By David G. Barry
The California State Teachers’ Retirement System (CalSTRS) has gotten the go-ahead to implement four proposals aimed at meeting its pledge to achieve net-zero portfolio emissions by 2050 – one of which would involve the movement of more than $20 billion.
The $301.5 billion pension fund received approval from its investment committee to reduce its portfolio carbon emissions by 50% by 2030, adopt a net-zero investment decision-making process, integrate climate scenarios into its asset-liability management framework, and establish a 20% target allocation to the MSCI ACWI Low Carbon Target Index.
CalSTRS’ efforts stand in stark contrast to the recent resolution that restricts the Florida State Board of Administration (SBA) in using environmental, social, and governance (ESG) factors in making investment decisions.
In remarks to the board, Chief Investment Officer Christopher Ailman said the proposals are an “initial step” to “shifting our global equity portfolio to a low-carbon world.”
CalSTRS’ investment team recommended the four actions essentially a year after the investment committee approved the net-zero emissions pledge – a pledge which staff said in a report that it has made “an extremely high priority.”
Under the net-zero investment decision-making process, CalSTRS will incorporate a complete analysis of the impact on risk, return, emissions and funding status associated with any investment decision presented to the investment committee. CalSTRS’ staff said it would be the first pension fund to do such analysis.
The move to establish a 20% target allocation to the low-carbon index would result in the reallocation of an estimated $21 billion. Currently, 42%, or roughly $125 billion, of CalSTRS’ portfolio is invested in public equity. CalSTRS, as of June 30, already managed $3.9 billion in the MSCI ACWI Low Carbon Target Index as part of its Sustainable Investment & Stewardship Strategies (SISS) Public Portfolio.
According to the staff report, the $3.9 billion represents approximately 44% of the SISS Public Portfolio and approximately 3% of CalSTRS’ total public equity exposure. A spokesperson for CalSTRS said the 3% that has been deployed is included in the 20% target figure.
CalSTRS’ report said that the MSCI ACW Low Carbon Target Index was chosen over four other indexes because it had “the highest carbon emissions reduction per unit of active risk” and staff has experience managing a portfolio that replicates the index.
In its report, CalSTRS said that with 74% of its public portfolio passively allocated and with public equities providing the most accurate and broadly available carbon emissions data, the 20% allocation to the low-carbon index is seen as the “as the most meaningful way” to reduce its total portfolio emissions.
CalSTRS said the 20% allocation to the index would reduce the emissions from its public equity portfolio by approximately 14% from the baseline level reported in May.
In getting approval, staff said it will reappear before the investment committee with a plan to implement the 20% allocation.