Our previous article, CalSTRS Glosses Over Climate Risk with SB 964 Report (January 20, 2020), introduced and critiqued the CalSTRS Green Initiative Task Force report, summarizing the “good”, “sort-of-good”, and “bad” news presented by CalSTRS about climate-related financial risk in their investments.
This article looks at some of the language and analysis presented in the Green Initiative Task Force Report, and explains why the bad news is not only bad, but also:
- shows a misunderstanding (willful ignorance?) of the scientific and global policy consensus related to climate change, and
- uses a faulty (incomplete) risk assessment metric.
CalSTRS’ Portfolio Analysis
In the introduction to the Report’s section on Risk Management, CalSTRS states “Senate Bill 964 required that CalSTRS conduct an analysis of the Teachers’ Retirement Fund’s alignment with the emissions reduction goals of the Paris Agreement, which calls on all countries to develop carbon reduction plans to hold global temperature increases at or below 2 degrees Celsius from pre-industrial levels.” This section of the report presents a “Climate Scenario Analysis” for two public portfolios, the Public Equity Portfolio and the Fixed Income Corporate Bond Portfolio. Two scenarios are presented in bar graph form for each portfolio: one is a 2°C scenario and the other an incredible (apocalyptic) 4°C scenario. There is no mention of a 1.5°C scenario.
(Source: Green Initiative Task Force Report 2019 pp. 69 and 70)
A summary of the findings in the Metrics and Targets section of the CalSTRs report (p. 79) suggests they have met the objective to “Conduct carbon risk assessment and alignment with Paris Agreement”.
The Metrics given to summarize the risk assessment and alignment are the following:
- 2019 Public Equity Portfolio emissions are 28 percent less than budgets that align with a 2 degree Celsius scenario
- Public Equity Portfolio is aligned with a 2 degree Celsius scenario until 2031
- 2019 Fixed Income Corporate Bond Portfolio emissions are 35 percent less than budgets aligned with a 2 degree Celsius scenario
- Fixed Income Corporate Bond Portfolio is aligned with a 2 degree Celsius scenario until 2033
However, the Climate Scenario Analysis and the summary metrics provided by the consultants (Institutional Shareholder Services):
- do not reflect the Paris Climate Agreement goals,
- misapply the science behind carbon budgets, and
- ignore the types of data-based risk assessments modeled by the 2018 IPCC Special Report on Global Warming of 1.5 degrees C .
Goals of the Paris Climate Accord; Difference Between 1.5°C and 2°C
The fact that CalSTRS’ Climate Scenario Analyses use both 2°C and 4°C as their benchmarks ignores the intent and goals of the COP21 Paris Climate Agreement. According to French Foreign Minister Laurent Fabius, who presided over the talks, the Paris accord aims to limit the increase of global temperatures “to well below 2 °C above pre-industrial levels and to pursue efforts to limit the temperature increase to 1.5 °C.” He said that parties to the agreement should “aim to reach global peaking of greenhouse gas emissions as soon as possible…and to undertake rapid reductions thereafter.” The goal was to achieve a balance between human-caused greenhouse gas emissions and human-promoted carbon removal or capture by 2050. This balance is usually described as net zero emissions.
This goal of achieving net zero emissions was reinforced in the 2019 International Energy Agency’s (IEA) World Energy Outlook Report, and the 2018 IPCC Special Report. The 2018 IPCC Special Report states “Future climate-related risks depend on the rate, peak and duration of warming. . . . they [risks] are larger if global warming exceeds 1.5°C . . . especially if the peak temperature is high (e.g., about 2°C) . . . Some impacts may be long-lasting or irreversible . . .” The aspirational goal of 1.5°C is important, because the seemingly small difference of .5°C makes a huge difference in the inevitable impacts and risks of heatwaves, droughts, floods, crop yields, sea level rise, coral bleaching, etc.
Source: IPCC 2018 SPM2 Impacts and Risks
Carbon Budgets vs. Emission Pathways
The scenario of “4 degrees Celsius” carries with it such severe consequences for humans and our ecosystems that it should not be presented as one possible benchmark, without comment. Has the CalSTRS team failed to grasp the implications of such an enormous temperature increase? Not only that, but the “Climate Scenario Analyses of 2°C and 4°C and the associated risk assessment “Metrics” also misapply the scientific concepts behind carbon budgets and ignore tools such as carbon emission pathways, which more accurately model goals and risk.
