Cop26

Largest US Teachers’ Pension Fund Makes Net Zero Commitment

CalSTRS pledge follows steady increase in climate-related action taken by the pension fund.

The board of the California State Teachers’ Retirement System (CalSTRS) has committed to net-zero greenhouse gas (GHG) emissions by 2050 or sooner. The Teachers’ Retirement Board (TRB) will develop a four-part implementation framework charting the US$306.7 billion educator-only pension fund’s decarbonisation strategy.

Aligning with the science-based targets of the Paris Agreement, CalSTRS is committing to the following steps: establishing milestones for managing emissions-related risks; expanding investments in low-carbon solutions; and driving engagement with investee companies to promote a net-zero transition. CalSTRS will regularly report its progress to the TRB Investment Committee.

“CalSTRS’ commitment to a net-zero investment portfolio builds on a prudent process analysing the effects on the fund of the low-carbon transition and more than 20 years of progress using our influence as a significant global investor to promote long-term sustainable public policies and business practices,” said Harry Keiley, TRB Chair.

The fund also committed to implementing clear internal governance structures and using appropriate methodologies and frameworks to support net-zero commitments, measure portfolio emissions and set interim goals.

The net-zero pledge builds on existing climate-focused actions the pension fund has already taken, including a multi-year Low-Carbon Transition Work Plan, initiated in October 2019.

The fund has been investing in a low-carbon public equities index since 2016 and, in 2017, implemented thermal coal exclusions in its investment portfolio.

“The investment risks and opportunities associated with the net-zero transition are accelerating due to increasing global urgency and momentum to achieve the goals of the Paris Agreement. We will review our Net Zero Action Plan annually to adjust, adapt and respond to changing market developments, best practices and lessons learned from around the globe,” said TRB Vice Chair Sharon Hendricks.

CalSTRS has also been under increasing pressure to divest from carbon-intensive oil and gas companies.

Targeting impact on path to net zero

In July, CalSTRS also participated in a Global Impact Investing Network (GIIN) report which measured the efforts of 24 asset owners (managing a collective US$4.7 trillion in assets) to align their portfolios with the Paris Climate Agreement. Other participants include Allianz, Aware Super and Brunel Pension Partnership.

Asset owners are increasingly using quantitative targets to measure climate impact, although they remain inconsistent in their impacting investing strategies across their portfolios, GIIN highlighted.

Prior to the net-zero commitment, social and environmental matters were already incorporated into the nine investment beliefs considered by CalSTRS board members and which govern resulting investment decision-making, the report noted. For example, Investment Belief #9 is an acknowledgement that “investment risks associated with climate change and the related economic transition materially impact the value of CalSTRS’ investment portfolio”.

Kirsty Jenkinson, Investment Director for CalSTRS, previously said the firm is asking its asset managers to disclose the various opportunities for investing in solutions to ESG-related challenges, rather than just focusing on mitigating ESG-related risks. With this in mind, CalSTRS is increasingly looking for investment opportunities in private markets.

The fund has expanded its sustainable investment team’s responsibilities to include private assets, according to the GIIN report.

“This new sustainable private market portfolio has the dual objective of both providing a source of additive long-term capital appreciation for the total fund and securing investments that have a demonstrable positive contribution towards a more sustainable global economy,” the report added.

Institutional investors are increasingly using private markets to source opportunities in sustainable industries, such as renewable energy.

CalSTRS is a member of global investor group the 300 Club, which aims to raise awareness about the impact of current market thinking and behaviours in order to encourage positive change. Other members include PGGM, the Impact Investing Institute and Federated Hermes.

Earlier this year, the group published a paper asserting that sustainable wealth creation is most effective when taking a long-term view, and also requires “careful stewardship of investors’ capital in the way it is allocated and active stewardship of those investments once they are made”.

Alongside climate action, CalSTRS is taking a social stance, recently announcing plans to vote against all directors at firms with zero women on their boards. The fund will focus future diversity efforts across three primary areas: corporate boards, internal staff and the investment industry.

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