Leaders and laggards: why climate strategies differ across US public pension funds
Against the backdrop of growing political backlash against climate ambitions, climate strategies and targets at US public pension schemes are diverging
Minnesota’s State Board of Investment (SBI) has been around since 1885. The board – which looks after the state’s public pension scheme – has been refining its climate investment strategy in recent years. SBI’s inaugural attempt at assessing its climate risk exposure came back in 2019.
By 2029, SBI is aiming to invest $1bn in climate solutions. It is one of only five US public pension schemes with an explicit target. That is according to a new assessment of US public pension schemes by Sierra Club, an advocacy group.
The analysis, published today, compares 30 US public pension funds on their climate solutions investment strategies. The findings show a divergence – between the majority of funds that are lagging behind and a small minority leading the way.
Leaderboard
US public pension funds govern large pools of capital. At last count, they collectively held assets over $6.5tn. Their scale adds systemic heft to their climate solutions appetite – which Sierra Club says shapes their ability to deliver benefits to public sector employees.
“US public pensions depend on a strong, stable economy to deliver on their promised benefits to public sector workers”, notes Jessye Waxman, sustainable finance campaign advisor at Sierra Club.
Sierra Club’s scoring methodology incorporates both the processes behind setting a climate solutions target (think governance, reporting and guardrails) as well as the quality of the target itself.
The findings show the vast majority lagging behind. 22 of the 30 funds had no clear plan to invest in climate solutions, 24 had no net zero commitment and just eight had a strong degree of board oversight of climate risk.
Some funds, however, do seem to be making progress. Minnesota’s SIB, three funds governed by the New York City Comptroller (NYCERS, BERS, TRS), the Oregon Public Employees Retirement Fund and the New York State Common Retirement Fund scored high on the climate investment strategy indicator.
“While some US public pensions are beginning to address how climate change impacts portfolio performance, most still rely on high-level commitments or inadequate metrics that do little to drive emissions reductions in the real world and protect retirement security for millions of Americans”, Waxman adds.
Driving divergence
Partly, the differences in climate strategies have to do with their structure. For instance, the report shows that in some cases climate solutions holdings seem to result from diversification more so than dedicated exposures. Examples cited in Sierra Club’s report include California State Teachers' Retirement System (CalSTRs), one of the country’s largest asset owners.
“Without a stated strategy or target, there is no clear indication these pensions are proactively making new investments in climate solutions”, the report reads.
The quality of stated strategies, the report argues, also has to do with intentional classification of what counts as a solution and what does not.
For example, CalPERS – the country’s largest pension fund—has a $100bn climate solutions target. The report highlights the target’s inclusion of carbon capture and storage technologies. Something the authors believe is “a technology whose deployment and emissions-reduction outcomes remain uncertain without strong guardrails”.
Another difference between leaders and laggards is the extent to which climate solutions discussions are moving beyond energy. Nature and biodiversity for instance, tends to be on average, left out. The vast majority of Sierra Club’s sample had no policy on that front.
It is not immediately clear from Sierra Club’s numbers that a red-blue divide explains the divergence. Although schemes based in states such as North Carolina and Texas have governance processes that Sierra Club classifies as ‘anti-ESG’, several other funds with weaker scores are in democrat-governed states.
Progress, on the climate investment front, is visibly fragmented for America’s public pension schemes. Sierra Club’s inaugural assessment of these asset owners highlights where and why that fragmentation occurs. All, however, does not seem lost. In the midst of it all, a small minority are leading the way – improving not only the targets they adopt but also the processes that hold these targets in place.
