What’s in CalPERS’ $60 Billion Climate Portfolio?

By Ali Lindstrom and Jakob Evans, especially for CalMatters

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In November, the California Public Employees Retirement System announced it invests $60 billion in “climate solutions,” toward a goal of $100 billion by 2030. While the announcement highlighted several deals, the overall pension strategy remains shrouded in secrecy.

As the largest public pension in the US, what CalPERS does has a big impact. Yet it does not disclose a full list of its climate-focused investments, nor the criteria used to select them.

When asked how CalPERS defines climate investments, its staff points to a “taxonomy of mitigation, transition and adaptation” — meaning investments that reduce carbon emissions, support cleaner technologies for polluting businesses and help communities adapt to climate impacts.

This taxonomy covers the right topics but is a woefully poor definition of a pension that prides itself on its climate leadership.

Climate finance around the world faces credibility challenges. Research shows that climate dollars go to everything from airports to ice cream shops.

CalPERS can and should do better. The Sierra Club and the California Common Good Coalition asked CalPERS to be more transparent and adopt scientifically based principles to guide its climate investment strategy.

It became more important after that research exposed CalPERS climate plan includes $3.56 billion invested in fossil fuel companies, as well as airlines, plastics manufacturers and technology companies.

CalPERS’ Climate Plan aims to do more than just reducing carbon emissions through its portfolio, but to reduce the risk that climate change poses to the pension fund.

As studies show, risk reduction should be front of mind pension funds are particularly vulnerable of the wide-ranging economic impact of climate change and could face a drop in investment returns of up to 50% by 2040. This would be a huge shock to all pension systems working to ensure a safe and secure retirement for beneficiaries.

What remains unclear is how CalPERS’ investments in polluting companies actually address climate risk.

CalPERS has defended its fossil fuel spending, stressing that the investments are “small,” and “a green asset is a green asset.” That doesn’t do it. The investments lack what is called “additionality” — they are not new investments and do not unlock resources for decarbonization.

Simply put, owning investments in fossil fuel companies does not protect workers’ savings from systemic risk of climate change.

A climate plan that considers anything with a whiff of “green” as a climate investment does not represent a commitment to allocating capital where it is needed to scale clean energy solutions and stabilize markets. Every dollar invested in polluting companies—that isn’t used to drive change—is a dollar that could have been invested in reducing emissions and protecting communities.

Fossil fuel investments do not belong in CalPERS’ portfolio of climate solutions.

By keeping its criteria for investing in climate solutions vague, CalPERS may think it retains the flexibility to develop a cutting-edge strategy. But it lacks the ability to show how public money can be invested proactively protecting workers’ livelihoods, retirement savings and communities.

The CalPERS Climate Plan reports progress in billions of dollarsbut it doesn’t measure the most important things, like the amount of emissions reduced, the communities served, and the clean energy used.

System-level risks require system-level solutions. For a fund of CalPERS’ size and influence, that means using its leverage to mitigate climate change risks that threaten the economy and beneficiaries’ pensions.

CalPERS can start from acceptance of scientifically based principles that set clear exceptions to what constitutes — and what does not — climate investment, and by clearly defining mitigation, adaptation and transition strategies.

CalPERS should be applauded for identifying that climate change poses a clear risk to beneficiary savings and the entire economy. Many pensions have yet to follow suit.

But it has not yet formulated a vision bold enough to effectively mitigate these risks.

This article was originally published on CalMatters and is republished under Creative Commons Attribution-NonCommercial-No Derivatives license.