San Francisco Creates Reduced-Carbon Portfolio

Fund will be weighted towards companies that are more environmentally friendly in their carbon usage.

The San Francisco Employees’ Retirement System (SFERS) will create a “carbon constrained” passive index equity strategy, one of the few pension plans in the US that is eliminating heavy carbon emitters from part of its stock portfolio.

The board of the $24 billion pension system approved Wednesday evening the move of $1 billion of its $5.1 billion US equity stock portfolio into the reduced-carbon index equity strategy.

In round numbers, around $50 million of US fossil fuel stocks will be sold from SFERS portfolio as part of the creation of the new index portfolio, the system’s Chief Investment Officer William Coaker said Wednesday evening at a special board meeting.

The portfolio is part of a new sustainability investment plan for the retirement system which will include the hiring of a director of socially responsible investing, increasing engagement of companies in the SFERS portfolio over social, environmental, and governance issues, and divesting of fossil fuel companies that fail to curb heavy carbon emissions.

The new equity strategy will take months to build and will not eliminate companies that emit carbon, but instead will be weighted towards companies that are more environmentally friendly in their carbon usage, said Coaker.

In the US, two large pension plans—the $200 billion New York State Common Retirement Fund (NYSCRF) and the $225 billion California State Teachers’ Retirement System (CalSTRS)—also have introduced such portfolios in the last several years.

Mr. Coaker told the board that he believed the portfolio could be introduced with a minimum effect on pension system returns.

He  presented a report to the board that demonstrated back-testing by money manager Goldman Sachs Asset Management showed eliminating the stocks of heavy carbon emitters from the S&P 500 reduced carbon going into the environment by 50%. Investment-wise, he said, the portfolio of stocks with less emissions resulted in an underperformance of just 0.6% annualized gross of fees between March 2005 and September 2017 in comparison to the S&P 500.

Coaker said the carbon-reduced portfolio “did have slightly better performance in down markets and a tad less volatility and beta.”

“While the back-tested results of the carbon constrained strategy have not outperformed, we do anticipate the introduction of electric vehicles is likely to meaningfully accelerate, and that the adoption of solar and wind could soon increase as well,” he said in the report.

Coaker said the increased usage of electric vehicles and solar and wind power, “explain why adopting a carbon-constrained strategy for a portion of our passive public markets portfolio now makes sense.”

The San Francisco pension system’s commitment to the new portfolio is significant given its size. NYSCRF has committed $2 billion and CalSTRS $2.5 billion to their low-carbon portfolios, but each of the systems has a more than $100 billion equity portfolio.

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