We believe climate change is one of the greatest threats to our future, with undeniable links to business and financial investments. Climate change impacts health and safety, the environment and the global economy, which puts the CalSTRS Investment Portfolio at risk. Our mission is to support the retirement security of California’s educators. Virtually all companies and assets in our portfolio are affected by climate risk and must prepare for climate change.
In September 2021, the Teachers’ Retirement Board pledged to achieve net zero greenhouse gas emissions across the CalSTRS Investment Portfolio by 2050, or sooner. Net zero means the amount of greenhouse gases emitted is offset by the amount taken away. This decision acknowledges the complexity of the climate change challenges impacting the world and helps ensure we remain resilient and sustainable.
In August 2022, the board approved a package of investment actions to enhance our efforts to achieve a net zero investment portfolio, address climate change and support the retirement security of California’s public educators. This included a decision to set a science-based interim goal to reduce emissions from the portfolio by 50% by 2030.
These actions integrate our net zero strategy across the CalSTRS Investment Portfolio in a total fund approach. This strategy has three pillars:
- Managing and reducing emissions in the portfolio.
- Influencing policy makers, companies and financial markets to speed up the global low-carbon transition.
- Increasing investments in climate solutions.
Managing and reducing greenhouse gas emissions
The first pillar of our net zero strategy is managing and reducing portfolio emissions, which are the greenhouse gases emitted by the companies and assets we invest in on behalf of California’s public educators. We do this by using science-based tools to measure emissions in our portfolio. Our goal is to align our emissions reductions with the Paris Climate Agreement. We report these measurements regularly and use them to inform our investment decisions and our priorities for influencing companies and policy makers.
We will continue to focus on stewardship and engagement efforts and investing in climate solutions that will further reduce greenhouse gas emissions and risks related to our portfolio.
We use MSCI’s Climate Value-At-Risk service to help measure and manage our net zero public market emissions exposure and reduction efforts. The platform offers a tool that allows us to compare our portfolio emissions against plausible representations of Earth’s future climate. You can read more about these measurements in our climate-related financial risk reports.
In May 2023, the board approved an emissions reduction plan in our Fixed Income Portfolio. The plan incorporates an initial carbon reduction of approximately 12% in our current corporate credit exposure and supplements previously approved emissions reduction plans in public equities. The plan allows us to effectively reduce carbon emissions in alignment with our risk and return goals.
We will annually update our public market emissions exposure, track our alignment with future climate scenarios and update with the Teachers’ Retirement Board in a public meeting.
Speeding up the transition
The science is clear: To ensure the future of our planet, the economy must move toward net zero greenhouse gas emissions. And to achieve our net zero goals, we need the companies in our portfolio to speed up emissions reduction efforts. We use our influence to push for an accelerated transition in three ways: voting on shareholder proposals, engaging with companies, and public policy and regulatory advocacy.
One of the ways we influence companies is by casting votes, known as proxy votes, at the annual meetings of corporations where board members are elected (or reelected) and other key proposals are considered. Proxy voting is often an effective way to shape company behavior and affect long-term performance.
In 2022, a record number of proposals were introduced by shareholders at these annual meetings. We applied a consistent and thoughtful approach to voting on 1,033 shareholder proposals in 2022 alone, including proposals that ultimately succeeded in motivating companies to align their corporate activities with the goals of the Paris Climate Agreement.
In 2023, we’re taking stronger action against corporate boards that fail to demonstrate their commitment to appropriately managing and addressing sustainable business practices. As company meetings occur, a key priority for CalSTRS is enhancing our strategy to address the risks climate change poses to our global portfolio.
We are focused on the boards of directors of the largest companies around the world and are paying particular attention to the companies emitting the highest levels of greenhouse gases.
We will vote against directors at the largest global companies that do not provide at minimum, disclosures, including financial reports that align with the recommendations of the Task Force on Climate-Related Financial Disclosures and include, at a minimum, the company’s direct emissions (scope 1) and indirect emissions (scope 2).
Support of such proposals indicates a growing understanding that these issues are important when making investment decisions. The proposals also send strong messages to companies about investors’ expectations.
Engaging with companies in our investment portfolio has helped by influencing multiple companies to reduce their emissions. We are a leading participant in Climate Action 100+, an initiative of more than 700 investors working with the companies they invest in to reduce emissions. Since Climate Action 100+ launched in December 2017, 119 companies have made commitments to reduce emissions. Combined, those commitments make up more than a quarter of the greenhouse gases emitted around the world today.
Learn more about how we influence changes in public policies and corporate practices in our quarterly newsletters.
When traditional engagement methods fail to produce meaningful results, we turn to our activist stewardship approach, a targeted and heightened method of engagement.
Daikin Industries: Japanese multinational air conditioning manufacturing company committed to net zero by 2050. In the company’s 2021 Sustainability Report, it highlighted a short-term strategy known as Fusion 25 that calls for lowering emissions throughout the life cycle of its products by 50% or more by 2030. The plan also focuses on reducing energy usage.
Dominion Energy: American power and energy company committed to net zero by 2050. The company’s Planning and investing for South Carolina’s future: Integrated Resource Plan 2021 Update outlines the next steps for retiring almost all of its coal-generating units by 2030.
Duke Energy: American electric power and natural gas holding company committed to net zero by 2050. Duke Energy is providing cleaner energy to customers, shifting to lower- and no-carbon sources, maintaining reliability and charging rates below the national average. The company also made the following commitments: Phase out of coal by 2035, retire several older oil and natural gas generation units, and achieve net zero methane emissions by 2030 for its natural gas companies.
