CalPERS plans raft of climate measures including $100bn for climate solutions

The California Public Employees’ Retirement System plans to increase its allocation to climate solutions investments to $100 billion by 2030. Already one of the world’s biggest climate investors, with more than 10 percent of its $463 billion portfolio estimated to be invested in climate-related assets, CalPERS’ plans herald a wave of capital available for climate-focused private funds over the next six years.

The move is part of CalPERS’ net-zero strategy, which also includes plans to build the $462.8 billion pension’s sustainability headcount, integrate deeper ESG due diligence into investment decisions and identify conditions for potential climate-related divestments. The strategy will be presented by Peter Cashion, managing investment director for sustainable investments, to CalPERS’ board on Wednesday for feedback.

CalPERS previously announced a net zero by 2050 target.

New money

CalPERS plans to increase its exposure to climate-related assets from $47 billion, its estimated holdings in this sector at the end of Q3 2023, to $100 billion across private and public markets by 2030. This is “consistent with more than a 50 percent reduction in portfolio emissions intensity by [2030]”, according to an internal memo seen by New Private Markets.

The pension will develop climate investment plans specific for each asset class to reach this target, including identifying climate sub-themes and managers to back. CalPERS will consider climate solutions opportunities along three sub-themes: climate change mitigation (such as renewable energy generation, carbon capture and storage, and waste management), adaptations (water management, agricultural resilience and disaster risk reduction) and transition (brown-to-green strategies for hardest-to-abate sectors and assets).

Portfolio management

CalPERS will “roll out a system for periodic ESG attestations and reporting from asset managers”, according to the memo.

The new strategy will also see CalPERS integrate climate risk assessments into due diligence for new investments and conduct them annually at a total-portfolio level, including physical risks and transition risks. Scenario analyses for some parts of the portfolio to make asset liability and risk evaluations are also in the works, according to the memo – although it does not specify which asset classes will be subject to scenario analyses.

CalPERS wants to see net-zero plans and transition readiness in its portfolio companies. Engagement remains its preferred method to ensuring assets and companies transition but the net-zero plan also includes building a procedure for when CalPERS would divest.

Where companies have inadequate net-zero or transition plans that pose a financial risk to CalPERS’ investment, the pension may “take action, consistent with fiduciary duties, to exit certain securities where there is not a financial rationale to have continued exposure”, the memo states. NPM asked CalPERS whether this applies to private investments, but the pension had not responded prior to publication.

CalPERS has not excluded fossil fuel investments: its position is that fossil fuels are “an important near-term component of the global economy and contribute to energy security”, according to the memo, as well as being “an important source of portfolio diversification”.

More muscle

Cashion plans to build out his sustainable investing team from five to 15 professionals to execute this strategy. Of the 10 additional hires, five will be investors, sourcing sustainable opportunities; and three will support ESG due diligence and reporting alongside generalist investment and portfolio management teams.

Who is Peter Cashion?

Cashion leads CalPERS’ sustainable investing team as managing investment director for sustainable investments. He joined the pension in January 2023, taking the role that had been vacated by Anne Simpson a year prior. Simpson left CalPERS in January 2022 to become Franklin Templeton’s global head of sustainability.

Cashion joined after a 27-year run at the World Bank’s International Finance Corporation, where he was most recently global head of climate finance and chief investment officer for the IFC’s financial institutions group.