This year, CalSTRS focused on climate risk disclosure during the 2024 proxy season, voting against the boards of directors at a record 2,258 companies. This is up from the previous record of 2,035 companies in 2023. Many of these companies failed to provide minimum levels of climate risk disclosure or set greenhouse gas emissions reductions targets.

At CalSTRS, we expect all portfolio companies to accomplish the following, to help effectively manage the risks associated with climate change:

• Publish a report on sustainability-related disclosures that aligns with the International Financial Reporting Standards, which took over the monitoring of companies’ progress on climate-related disclosures from the Task Force on Climate-related Financial Disclosure (TCFD).
• Disclose Scope 1 and Scope 2 greenhouse gas emissions. Scope 1 emissions come from a company’s operations and Scope 2 emissions are from the generation of power a company uses.

In addition, we expect the highest emitting companies globally on the Climate Action 100+ focus list and other high-emitting companies to set appropriate targets to reduce greenhouse gas emissions, as this is an important step toward CalSTRS reaching a net zero emissions portfolio by 2050 or sooner.

Despite the inconsistent climate data disclosure, there was considerable improvement in methane emissions reporting from portfolio companies. Methane is 80 times more potent than carbon dioxide, and we continue to call on eligible companies to join the Oil and Gas Methane Partnership 2.0 (OGMP 2.0), a United Nations-led framework committed to the measurement, reporting and mitigation of methane emissions.

Focusing on methane emissions is one of the most economically viable and immediate means to slow climate change. The International Energy Agency estimates 30% of methane emissions from fossil fuel operations can be abated with no net cost.

As a result of CalSTRS-led engagements, 10 companies have joined the Oil and Gas Methane Partnership 2.0, including ExxonMobil, Chevron, Harbour Energy, OMV A.G. and Vital Energy.

Additionally, several companies we have engaged with in the exploration and production industry became members through mergers with companies which were already part of the Oil and Methane Partnership 2.0.

During the 2024 proxy season, we voted at more than 10,000 global company meetings, on more than 100,000 individual ballot items, and on more than 1,200 shareholder proposals covering topics such as human capital management (workforce management and employee wellness), board governance and climate-related risks.

We will continue working collaboratively with peers and use our proxy votes to influence the world’s largest companies to create sustainable business practices—which in turn will minimize risk and create value—and ensure California’s public educators continue to have a secure retirement.

See our Path to net zero, Corporate Governance Principles and proxy voting records for more information.

Outcomes from California funds engagement and expanded focus

California-based investors, including CalSTRS, California Public Employees’ Retirement System, Los Angeles County Employees Retirement Association and San Francisco Employees’ Retirement System, wrapped up another year of diversity-related engagement at the end of June 2024. The group has been building success since its inception in 2015 with an initial focus on increasing the board diversity of California companies.

In 2023, the same investors expanded their focus to companies in the Russell 3000 Index (a stock market index which covers the largest 3,000 U.S. companies).  The goal has been to increase diverse director representation and implement governance practices that ensure future board refreshment and expanded recruitment efforts. The California group engaged 52 companies, leading to the appointment of 19 directors of diverse backgrounds. Additional engagement successes include:

• 22 companies updated their definition of diversity to include gender and race/ethnicity in either their proxy or governance documents.
• 23 companies included a skills matrix in their proxy statements.
• 12 companies included individual director-level information on gender and race/ethnicity, often combined with the skills matrix.
• 11 companies adopted a diverse director recruitment policy that requires candidates from underrepresented groups be included in the initial search pool.

In the fiscal year 2024–25 engagement season, for the first time, the group will expand its focus internationally, engaging 41 global companies, 15 of which are non-US companies. These engagements will encourage companies to enhance their board diversity disclosures, address board diversity in board refreshment and recruitment practices, and increase diverse director representation.

Engagement: a long-term and continuous lever of influence

Engagement is not usually a one-time interaction that yields an immediate outcome. Rather, engagement is an ongoing process of developing relationships and building consensus through understanding. One of our core strategies in reaching a net zero emissions investment portfolio by 2050 or sooner is to engage and influence companies through the global energy transition. During the quarter, staff held over 100 meetings with companies. Through these meetings, we ask companies to identify and disclose climate-related financial risks, set long, medium and short-term targets for greenhouse gas emissions reductions, and establish credible transition plans. We believe these actions will build resiliency and long-lasting value at the companies we invest in as the world moves toward a lower-carbon future.

Creating dialogue with corporate laggards and leaders on DEI

We believe companies that proactively publish meaningful workforce metrics – particularly around diversity, equity and inclusion (DEI) issues – can foster an inclusive workplace culture. Inclusive cultures attract and retain highly qualified talent, drive productivity and related financial benefits, and reduce reputational risk. This is demonstrated by a growing body of empirical evidence correlating diversity across several dimensions with financial outperformance.

We are now engaging companies that have recently announced intentions to unwind their previous publicly announced commitments related to diversity, equity and inclusion. Many of these reversals have come after companies were targeted through political pressure. The goal of our outreach is simple: to have an open dialogue to better understand why companies have made this decision and to reiterate our conviction that diversity has been shown to improve financial performance. Also, we seek to engage companies we believe are exhibiting best practices in diversity, equity and inclusion, to reaffirm our support for their efforts. Companies receive input from a wide set of stakeholders. It is important that CalSTRS, as a long-term investor, is part of the conversation and our voice is heard.