CalSTRS Expanding Green Investment Efforts

CalSTRS’s annual green report goes beyond the pension’s efforts to offer a bleak picture of global plans to deal with climate change.

The California State Teachers’ Retirement System (CalSTRS) is beginning a new phase of its $2.5 billion program to invest in the stock of companies with low carbon emissions while also monitoring its external equity mangers to see that they are incorporating sustainability factors in making investment decisions.

While investment officials of the $226.5 billion pension system, the second-largest by asset size in the US, say they are doing their part, they offer a sobering assessment of the world’s progress in meeting the goals of the global Paris Agreement. Under the 2015 agreement, nations are supposed to take the necessary environmental steps, such as limiting carbon emissions, to keep global temperature rise this century to well below 2 degrees Celsius. The temperature rise is based on pre-industrial days before 1900.

“Despite the Paris Climate Accord outcome, ambitious and stringent climate policy and mitigation action have yet to materialize, CalSTRS says in the “Green Initiative Task Force 2017-2018 Annual Report,” released March 28. “Also debatable is whether existing policy and mitigation efforts are aligned and cohesive.”

The CalSTRS report does not make any comments on President Trump’s decision in 2017 to withdraw from the Paris climate treaty. Trump argued that the treaty, agreed to by almost every country in the world, including the US, is unfair to American businesses. However, the soonest the US can officially withdraw is Nov. 4, 2020, under treaty rules.

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The CalSTRS report touts its efforts but paints a bleak picture of the green energy economy, saying investments by companies in clean energy technology has been trending down overall for the last several years. It says that most countries around the world have not implemented, or do not seem to be considering, any type of emissions reduction program, despite promising to do so as part of the Paris accord.

Citing Bloomberg New Energy Finance, the report states that global investment in clean energy projects, like renewable energy, for the first six months of 2018, was $138 billion. If that pace stays consistent during the second half, the total global new investment in clean energy will be $276 billion, the report says.

That would be down from $334 billion in 2017 when there was slight growth from the prior year’s $325 million, the report said. It noted that 2015 clean energy projects totaled $361 million.

While the overall report does not present a rosy picture of global efforts to reduce the efforts of climate change, CalSTRS Chief Investment Officer Christopher Ailman offers an optimistic view of the CalSTRS programs, noting that, “I am happy to announce the second phase of the CalSTRS $2.5 billion Low-Carbon Index.”

The pension system ended the first phase of the program, investing $1.3 billion in the stock of low-carbon companies, in July 2017. In the second phase, CalSTRS will invest another $1 billion in low-carbon-emitting companies in non-US markets over the next few months, by June 2019. The final $200 million is expected to be invested after that in low-carbon companies in emerging markets.

No exact timetable has been set for the investment of the remaining $200 million, considered the most challenging, even though it is a smaller amount, due to the more unstable nature of companies in emerging markets.

While CalSTRS has been one of the few US plans to invest in a low-carbon index program, Ailman has acknowledged in the past the pension system is still testing the waters to assess whether a portfolio of companies that have low emissions can outperform a broader market segment on a long-term basis.

The doubt is shown in the fact that the $2.5 billion portfolio—when fully invested—will still make just over 2% of CalSTRS’s appropriately $115 billion global equity portfolio.

So far, the portfolio has performed strongly. CalSTRS statistics show that the low-carbon stocks in the CalSTRS custom index in the 12-month period ending June 30, 2018—its first full year—saw a 14.79% return, outperforming the pension system’s custom benchmark by four basis points.

CalSTRS overall global equity portfolio saw a lower 11.7% return in the same period, underperforming the 11.8% return of its custom benchmark, show pension plan numbers.

Another CalSTRS initiative detailed in the green report is the pension system’s program to determine what percentage of its external managers are accounting for various climate change considerations into their investment process. CalSTRS works with around two dozen external managers who invest more than $40 billion of the global equity portfolio.

For at least the last five years, the pension system has been pushing its global equity managers to incorporate environmental factors into their investment criteria.

The green report shows that 72% of external managers said they had taken steps in the 2017-2018 fiscal year to better assess climate change risk in their investment process. The report said that was up from 66% in the 2016-2017 fiscal year, from 56% in the 2015-2016 fiscal year, and 30% in the 2014-2015 fiscal year.

Sixty-two percent of external money managers in the 2017-2018 fiscal year said they considered a company’s carbon before making investment decisions. This was up from 48% in the 2016-2017 fiscal year and 44% in the 2015-2016 fiscal year. The question was first asked of the external money managers in the 2015-2016 fiscal year.

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