The California State Teachers’ Retirement System is taking the lead among US institutional investors to reduce its carbon footprint and mitigate exposure to rising environmental threats such as coastal flooding, hurricanes and wildfires.
CalSTRS’ adoption of a low-carbon plan earlier this month comes after California governor Gavin Newsom signed an executive order in September requiring CalSTRS and the California Public Employees’ Retirement System – the two biggest US investors – to devise sustainability plans. Such measures are not uncommon for similar-sized investors globally, but CalSTRS is one of the few US institutions to adopt a formal policy on climate change to date.
The $240 billion Sacramento pension rolled out an 18-month low-carbon transition work plan on October 3, though few details were cemented during the meeting. The first step, CalSTRS director of corporate governance Kirsty Jenkinson told PERE, is to conduct a detailed analysis of the risks associated with climate change as well as investment opportunities for potential solutions.
The new strategy will touch all asset classes, but the challenge for real estate is twofold, Jenkinson said. CalSTRS will try to limit emissions from the buildings in its portfolio while also taking steps to protect them from natural calamities. “Different assets have different exposures,” she said. “Our job is to work out where we need to be apprised of what.” Also, as it looks to invest in real estate more directly, the pension will need standards for its in-house team and third party managers.
CalSTRS’ low-carbon plan reflects a broader trend by US investors – particularly those with ample resources – to approach climate concerns proactively, Susan Swanezy, a partner at the New York advisory firm Hodes Weill & Associates who specializes in matters of environment, social and governance investing: “The environmental component of ESG is moving from best practices in operations and development to risk management, to ‘are you factoring in these considerations in your investment decision making practices?’”
US investors tend to pay less attention to environmental concerns than their global peers. Just 35 percent of institutions in the US have an ESG policy, according to the 2019 Allocations Monitor, an annual report from Hodes Weill and Cornell University’s Baker Program in Real Estate. By contrast, 65 percent of investors from Europe, the Middle East and Africa reported having an ESG program, as did 76 percent of respondents in Asia-Pacific, where AustralianSuper and other pensions have taken leadership roles in sustainability.
Even among US investors with ESG policies, just 25 percent of respondents said they modeled their investment strategies on them. Yet that tide is turning. The Americas saw the fastest rate of ESG policy adoptions between 2018 and 2019 – jumping from 26 percent to 35 percent – according to the 212-respondent survey.
Neil Pegram, director of Americas for the Global Real Estate Sustainability Benchmark, or GRESB, a Dutch firm that tracks real asset sustainability, told PERE that CalSTRS’ low-carbon plan could encourage more US investors to follow suit: “CalSTRS is ahead of the curve in the US market and their leadership will put pressure on other large institutional investors and US pension plans to set sustainability road maps and increasingly recognize sustainability and carbon issues as material risks.”
Adin Meir, president of CodeGreen Solutions, a sustainability and energy management consultant, said climate change has become a more significant issue among US investors and managers because incidents of weather-related destruction are growing more frequent. “Those things are happening on an annual basis,” he said. “Increasingly, year over year, people are struggling with how to respond to those issues and how to prove to investors that they’re protecting their assets. There’s really been an uptick in interest along the lines of risk mitigation, as well as people understanding that operating a sustainable portfolio is also equitable with operating a more efficient portfolio with higher returns for investors.”
CalSTRS has factored environmental concerns into its investments for years, albeit without an umbrella strategy. In 2011, it earned LEED Platinum certification for its West Sacramento headquarters and in 2016 it committed $2.5 billion to low-carbon equities investments. Jenkinson was brought in earlier this year to oversee CalSTRS’ $4.1 billion ESG portfolio. However, prior to the governor’s executive order, groups in California have called for the state’s pension funds to go further. The $70 billion University of California Retirement Plan and the $26 billion San Francisco Employees’ Retirement System have both succumbed to demands for total fossil fuel divestment.
Jenkinson said CalSTRS is determined to balance public sentiment with principles of sound investment: “We need to recognize where people’s interests and concerns lie but our job, ultimately, is to bring it back to managing the portfolio in a way that makes sense.”