Helping the largest pension fund in the US set climate priorities.
The California Public Employees’ Retirement System (CalPERS) manages the largest public pension fund in the US, with over $300bn in assets. CalPERS is a founding signatory to the UN-supported Principles for Responsible Investment and a widely acknowledged leader in sustainable investment. In 2016 the fund adopted a new strategic plan which looks towards 2046 when full implementation of the Paris Accord’s goals are due to be achieved.
CDP data helps with growing part of portfolio analysis
"As long-term owners of corporations, our role is to ensure that company strategies are in line with ours on areas such as climate risk. CDP's data is very useful in helping us do this efficiently and effectively" explains Anne Simpson, Investment Director, Sustainability at CalPERS. She continues, "Mapping a company's carbon footprint, or the emissions it produces, and measuring its progress in this area is an important and growing part of our portfolio analysis."
In 2015, to help meet this challenge, CalPERS took the carbon footprint of its Global Public Equities Portfolio with CDP being the source of much of the data.
Simpson explains, "We developed a method of carbon footprinting that blends data from three different commercial providers, but we can't model out of thin air. We need the information and it is CDP's data that underpins all our analysis."
CalPERS asks all companies that it invests in to complete CDP's questionnaire for their carbon and water use.
Using climate analysis to set priorities
Perhaps the most startling finding from the carbon footprint exercise was that out of the 10,000 companies in CalPERS' portfolio, just 340 are responsible for 75% of the emissions.
Based on these findings, CalPERS has selected 100 of these high-emitting global companies and categorized them as ‘Systemically Important Carbon Emitters’ (SICE). The Fund argues that these 100 companies should be subject to mandatory reporting requirements as they pose risk to the wider economy through their emissions. These emitters fall across several sectors including Basic Resources, Chemicals, Construction & Materials, Food & Beverage, Industrial Goods & Services, Oil & Gas and Travel and Leisure Utilities.
The SICE list has given CalPERS a sharp focus, as these 100 large emitters are now seen as priority firms to engage with. Simpson says that this prioritization is an important step forward for CalPERS and is grateful that CDP’s work has enabled it.
“CDP’s data helps us understand whether companies are committed to aligning their emissions with global targets,” says Simpson “For example, 33% by value of CalPERS’ holdings publicly report their absolute GHG reduction targets to CDP. So we know that the total carbon emissions reduction pledged by these companies would reduce CalPERS public equity emissions by 6%1 ”. The fund can also look to CDP’s sector research reports to see which companies are managing or not managing the transition to a low carbon economy.
Aiming for zero
Aiming for zero CalPERS plans to work with fellow asset owners to engage the 100 SICE companies and drive the 50% figure to zero. “We have the ability to drive this down between us” says Simpson. “Over the long-term, investors are saying to these companies that we want them to align their business strategy with the Paris Agreement”.
CalPERS also plans to roll out its carbon footprint exercise to other parts of its portfolio in the coming years, including real assets and, ultimately, to its total fund. It says that CDP’s data will be extremely valuable for this and a key part of tracking progress.
Role for regulators
Simpson adds that the role of regulators is essential and she wants more policymakers to study CDP’s criteria and methodologies. She explains, “CDP has moved the needle on carbon reporting in the past decade and given us the opportunity to tackle it effectively and measure progress. But we also argue that there is a need for a wider policy framework of mandatory reporting of relevant risks for investors to bodies like the Financial Stability Board (FSB) and others.”
“The first part of our work is around advocacy. We need a policy framework that will price in this externality. We need to be advocates for market reforms which will price this risk in a better way”
CalPERS’ new investment strategy also includes a focus on water risk, which includes both rising oceans and water shortages, and CDP data is set to play an important role in the analysis that CalPERS does in this area to ensure they can measure and manage this risk.