CalPERS Releases Draft Climate-Change-Impact Report

The Los Angeles Times reports that CalPERS has released a draft version of its first report on how climate change will impact investments held by CalPERS' $394-billion pension fund. This report is the first of three such reports required by Senate Bill 964.

According to the Los Angeles Times article the draft report found that "one-fifth of the fund’s public market investments were in sectors that have high exposure to climate change. Those include energy, materials and buildings, transportation, and agriculture, food and forestry." The article notes that "[t]he financial toll of climate change stems partly from its physical impacts, such as rising sea levels, fiercer storms and heat waves. However, companies’ bottom lines can also be affected by new regulations intended to curb warming, by lawsuits that seek to hold polluters accountable for climate damages, and by market trends, like the fast-dropping price of renewable energy."

The draft report was rather vague about the details of the climate-change impacts on the value of portfolio investments mainly because only about half of the more than 10,000 companies in the CalPERS investment portfolio release data about their carbon emissions. In addition, the report did not consider so-called "Scope 3" emissions by companies in the CalPERS portfolio. Scope 3 emissions include indirect carbon emissions in a company's supply chain or in the end use of their products.

The omission of Scope 3 emissions in the report is significant because leaving them out underestimates the vulnerability of fossil-fuel companies in the portfolio to new regulations such as the imposition of a carbon tax. The imposition of such a tax might cause a sudden loss of value for holdings in fossil-fuel companies. In response to the release of the draft report, some CalPERS board members as well as members of the public pushed for inclusion of Scope 3 emissions in the final report. However, CalPERS staff indicated a reluctance to include them owing to difficulties in obtaining accurate data and in avoiding double counting of certain emissions.

The release of the draft report was met with both criticism and praise. For example, Vanessa Warheit - executive director of Fossil Free California - said that 'the report’s shortcomings made it "impossible to accurately assess where and how climate-related risk is distributed.' On the other hand, others present at the CalPERS board meeting considered the draft report a good first step.

At present, there seems to be some disagreement among CalPERS staff about whether the best course of action is to divest from industries that will be challenged by climate change, or to engage with those companies to encourage them to make changes that will reduce their climate-change impacts. In addition, while climate change presents challenges and risks for many companies and thus for large investment funds such as the CalPERS pension fund, it also is likely to provide investment opportunities in companies and industries that are involved in mitigation and adaptation efforts.

More information on this issue will be provided when the final version of the report is adopted.