CalPERS doubles climate solutions: ‘The first objective is to create outperformance’
CalPERS, the largest public pension fund in the US is planning a significant overhaul of its climate strategy, including doubling its investments in climate solutions by the end of the decade
The new strategy will increase the $462bn plan's investments in transition assets from $47 billion to $100 billion by the end of the decade.
It also involves selling stocks from companies with poor transition plans and significantly expanding the plan’s responsible investment team said Peter Cashion, managing director sustainable investments at CalPERS, who joined the plan at the beginning of this year.
A key reason for the plan's increased investment in climate solution is their potential for outperformance, Cashion said: "The first objective is to create generate outperformance or alpha by making such investments, because we really believe that there's a full opportunity set coming about from the transition to a lower carbon economy."
Investing in climate solutions is also aimed at bringing down the plan's net emissions by 50%, Cashion said.
Despite short-term macroeconomic challenges for renewables, Cashion said he is confident that they will outperform over the long term due to a combination of policy incentives such as the Inflation Reduction Act in the US and the the exposure of fossil fuels to transition risks.
"If companies and investors are not factoring in overall climate risk into their assessments, they are missing an important change that's going to come about over the next years, and the two components of that of physical transition risk" he argued.
Stewardship in listed markets will remain a key priority for the plan, which has nearly half of its portfolio invested in listed equites. But CalPERS, which is a founding member of the Net Zero Asset Owner’s Alliance (NZAOA) and CA100+ plans to increase the pressure on firms that fail to present credible transition strategies, Cashion said.
While he was careful not to describe the plan's approach to stewardship as more aggressive, he did suggest that it was now more likely to at least underweight companies which failed to deliver a credible transition plan.
The new proposals will be put forward at the plan’s next board meeting on 13 November, though no formal approval is required.
Push for transition assets
CalPERS is already a significant investor in private markets with 13.5% of its portfolio invested in private equity and 15% in real assets, it now plans to invest more in climate transition assets whilst reducing the carbon footprint of its listed equity holdings.
As of last year, some $18.9bn of its global equity portfolio and $12bnof its global fixed income corporate credit portfolio was invested in companies designated as low-carbon solutions.
CalPERS’ net zero overhaul comes amid a number of regulatory changes in the US.
In September, the Californian State Legislature adopted the Climate Corporate Data Accountability Act also known as SB253. The bill requires companies with annual revenues over $1 billion to publicly disclose greenhouse gas emissions from their operations and electricity use by 2026.
Moreover, SB261, the Climate-Related Financial Risk Act could require companies doing business in California to prepare and submit climate-related financial risk reports consistent with TCFD recommendations. It could apply to all firms with a revenue of more than $500 million.
Crucially for CalPERS, it is also facing SB 252 the California Public Pension Divestment Bill, which could force it to sell all its fossil fuel holdings by the end of the decade. The bill has been blocked for the second time earlier this year.
The plan is facing pressures from both the left and the right of the political spectrum. Whilst Republican politicians associated to the anti-ESG movement have accused it of ‘acting like a climate cartel’, progressive campaign groups are calling for an outright divestment from fossil fuel assets.
Campaigners say that CalPERS and CalSTRS currently have more than $14.8bn invested in fossil fuels and argue that stewardship has so far seen little results.
But both CalPERS and CalSTRS have been critical of the bill, warning that an outright divestment of all fossil fuel assets would impact financial returns.
CalPERS CEO Brad W. Pacheco warned in a statement earlier this year that the bill could have unintended consequences: “Divesting appears to almost invariably harm investment performance, by, for example, causing transaction costs (e.g., the cost of selling assets and reinvesting the proceeds) and compromising investment strategies.
“In addition, there appears to be considerable evidence that divesting is an ineffective strategy for achieving social or political goals, since the usual consequence is often a mere transfer of ownership of divested assets from one investor to another” he added.