Climate Finance | February 1, 2018

Pension funds tell companies: ‘No excuses’ for inaction on climate change

David Bank
ImpactAlpha Editor

David Bank

It’s been easy for some corporations to reach for reasons not to act on climate change, or at least not to tell anybody what they’re doing. Not anymore.

At first glance, the “Investor Agenda” presented at the biannual Climate Risk conference in New York might seem full of bland platitudes. But the four-part plan includes a finite number of specific mandates that major asset owners and managers have agreed to make de facto requirements for the companies they invest in, which is effectively all companies.

For example, one plank commits the funds to “corporate disclosure in line with the final recommendations of the Task Force on Climate-related Financial Disclosures,” the new bible for assessing climate risks. The task force was chaired by former New York Mayor Michael Bloomberg under Mark Carney, governor of the Bank of England and chair of the Financial Stability Board.

Even more detailed sector-specific reporting is required “to enable investors to assess the robustness of companies’ business plans against a range of climate scenarios,” including those even more strict than the standard 2-degree Celsius model.

If accounting is destiny, such reporting will force a reckoning with the valuations of many companies. The new Agenda synthesizes the welter of reporting standards and initiatives so corporate executives know what they have to do.

“This is a much more coherent ask, one they can work with, rather than let it be a deflection point,” Jack Ehnes, CEO of the $252 billion California State Teachers Retirement System, or CalSTRS, told ImpactAlpha. “It takes the ‘Buts’ off the table and sends a clear message.”

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Target companies

The Investor Agenda builds on and reinforces the work of the Climate Action 100+, launched in Paris in December, an effort by 225 asset owners representing more than $26 trillion in assets to force key greenhouse gas emitters to report their climate-related risk.

Many of the same groups are behind both Climate Action 100+ and the new Investor Agenda, including Asia Investor Group on Climate Change (AIGCC), Ceres; Investor Group on Climate Change (IGCC), Institutional Investors Group on Climate Change (IIGCC), and Principles for Responsible Investment (PRI). The Carbon Disclosure Project and the UNEP Finance Initiative also helped produce the Investor agenda.

Importantly, the investors commit themselves to the same Task Force on Climate-related Financial Disclosures recommendations for asset owners and asset managers.

“We don’t want to just tell companies to disclose. We want those responsibilities for ourselves,” Ehnes said in the interview. He said implementing the Investor Agenda would require internal adjustments at CalSTRS, for example, to direct resources to the Climate Action 100+ strategy.

“We’ve done modeling with outside assistance of the 2-degree scenarios and it does have potential impact,” Ehnes said. “There aren’t many pension funds doing work in that area. Disclosure will bring that front and center.”

The teachers’ pension fund, second-biggest in California behind CalPERS, for other public employees, issued an RFP in 2016 to add investment managers focused on “ESG,” for environmental, social and governance factors. CalSTRS did not make the list of top 25 responsible investors released last year by the Bretton Woods II project of the New America Foundation. According to the project’s data CalSTRS fell short of the leaders on integrating ESG considerations, reporting and commitment to sustainable development.

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2020 ambitions

The Agenda recognizes that 2020 is a key milestone for scaling up commitments in time to reach the Paris climate accord’s 2030 deadlines. It commits investors to increase their investment — though not by how much — “in appropriate low carbon opportunities such as renewable energy, energy efficiency, low carbon transportation, energy storage and energy efficient buildings.” The Agenda also commits them to phasing out “thermal” activities, specifically mining and coal-fired power generation.

And the investors will step up their policy efforts to encourage governments to implement the Paris climate agreement, notwithstanding the Trump administration’s stated intention to withdraw. The advocacy is intended to prod governments “to enhance their climate policy ambition by 2020, and to promote low carbon investment.”

One incentive to carry through will be the public scrutiny the Agenda’s promoters are pledging. By September, they say, investors, businesses, policymakers and other stakeholders will be able to see which investors have taken action and what they’ve committed to. The annual report from the seven organizations that produced the Agenda will round up the level of investor support and the outcomes of the initiative.

“This is a strong message to the market that there is now consensus among those active in these issues,” Ehnes said. “Things haven’t fallen flat in the two years since Paris. Investors are moving forward and there are now opportunities for collaboration on a global basis.”

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