CalPERS: Why investments in oil and gas groups are also climate solutions

CalPERS has hit back at criticism from a coalition of environmental advocates and public sector unions, California Common Good, that its flagship $53 billion sustainable portfolio which it hopes to double to $100 billion by the end of the decade includes a $3.5 billion allocation to many of the world’s biggest polluters.

The organisation used public records, including filing a California Public Records Act request, to highlight that CalPERS’ climate adaptation, transition, and mitigation investments include holdings in 52 of the world’s largest greenhouse gas emitters. The report aims most of its criticism at CalPERS’ inclusion of seven oil and gas companies in the portfolio.

“Unfortunately, the report raises unfounded concerns that CalPERS isn’t serious about addressing climate change. Even worse, it could be construed as suggesting that CalPERS is intentionally misleading its 2.2 million members and the public about the intent of our climate investing program,” said CEO Marcie Frost in a statement.

Problems in Solutions

CalPERS does indeed classify a small proportion of its investments in oil and gas companies as providing climate solutions, confirmed Peter Cashion, managing investment director for sustainable investments, speaking during the investor’s mid-March board meeting.

Specific business lines at these companies amount to $67 million worth of investments in activities that qualify as climate solutions like developing green biodiesel, carbon capture technology and sustainable aviation fuel.

CalPERS measures portfolio companies’ green business activity using a taxonomy that tracks climate solution investments across three categories – mitigation, adaptation and transition. Under the transition umbrella, Cashion said it is possible for high emitting companies in hard to abate sectors to qualify as providing a climate solution if they have transition strategies that support pro-climate activities.

Using this approach, CalPERS values 1 per cent of its $234 million Saudi Aramco holding as a climate solution, for example. Elsewhere the investor classes its $12.6 million investment in Indian coal giant Adani Group’s Green Energy subsidiary as a climate solution.

CalPERS uses a variety of globally recognised data providers to measure companies’ green activity including Financial Times Stock Exchange, HSBC and MSCI and Blomberg. The CalPERS team have sought out best practices supported by the Institutional Investor Group on Climate Change (IIGCC), the EU Sustainable Finance Disclosure Regulation (SFDR), and the European Securities and Markets Authority (ESMA).

Cashion said the allocation reflects CalPERS belief that “a green asset is a green asset regardless of corporate ownership” whereby even if a green asset sits on the balance sheet of an oil producer, it is still viewed as green.

He also reiterated the importance CalPERS places on engaging with oil and gas companies to promote sustainability at these corporations. Witness how CalPERS $5 billion allocation to a Climate Transition Index underweights oil and gas companies with no transition plan.

Frost said that CalPERS’ approach to assessing climate solutions has been iterative in a reflection of the emergence of best practices and additional data. “We wish things were easier. CalPERS has long supported clarity and consistency in climate investing definitions. We reject any suggestion that our methodology wasn’t well researched or independently authenticated,” she stated.

She also reiterated why CalPERS does not support climate divestment, something she called a “a symbolic act that not only ignores the value of climate transformations and investor engagement, but a possible breach of our fiduciary duty as required under the California Constitution.”

Her response underscores the challenges investors face balancing financial returns with their climate commitments. CalPERS believes that its influence can push polluting companies toward greener practices and support funding clean energy technologies. Yet transition progress is slow – and remaining invested is an essential return stream for CalPERS 2 million beneficiaries.

California Common Good also called for more details on the private equity, private debt, infrastructure and real estate holdings CalPERS classifies as climate solutions. The lobby group said this was particularly important given CalPERS has announced plans to increase private holdings to 40 per cent of its portfolio.