ENEOS: Japan’s largest oil company committed to net zero by 2040. The company’s transition plan includes strategies for renewable energy, carbon-free hydrogen production and distribution, and infrastructure to support an electric vehicle charging network across Japan. The company also sold its interests in foreign coal mining operations. In 2020, ENEOS reduced its carbon emissions by 3.14 million tons.
ExxonMobil: American multinational energy and gas corporation committed to net zero by 2050 from its scope 1 (direct greenhouse gas emissions from its operations) and scope 2 (greenhouse gas emissions from the generation of the power it uses) emissions.
In May 2021, CalSTRS supported a monumental campaign that resulted in the election of three alternate candidates nominated by U.S. hedge fund Engine No. 1 to the ExxonMobil board of directors. Eight months later, Exxon Mobil announced its 2050 net zero pledge. While this step demonstrates progress, it does not include the company’s most significant scope 3 emissions (greenhouse gas emissions generated from consumer use of their products).
Exxon plans to meet its scope 1 and scope 2 emissions reduction goal by focusing on energy efficiency measures, reducing methane leaks, upgrading equipment, and eliminating the venting and routine flaring of natural gas.
Nippon Steel: The world’s fourth largest steel producer committed to net zero by 2050. The company’s 2050 carbon neutral climate goal leverages its energy efficiency methods. By 2030, the company plans to introduce a mix of hydrogen into its steel-making process, which will reduce the use of coal. By 2040, its goal is to use a 100% hydrogen mix that will eliminate carbon emissions from the production of steel.
Phillips 66: U.S.-based global energy manufacturer committed to a 30% reduction in emissions that come from its own operations and from generating the energy it needs, and a 15% reduction in emissions from the products it sells. In September 2021, Phillips 66 became the first U.S.-based oil refiner to commit to lowering emissions that come largely from the burning of the oil, natural gas and other fuels it sells. The company also committed to reducing those emissions to 15% below 2019 levels by 2030. This was in response to a shareholder proposal CalSTRS supported and was passed.
In October 2021, Phillips 66 released a lobbying activity report detailing how the company’s policy goals now align with the Paris Climate Agreement and explaining its emerging focus on renewable fuels, batteries, carbon capture and hydrogen. The report was a direct result of a CalSTRS-led shareholder proposal and public campaign.
Southern Company: The second largest U.S. utility provider committed to net zero by 2050. The company also designated 2028 as a target for retiring more than half of its remaining coal-fired power-generation fleet. In 2022, the company released its first Just Transition Report, which highlights the company’s efforts to secure the rights and livelihoods of workers as the economy makes fundamental shifts toward decarbonization.
Toray Industries: Japan-based industrial chemical product company committed to a 30% reduction in greenhouse gas emissions. The company outlines its plans through 2030 in its 2021 Integrated Annual Report.
In our effort to reduce greenhouse gas emissions, we work at the state and federal level to influence changes in public policies and corporate practices, both independently and in coalitions. Our goal is to shape laws and regulations at all levels of government to provide more regulation and disclosure that helps inform our investment decisions. This advocacy includes writing letters, testifying in government hearings and speaking publicly. A few examples are:
Regulating methane emissions, the most potent greenhouse gas. The Environmental Protection Agency proposed updates to the Clean Air Act to reduce methane emissions from the oil and natural gas industry. This proposed rule would reduce 41 million tons of methane emissions from 2023 to 2035, more than the amount of carbon dioxide emitted from all U.S. passenger cars and commercial aircrafts in 2019. We have long advocated for better measures to reduce these emissions.
Requiring companies to provide better climate-related disclosure records to investors. We supported a draft U.S. Securities and Exchange Commission climate-disclosure rule that includes a requirement for companies of all sizes and in all industries to disclose direct (scope 1) and indirect (scope 2) emissions.
Including climate change as a determinant of U.S. financial stability. We supported a federal bill that establishes a climate risk advisory committee within the Financial Stability Oversight Council that provides comprehensive monitoring of the stability of our nation’s financial system.
Investing in climate solutions
We focus on investing in companies and assets that meet our investment return objectives and reduce portfolio emissions, such as producing renewable energy or constructing and managing buildings that meet the highest standards for energy efficiency.
Since 2004, we have been actively integrating climate-oriented solutions into our portfolio and have invested more than $20 billion in low-carbon solutions. Examples of these investments include:
- $18.3 billion: LEED-certified buildings in our Real Estate Portfolio, as of June 30, 2022.
- $8.9 billion: Total Sustainable Investments and Stewardship Strategies Portfolio, as of June 30, 2022.
- $1.8 billion: Renewable power, agriculture, timberland and LEED-certified structure investments in our Inflation Sensitive Portfolio, as of March 31, 2022.
- $306 million: Green bonds in our Fixed Income Portfolio, as of June 30, 2022.
At the August 2022 Teachers’ Retirement Board meeting, the board approved targeting a 20% allocation of our Public Equity Portfolio to a low-carbon index. This index is designed to significantly reduce emissions while managing risk by allocating more money to companies with low-carbon emissions. This shift alone could reduce portfolio emissions by as much as 14%.
Our Sustainable Investment and Stewardship Strategies team deployed more than $1.3 billion into low-carbon investments. Examples of these types of investments include:
- A $350 million commitment to a strategy supporting the decarbonization of the U.S. energy market. Specific investments scale renewable power capacity across multiple states and provide cost-effective energy efficiency solutions for industrial processes.
- A $60 million commitment to a strategy that provides technology-enabled low-carbon solutions. Specific investments include a digital platform that enables more residential and utility customers to access renewable power and a food company making alternative meat protein from mushrooms with significant carbon and water savings, as well as dietary health benefits.