Highlights from CalSTRS’ climate-related allocation changes

The California State Teachers’ Retirement System has approved increases to its private markets allocations due, in part, to climate change: to mitigate the impact of climate change risks on its portfolio and to deploy more capital towards low-carbon assets.

CalSTRS, which reviews its asset class allocations every four years, held an investment board meeting last week to discuss and approve the changes. “This is the most important decision the board makes every four years,” said William Prezant, who chaired the investment board meeting.

The pension’s public equities bucket has been trimmed by 4 percent.

• 1 percent has been allocated to private equity.
• 1 percent has been allocated to ‘inflation sensitive’ assets – which will be invested in “infrastructure in particular… [where] we’re seeing a lot of opportunities for the low carbon future”, said Geraldine Jimenez, senior investment director at CalSTRS.
• 2 percent into fixed income, “including private credit and direct lending”, said Jimenez.

Here are some highlights from the board meeting.

Faith in fixed income

For the first time, CalSTRS’ asset allocation meeting included climate scenario analyses. Investment consultant Meketa showed the fund how physical and transitional risks could impact the volatility of the fund’s assets.

Meketa modelled the expected volatilities of CalSTRS’ portfolio for various asset allocation breakdowns under six different global transition scenarios between “no change to current global climate management policies”, “net zero by 2050” and a “disorderly transition”. “Equities, both public and private, are going to be more sensitive and volatile, whereas fixed income is going to be less volatile to climate management,” Meketa managing principal Mika Malone told CalSTRS’ board.

Sustainable private markets boost

CalSTRS has deployed $1.3 billion to low-carbon assets in private markets through its Sustainable Investment and Stewardship Strategies programme. The meeting did not include detail on the investments made by the SISS private markets programme. Several CalSTRS staff and advisers from Meketa noted that the portfolio asset allocation changes were, in part, intended to increase the SISS private markets investments.

Colour-coded portfolio

CalSTRS has created a climate-impact classification framework for its private markets portfolio. It is asking all its private fund managers to classify their assets as “Green” (low carbon), “Olive” (transitioning – “there’s carbon exposure, but that can be reduced”, said CalSTRS investment officer Brian Rice) or “Grey” (“high-carbon and probably going to stay that way”). CalSTRS has introduced this framework due to the lack of reliable emissions data in private markets. “Through this, we’re better able to understand our carbon exposure in the private markets and it will help support us in [making] future investments in green and olive assets going forward,” said Rice.

Not to slow, not too fast

CalSTRS has developed a “Transition Tracker” tool to better understand the shape and pace at which global markets are transitioning. “We really think we need to be mindful around how the transition is unfolding. We certainly don’t want to get behind, but we don’t want to get too far ahead,” said Rice.