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California pension fund climate action pledge could counter Republican anti-ESG moves

© Shutterstock / ZikGCalifornia pension fund CalsTrs.

A series of climate-focused pledges by one of the world’s largest pension funds, the California State Teachers’ Retirement System (CalSTRS), may help to counter the anti-ESG sentiment in the US. 

CalSTRS has pledged to reduce greenhouse gas emissions across its investment portfolio by 50% by 2030, and also committed to a net zero portfolio by 2050.

Reducing exposure to fossil fuels is widely viewed as the best and fastest way to reduce GHG emissions.

The anti-ESG sentiment in the U.S. is largely anchored by the fossil fuel lobby.

California has been at the forefront of driving climate change regulation in the US., as seen by the recent vote to end the sale of gasoline-powered cars in the state by 2035.

It was the first state to adopt a microplastic reduction policy in February 2022, having enacted legislation in 2016 to reduce GHG emissions 40% below their 2019 levels by 2030.

The state is also home to the California Public Employees Retirement System (CalPERS), which manages over $500 billion, is a signatory of the UN Net Zero Asset Owner Alliance and is active in engaging with the companies it invests in to help drive their sustainability transition, and guide them to adopt climate change targets.

CalSTRS sustainability policy goes beyond emissions reduction

The climate goals set by CalSTRS provide additional detail into its carbon reduction goals. Setting an interim 50% reduction target to achieve a net zero portfolio by 2050 also brings with it a pledge to allocate 20% of its public equity portfolio to a low-carbon index.  

Emissions will also be factored into its traditional risk-return analysis, and climate-related scenarios will also be incorporated into CalSTRS asset-liability modelling framework, to guide investment allocations.

CalSTRS 2021 sustainability report also highlights its sustainability vision and guiding beliefs, which include ‘stewardship of our natural resources”. The fund is likely to score highly on gender diversity as well – it is female-led, and has a female-majority board.

Alignment along party lines in the U.S. is echoed by sustainable stance

Meanwhile moves by the governments of Florida, Texas and West Virginia to ban financial services firms that had an anti-fossil fuel stance from doing business in their states may be to the detriment of their own citizens. 

Texas’ ban on banks will likely drive up interest costs,  a recent study suggests, as a smaller pool of lenders, with a potentially higher cost of capital, compete for the same business. Incorporating climate change risks could add to that cost in the future.

Florida’s recent move to ban ESG considerations from investment decisions related to its $228 billion in state pension funds seems to defy logic. Florida’s call is for purely financially material issues to be considered but, given that the state has seen state has seen some of the worst weather related disasters, which experts say will only get worse over time, one can’t help but wonder what funds are supposed to do with investments that are not developing a resilience strategy.

The ESG investment approach does appear to be becoming increasingly politicised in the US but the CalSTRS move could also spur other pension funds and large asset managers to follow suit and take a stance.

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