Citing concerns of climate change’s impact on the financial sector, California passed SB 964 last week requiring the country’s two biggest pension funds to publicly disclose and analyze their climate-related investment risks. Under the new law, The California Public Employees’ Retirement System (CalPERS) and California State Teachers’ Retirement System (CalSTRS) must review and report “climate related financial risks” that are “material” to the stability of their public market portfolios. Such “climate-related financial risks” include “intense storms, rising sea levels, higher global temperatures, economic damages from carbon emissions, and other financial and transition risks due to public policies to address climate change, shifting consumer attitudes, changing economics of traditional carbon-intense industries.” SB 964’s obligations, which will take effect on January 1, 2020 and continue every three years until 2035, also require the funds to report on their alignment to the Paris climate agreement, California climate policy goals, and any long-term climate-related financial risks.
It is possible that SB 964 could have little practical effect on CalSTRS, CalPERS or the companies in which they invest or which desire capital from those funds in the future. First, under the law, neither fund is required to disclose unless their boards decide it is in the best interest of their shareholders. Second, even if CalPERS and CalSTRS decide that they must disclose, both CalPERS and CalSTRs already have robust programs in place that focus on climate change risk identification, avoidance and disclosure. Both pension funds are signatories to the United Nations Principles for Responsible Investment (UN PRI) framework (CalPERS is a founding signatory), which framework requires its signatories to report on environmental (including climate change), social and governance (ESG) matters relating to their portfolio investments, as well as to conduct diligence reviews on ESG and climate change risks of companies in which the funds propose to invest. Further, CalPERS is a signatory to the Global Investor Statement on Climate Change, reflecting its commitment to low-carbon and climate-resilient investments. In 2016, CalPERS initiated Climate Action 100+, a five-year initiative to engage greenhouse gas emitters to improve their climate change risk profile and has a robust ESG strategic plan in place with goals through 2022.
The firm gratefully acknowledges the assistance of law clerk Megan Cronin in preparing this post.