why we believe you can’t simply divest your way to net zero, because a fully decarbonized fund in a highly carbonised world wouldn’t serve to protect our investments from the systemic risks posed by climate change.”

She continued that the key to achieving net zero for the economy lies with public policies that effectively price carbon and lead to the largest emitters changing course.

“Advocacy and engagement remain our principal tools for achieving net zero for the fund,” added Gordon. “Our sole objective is to derisk the fund, it’s not to decarbonize the fund just for the sake of decarbonizing or to make a statement. We act on climate risk to protect our investments for our retirees.”

Ceres, the sustainability non-profit, and 110 global investors representing $33 trillion in assets under management released a Net Zero Asset Owners Commitment on March 10 2021 for asset owners to commit to 10 specific actions to achieve Paris-aligned portfolios, including setting an interim portfolio emissions reduction target by 2030 or sooner. The actions include disclosing objectives and targets, and publishing a clear Investor Climate Action Plan for achieving these goals as soon as possible, and reporting annually on the strategy.

Mindy Lubber, chief executive and president of Ceres, said in a statement: “The global shift to net-zero emissions is one of the biggest investment opportunities of the 21st century.”

The group also published a Net Zero Investment Framework to assist both asset owners and managers to align their investments with a net-zero future.

Thomas DiNapoli, sole fiduciary of the New York State Common Retirement Fund, said in a statement:,“Climate change poses significant risks and opportunities for the New York State Common Retirement Fund, the markets, and the economy as a whole. We have put the Fund in a strong position for a net-zero future and strongly encourage others to do the same.”

Nathalie Lhayani, head of sustainability at French public sector financial institution Caisse des Dépôts, said on the panel that this is a powerful coalition that can send a very strong signal to governments and and businesses.

She continued that Caisse des Dépôts will align all its activities to mobilize financing through the green sector and renewables and engage with listed companies.

Nili Gilbert, board member and chairwoman of the investment committees, David Rockefeller Fund Paris Aligned Investment Framework, said on a panel that it is important that members of the Net Zero Asset Owners Alliance are committed to setting five-year targets.

“We’re now just publishing our targets for 2025 at the David Rockefeller fund and  I expect us to arrive at a commitment of abating about 25% of the carbon emissions in our portfolio,” Gilbert added. “The  alliance members are setting very personalised targets according to each organization’s philosophy, their journey and where their portfolios are starting. It’s really not a ‘one size fits all’ exercise and we all have the right and ability to find an approach that works for us as fiduciaries.”

Rick Lacaille, SSGA

Rick Lacaille, executive vice president & senior investment advisor at State Street Global Advisers, said on a panel that the asset manager has recently joined Climate Action 100+,  an investor-led initiative to ensure that 167 corporates, who account for about 80% of global emissions, take necessary action on climate change.

“Climate Action 100+ is dedicated to being very specific about what it is asking of corporates and with engagement being the way to effect change,” he added. “The alliance has developed a benchmark of 10 overall indicators about how they’re actually going to decarbonize and how they’re going to use science-based targets in order to achieve the goal.”

The alliance also often asks that executive compensation is linked to the targets. Lacaille gave the example of Cemex which has linked executive compensation to meeting its set net zero targets.

“So even in a difficult area like cement, it’s certainly feasible to do it,” he added.

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