How four institutional investors use climate action plans to map their paths to net zero

This blog was originally published by Impact Alpha.

New York State’s $279 billion pension fund understands the importance of planning.

When the New York State Common Retirement Fund announced in 2020 an ambitious goal to cut the greenhouse gas emissions across its portfolio to net zero by 2040, it was building on a plan it had started a year earlier. This climate action plan became the blueprint for how New York State Common would mitigate climate risk, capitalize on opportunities in the low-carbon economy, and protect the fund’s long-term value.

The strong 33.5% return the New York pension fund generated during the state’s latest fiscal year may have little to do with its investor climate action plan, but the plan clearly is not hurting returns either. The fund outperformed the S&P 500 annual return of 28.7% last year (although the two fiscal years are not the same).

New York Common is just one of many institutional investors across the globe that has made net zero commitments to address climate risk and invest in the low carbon future as part of their fiduciary duty to protect their portfolios’ long-term value. And investor climate action plans are the key to how investors will achieve their goals. To help investors map out these plans, the Investor Agenda, a global partnership of investor networks, has created the Investor Climate Action Plans Expectations Ladder and Guidance and published case studies on 20 of them. The investors studied include four North American funds. Each of them is a standout in at least one area of The Investor Agenda’s recommended action areas: investment, engagement, policy action and disclosure.

Investment

New York Common’s investor climate action plan covers the spectrum of portfolio management activities recommended by the Investor Climate Action Plans Expectations Ladder and Guidance.  But what may be most notable about New York Common’s investor climate action plan is the Fund’s creation of a special unit to focus on investing in climate solutions: its Sustainable Investment & Climate Solutions unit is a multi-asset class program to focus on opportunities in climate solutions. At the outset, New York Common said it would allocate $20 billion to the fund by 2030. Two years later, it is way ahead of schedule with $15 billion in the fund, about 5% of its total $279 billion in assets. Investments include public equity strategies, green bonds, clean and green infrastructure funds, private equity, and green building real estate funds. One is a $300 million investment in Avenue Sustainable Investments, which helps finance projects and companies offering environmentally sustainable solutions, including recycling, renewable energy, energy efficiency and battery storage, water and agriculture, and safety and resilience. 

Engagement

The California State Teachers’ Retirement System (CalSTRS) also created a comprehensive investor climate action plan and is another early mover. CalSTRS began integrating climate risk and opportunity into its investment decisions in 2004, investing in climate solutions and then disclosing its emissions data since 2005. Then last year, it set a net zero emissions by 2050 goal for its own portfolio.

CalSTRS stands out for its engagement with portfolio companies. In 2021, it led the effort to mobilize investors around supporting a new dissident slate of board members at ExxonMobil nominated by the hedge fund Engine No. 1, building the case that ExxonMobil needed directors experienced in energy transitions. It was an historic vote that upped the ante of what investors expect of companies on climate-related risks. CalSTRS also is among the investors leading Climate Action 100+, the biggest investor climate initiative ever, which is engaging with the globe’s largest corporate emitters, pursuing dialogues and filing shareholder proposals to push them to make and deliver on climate commitments.

Like New York Common, CalSTRS beneficiaries saw solid investment returns – in fiscal 2021, CalSTRS earned a 27.19% rate of return on its investments.

Policy advocacy

Because the climate crisis is a systemic risk to portfolios, policy advocacy is integral to any Investor Climate Action Plan. Global warming cannot be solved by some investors or companies or some cities and states. A systemic approach to an economy-wide risk is needed, with legislation and regulation that will level the economic playing field and unlock investment opportunities and capital flow by providing long-term signals to the market.

Impax Asset Management’s investor climate action plan is notable for the strength of its policy advocacy. London-based with substantial operations in the U.S., Impax Asset Management was an early and ongoing advocate for regulation by the U.S. Securities and Exchange Commission (SEC) on disclosing climate risk. It petitioned the SEC in 2007 to provide interpretive guidance on climate risk reporting and in 2019 to require companies to report on the locations of significant assets so investors could assess the physical climate risk companies face. 

In the SEC’s current proceeding on mandating climate disclosure, Impax has provided written and verbal comments to the SEC, emphasizing that investors need to understand where emissions in a portfolio are concentrated and urging that disclosure be mandated.

Disclosure

San Francisco Employees Retirement System (SFERS) was one of the first institutional investors to develop an investor climate action plan, doing so in March of 2020.

SFERS integrates climate risk and opportunity into due diligence and monitoring of all its investments, aiming to ensure allocations across all asset classes are consistent with a net zero emissions by 2050 pathway. Each year it tracks the carbon footprint of all its public equity and fixed income holdings which, in turn, has allowed it to manage a steady implementation of its portfolio decarbonization. SFERS set – and is on track to meet – an ambitious interim target of 50% reduction of portfolio emissions by 2025 and 65% by 2030 from a 2017 base year. SFERS publishes the quantitative details of those interim goals and details of its carbon footprint.

While SFERS’ investor climate action plan includes robust engagement with companies and policy advocacy, its detailed disclosure is what stands out in its climate action plan. SFERS earned a rate of return of 33.7% for its fiscal year 2021.

Investment, engagement, policy advocacy, and disclosure are critical pillars of robust Investor climate actions.  Delving into these case studies of North American investors’ ICAPs shows that all four action areas are possible and prudent and that investors are prepared to be transparent with their stakeholders on how they manage climate risks and align strategies with the goals of the Paris Agreement.