Carbon budgets are based on a proportional relationship between total cumulative human-generated global emissions of CO2 (since the pre-industrial period), and increases in global mean surface temperature. The 2018 IPCC Special Report discusses carbon budgets in the context of intentional plans and policies to reduce CO2 and other greenhouse gas emissions to net zero. A particular Total Carbon Budget is always estimated in relation to a defined temperature limitation goal (such as 1.5°C), a defined endpoint time to achieve net zero emissions, and a defined probability of achieving the temperature limitation (ie, 50% or 66%).
A carbon budget is only one aspect of the modeling required to create a projection of future temperature rise, describe possible intervention paths, and indicate the risks of each path based on multiple variables. The models used by IPCC and IEA scientists are called Emission Pathways. The 2018 IPCC Report includes several examples of these global pathways, which all share common characteristics.
Source: Global Emissions Pathway Characteristics, IPCC 2018 SPM.3a
Emissions pathway models are crucial because they include a temperature goal for limiting global warming, indicate at what future time emissions might peak, show the rate of change of carbon emissions along the path of reduction, project the timing for when the goal of net zero emissions could be achieved, and indicate probabilities for achievement of goals. In addition, they indicate whether a particular pathway relies on net negative emissions to limit overshoot of the temperature goal. Negative emissions rely on carbon capture and removal technologies and other methods that are not currently sufficiently developed.
The 2018 IPCC Report indicates that in order to stay close to the goal of 1.5°C, the rate of global human-caused emissions must decline by about 45% from 2010 levels by 2030. In addition, emissions must reach net zero by about 2050. An often-quoted finding from the IPCC 2018 report asserts that “The challenges from delayed actions to reduce greenhouse gas emissions include the risk of cost escalation, lock-in in carbon-emitting infrastructure, stranded assets, and reduced flexibility in future response options in the medium to long term . . .”
The Need for a Data-Based Risk Assessment
The CalSTRS Green Initiative Task Force Report purports to conduct a carbon risk assessment, and to analyze the investment portfolios’ alignment with the Paris Climate Agreement. It does neither. The modeling and metrics in CalSTRS’ report do not provide complete information about the carbon footprint of the equities and fixed income portfolios. CalSTRS needs to use more sophisticated metrics including emissions pathways, rate of change, and endpoints in order to express the likely impact of these investments.
The discussion of the percent of carbon budget used in each portfolio, and the remaining percent of budget to be used is a misapplication of the predictive value of carbon budgets, which by themselves are insufficient to create a predictive model. There is no discussion of how the portfolios are “aligned” with any modeled emission pathway for reducing carbon emissions, and there is no time frame for achieving net zero emissions. The bar graph doesn’t indicate what the rate of emissions represented in the portfolios is, or whether it is increasing, decreasing, or staying the same.
The graphics and limited data for the two public portfolios indicate only that the portfolios comprise investments that have contributed to carbon emissions (budget used) and:
- will continue to contribute (budget remaining);
- will have used up an emissions budget predictive of a 2°C temperature increase by 2030 or 2033;
- and will most probably continue to contribute emissions indefinitely.
The purported objective to “conduct carbon risk assessment and alignment with Paris Agreement” is faulty, because the data provided doesn’t indicate the portfolio’s “alignment” with any limitation of temperature increase, whether it be 1.5°C, 2.0°C, 4.0°C, or anything in between. The use of words such as “alignment” and “scenario” obscures the cause and effect relationship between the cause of global warming, which is ongoing carbon dioxide and other greenhouse gas emissions, and the effect, which is temperature rise. There can be no true analysis of risk associated with these portfolios, because there isn’t enough data given to analyze.
A carbon budget is only meaningful in the context of intentional and unprecedented decreases in carbon emissions, with a specified target date of net zero carbon emissions. The slick graphics, when analyzed with this in mind, only tell us what we already knew: if global carbon emissions as represented in the investment portfolios continue at the same rate or greater, we are headed towards unsustainable and irreversible consequences due to ongoing temperature increases.