CalSTRS, the $323.6 billion pension fund, is putting in place building bricks to meet its 2050 net zero pledge in a process that underscores the complexity and size of the task in hand. The pension fund won’t announce any firm commitments and targets until it has set up the governance structures; settled on the right incremental steps to net zero and understood how reducing emissions will impact its risk budget.
The pension fund is also looking at where it can invest in climate solutions in a total fund approach. It involves every asset class in a portfolio tasked with achieving a seven per cent annual return . “Getting the governance right really matters; we are spending a lot of time on this,” said Kirsty Jenkinson, director, sustainable investment and stewardship strategies, CalSTRS, speaking at Sustainability in Practice at Cambridge University.
That governance includes a leadership team setting targets, and an implementation team providing structured support with a private market and public market working group. Governance also prioritises next steps to maintain momentum. “With something this large, if you can’t break it down you lose traction and natural progress,” said Jenkinson. She noted a bigger challenge to measure and set base lines in private markets – although the majority of the pension fund’s assets are in public, passive allocations.
She added that CalSTRS net zero strategy also incorporates the influence the giant pension fund wields. This includes with policy makers; managing and shifting the portfolio around via active decisions and setting goals around what it can control. Where it has less active control, it will rely on market actors.
Portfolio implementation around net zero will lead to investors shedding assets, said Anne Simpson, global head of sustainability at Franklin Templeton. She explained how when one investor sells unsustainable assets another buys them in a process that often leads to assets going into private markets where there is less transparency and oversight. “Investors can have a pat on the back because they are decreasing ownership of emissions, but this is not the same as being on the right path,” she said.
Information remains an enduring barrier for investors aligning their portfolios to net zero targets. Investors rely on estimates without standardized mandatory reporting. Simpson urged investors to support the IFRS Foundation’s new standard-setting board the International Sustainability Standards Board, ISSB. Elsewhere she highlighted the need to end the subsidies still supporting fossil fuels and said that a price on carbon would enable investors to price risk accordingly. She also urged investors to focus on systemically important emitters in line with Climate Action 100+ and stressed the importance of climate competent boards.
Benchmark providers play an important role supporting investors pathway to net zero. They give investors the ability to differentiate between assets on a high carbon business model and those delivering the low carbon solutions of the future. Tools – known as portfolio alignment metrics – enable investors to distinguish the leaders from the laggards as economies adjust to a net zero future, explained Sylvain Vanston, executive director, climate change investment research, MSCI.
He said it is easier to achieve long term targets if investors structure in short term targets on route. And noted pros and cons around temperature metrics, and reflected the different trajectory of a carbon intensive company with an ambitious target to cut emissions in the same sector as a company with no transition plan. Reflecting on the data challenge, he said the benchmark provider uses proxies based on other models when there is no data. MSCI is developing a new framework supporting accessibility of targets, creating new guidance and stronger models.
Jenkinson attributed CalSTRS ability to measure a large amount of the public market portfolio to MSCI data. In contrast, there is no similar plug and play in private markets like real estate and private equity where some of the most exciting opportunities exist to allocate capital to companies providing solutions. “[Data] is asset class specific and depends on what is available,” she said, noting an additional challenge of aggregating up to a total fund level.
Simpson flagged the ESG Data Convergence Project, an initiative by leading global GPs and LPs to align around a standardized set of ESG metrics and mechanism for comparative reporting in private equity. Private equity, attracting criticism for asset stripping and questions about whether it constitutes genuine value creation, will benefit from the transparency, she said.
Simpson stressed the need to move away from traditional discussions around ESG integration (and its fabled ability to cure all things) and change the narrative to one of sustainability of the financial system. The debate needs to be reframed to talk broadly about the purpose of the financial system – whether providing retirement income or mortgages – to ensure better management of the financial capital on which society relies.