On December 31, CalSTRS issued a press release announcing its first report in response to SB 964, the 2018 state law that requires CalPERS and CalSTRS to report on climate-related financial risk in their public market portfolios. CalSTRS’ 81-page report is beautifully presented: very glossy. Beneath its sleek exterior, the report contains some good news, some sort-of good news, and some bad news.
The Good News
This year, CalSTRS has added three new ESG portfolio managers and is busy drafting a Low-Carbon Transition Work Plan, which might translate into more sustainable investments in due course. And CalSTRS’ modest forays into sustainable investing are paying off handsomely. The actively managed $2.5 billion Sustainable Investment and Stewardship Strategies portfolio achieved a 10-year net return of 13.54%, handily beating the 10.71% return of its benchmark. And the $2.68 billion Low-Carbon Index achieved a 10.51% net return, outperforming its benchmark by 46 basis points.
The sort-of good news: With an additional $286 million invested in “green” bonds, CalSTRS’ total stake in sustainability as of last June 30 was $5.4 billion—a paltry 2% of the fund’s total $248 billion portfolio. Such favorable returns should encourage CalSTRS to double or triple sustainable investments, even though such investments have remained at this “token” level since inception.
The Bad News
The seamless narrative and flashy graphics in this Green Initiative Task Force report gloss over the real “news” in the report: the carbon footprints of CalSTRS’ public equity and fixed income portfolios have already used up 72% and 65%, respectively, of their total carbon budget in a scenario that limits global warming to less than 2 degrees Celsius. Worse, alignment with a 2-degree scenario cannot be guaranteed past 2031 for global equities, or 2033 for fixed income. The more ambitious 1.5-degree scenario was not attempted, and the nightmarish 4-degree scenario was presented, without comment.
Having only 28% of carbon budget left in 2020 in a scenario timeframe that extends to 2100, is very bad news, and should spur CalSTRS board and staff to action now. If the intent is to decrease risk (rather than simply report on it, following the letter of the law), CalSTRS should reduce its investments in the most carbon-intensive companies in the short term, thus sending a clear market signal.
The Futility of Engagement
Worse yet, in spite of the fund’s dire future prospects for true sustainability, CalSTRS continues to defend its preferred strategy of shareholder engagement with Climate Action 100+ companies and other climate-risky companies in its portfolios. Engagement as a substitute for divestment means that the fund will stay invested in climate-destroying companies.
As the report shows with case studies, charts, and graphs, CalSTRS has diligently continued to pursue engagement. Fossil Free California maintains that engagement with fossil fuel companies is a time-wasting exercise in futility. For example (as CalSTRS proudly reports) oil major Royal Dutch Shell has promised to include value-chain emissions (including Scope 3) in its assessment of its own climate risk and to set emissions reduction targets based on this assessment. However, that promise is meaningless in the context of Shell’s continued investments in finding and producing more fossil fuels. In an excellent op ed in the Guardian, George Monbiot says that as long as Royal Dutch Shell “continues to invest in fossil fuels, it accelerates climate breakdown and the death of the habitable planet.”
Despite losing money on fossil fuel investments and acknowledging their contribution to climate risk, CalSTRS’ has maintained a steady investment in fossil fuel equities (by number of shares) in Big Oil companies such as Exxon and Chevron over the past ten years.
The energy sector now commands only 4.3% of the S&P 500 index, down from 25% in the 1980's, when oil and gas companies represented seven of the top 10 companies. Today, there are none. https://t.co/aQjrupvxzG
— Mark Campanale (@CampanaleMark) January 9, 2020
Inadequate Reporting on Scope 1-3 Emissions
The CalSTRS report, after nicely defining Scope 1, 2, and 3 emissions, estimates that its public equities Scope 3 emissions are 60 million tons of CO2 equivalent (see the bar chart on p. 66 of CalSTRS report). However, note that the sector contributions in the accompanying pie chart are based only on Scope 1 and 2 emissions, which means that Scope 3 emissions from the energy sector (for example) are not represented. We hope that updates to this report will reveal the full nature of the risk contained in fossil fuel investments, at the sector, industry, and company level.
Our Last Word
In general, CalSTRS’ Green Initiative Task Force report, like the report submitted by CalPERS, shows a failure to integrate the risk analysis with investment decisions. As Janet Cox, a former Board member of Fossil Free California, says, “There is really no nexus in either report between risk reporting and investment strategy. This is both concerning and puzzling. What’s the point?”
For further reading:
Randy Diamond (CIO Magazine) has a recent article on the STRS report and a longer one when the initial CalPERS report came out but before the board meeting where staff was told to revise the report. He also interviewed CalPERS CIO, Ben Meng, in December.
The LA Times covered the CalPERS report and revision much more comprehensively.
The SF Chronicle editorialized on the CalPERS first version on Dec. 23.