California's Climate Investment Framework Funds the Future
The State of California released its Climate Investment Framework yesterday as a part of several bold climate announcements during 2020 Climate Week. It promises to be a major step forward, aligning with the State’s other major announcements of the week as another example of California using its size and unique expertise to drive change on a local and global level. Once again, California does this just as the Trump Administration is seeking to make it harder for retirement funds to invest in climate safe solutions.
Governor Gavin Newsom presents a framework where the state pension funds play an increasingly important role in driving investment dollars towards those projects and companies that reduce emissions and adapt to climate change and away from those that don’t. Reducing the climate-related risk associated with pension fund investments is fully consistent with the fiduciary duty that pension fund trustees have to generate the returns necessary to pay the pensions of millions of teachers, those working in the UC system and other State public employees. According to the framework, collectively, these pension funds control more than $700 billion in investment assets, nearly equal to 1/4 of California’s annual Gross Domestic Product, which is one of the largest in the world.
The framework has three elements:
- Establish a California working group to develop a practical and comprehensive climate risk disclosure standard
- Increase use of low-carbon strategies by the state’s pension funds
- Become a signatory to the Coalition for Climate Resilient Investment
Climate Risk Working Group
The first element is very powerful for the same reason that Governor Newsom’s announcement on phasing out gasoline powered cars is important—California wields enormous power to drive positive change in the markets in which it participates.
Some companies are poorly managing their exposure to climate change while others are doing a better job. It’s hard to know which are which without getting accurate and sufficient disclosure of data from the companies themselves. By requiring companies to utilize clear, comprehensive and standardized disclosure on governance, strategy and risk management, and also to explain how they are using climate metrics and targets, investors will better be able to separate the climate winners from the climate losers.
The new investment framework would do just that. It contemplates convening a working group consisting of a broad cross-section of public and private investors to develop a comprehensive standard to best drive change not just in California, but nationally and beyond, since California’s pension funds are influential across the country and around the world. Just like car manufacturers will have to focus their efforts on electric vehicles to capture demand in California, companies competing for capital will have disclose climate-related financial information to get California investment. This will drive the broader market towards a single disclosure standard since it’s too costly for companies to do it differently for different investors.
Increase of Low-Carbon Investment Strategies
The second part of the framework is equally important. As noted, the foremost obligation of pension funds is to ensure that sufficient resources are available to pay benefits to current and future beneficiaries. That means most investments are in safe, low-cost investments like index funds. The current problem is that the supply of index-based investments pursuing a low carbon strategy is limited. The investment framework “challenges” California pension funds to transition more investment dollars to “low carbon indexes and other climate-conscious investments as they become available”.
Again, as California’s demand for such products increases, creators of investment products will seek to meet that demand, making such products more readily for other investors.
Joining the Coalition for Climate Resilient Investment
Lastly, becoming a signatory to the Coalition for Climate Resilient Investment means, again, that California will be adding its considerable market influence to that of other global players in the global financial community to drive for systemic change.
Thank you for your leadership, California!
Climate change poses an enormous risk both to health of California’s citizens as well as to the vitality of its world-leading economy. At the same time, the clean energy transition presents tremendous opportunities for new goods and services that foster sustainable and equitable growth.
NRDC is thrilled that, with its new Climate Investment Framework, California is driving forward to collaborate with local and world leaders to identify and mitigate climate risk while at the same time looking to invest the State’s pension funds in a climate safe future.