Public pensions must recognize their duty to address climate risk
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Federal progress to mitigate climate change has stalled. In March, President Trump signed an executive order to unravel Obama-era climate change policies, lifting restrictions on energy companies and emissions standards for power plants. The administration will soon decide whether to uphold campaign pledges to exit the Paris Climate Accord.

However, amidst federal policy chaos, other institutional investors such as college and foundation endowments have the latitude to address material risks associated with climate change. And for public pension plans, addressing climate risk isn’t an act of goodwill — it’s their fiduciary duty.

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Let me explain why. Sustainability issues such as climate change increasingly affect the financial performance of companies, and thus have the attention of most institutional investors. In a 2015 CFA Institute survey, 73 percent of institutional investors indicated that they take environmental, social, and governance (ESG) issues into account in their investment decisions to help manage investment risks. And 89 percent of the world’s top 100 asset managers are signatories to the Principles for Responsible Investment (PRI), committing to incorporate ESG issues into their investment decision-making.

 

Citing the potential impact of ESG factors on a portfolio, in 2015 the U.S. Department of Labor amended the Employment Retirement Income Security Act (ERISA) that establishes standards for pension plans in private industry, specifying that ERISA does not prohibit pension funds from considering ESG factors in making investment decisions. In fact, the bulletin said, “Fiduciaries should appropriately consider factors that potentially influence risk and return. Environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment.”

As a former fiduciary for the pensions of teachers, police, firefighters, and other public employees, one of my concerns was to ensure that we manage the material, financial risks presented by ESG that are often overlooked. As the Treasurer of Washington, I served on the Washington State Investment Board (WSIB) and worked to develop policies on disclosure of investment risks related to climate change.

The WSIB grounds its investment strategy and proxy voting in a set of investment beliefs. In 2014, the board amended its investment beliefs to incorporate an explicit expectation for companies and managers to disclose the risks to financial performance posed by climate change. This belief now pervades the WSIB’s evaluation of its entire portfolio.

Pension plans and other institutional investors want to better assess the impact of ESG factors on portfolios. However, they face significant challenges — namely, the absence of good data. Regulation to compel disclosure of material ESG risks in U.S. Securities and Exchange Commission (SEC) filings already exists, and most companies are trying to comply, but do so in a boilerplate way.

Research by the Sustainability Accounting Standards Board (SASB), which sets sustainability accounting standards, shows that 69 percent of companies are already addressing at least three-quarters of SASB disclosure topics for their industry, and 38 percent are already providing disclosure on all SASB disclosure topics.

However, more than half of sustainability-related disclosures in SEC filings use boilerplate language, which is inadequate for investment decision-making. This is understandable because up to this point there have been no generally accepted set of metrics or standards for disclosure. This encourages multiple, complex, and costly disclosure requests from shareholders and institutional investors, and opens companies to liability risk from under-reporting material ESG issues.

Recently, the California Public Employees’ Retirement System, with more than $318 billion in assets under management, and the Connecticut Retirement Plans and Trust Funds, with more than $31 billion, among others, filed a climate disclosure proposal requesting that Occidental Petroleum evaluate the company's portfolio under a 2-degree warming scenario. The California State Teachers’ Retirement System, with more than $202 billion, the Florida State Board of Administration, with more than 189 billion, and the Texas Teacher Retirement System, with more than $133.2 billion, are all voting in favor of this proposal.

Pension plans are asking for data to make decisions about material ESG risks like climate change. But investors shouldn’t need proxy proposals to obtain material information — that creates costs for both companies and investors. Under current law, companies must disclose material ESG information to investors in SEC filings. The missing piece, until now, has been standards. The SASB standards provide a benchmark for the disclosure of material ESG issues that are clearly within the scope of the fiduciary responsibility that pensions owe their beneficiaries.

Climate change presents significant risks that will affect the long-term financial viability of the capital markets. In the absence of federal action, it’s the fiduciary responsibility of public pensions to press forward. But to do so, they need sustainability information that is relevant, reliable, and comparable. Such data will not exist without standards.

Public fiduciaries, both elected and appointed, must intervene with companies and investment managers in response to ESG issues and demand standardized sustainability information. With comparable information on how companies are addressing sustainability issues such as climate risk, public pension plans can uphold their fiduciary duty, yield better outcomes for long-term investments, and create better outcomes for society.

James McIntire served as Washington State Treasurer from 2009 to 2017. He is now a senior advisor at Star Mountain Capital, an asset management firm based in New York.


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