Climate Investment Framework integrates climate risk strategies of the state’s three largest pension funds into a unified statewide approach
Framework released in response to Governor’s 2019 climate executive order
California joins public-private Coalition for Climate Resilient Investment to advance the inclusion of climate risk standards into investment decisions
SACRAMENTO – Recognizing that climate change poses not only a clear and immediate environmental risk but also a financial risk to long-term investment stability, Governor Gavin Newsom today announced that the Department of Finance has released the California Climate Investment Framework, which integrates the climate risk strategies of the state’s three largest pension funds into a statewide approach to sustainable investment going forward.
“California is putting our money where our values are,” said Governor Newsom. “With this new framework, we’re leveraging our state’s investment power to reduce financial risk while capturing the enormous opportunity and innovation offered by the transition to a clean economy.”
Last September, Governor Newsom issued Executive Order N-19-19, which tasked the Department of Finance with creating a framework to align California’s goals of lowering greenhouse gas emissions and achieving carbon neutrality with the asset management and investment policies of the state’s three principal retirement systems – the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS) and the University of California Retirement Plan.
Combined, these three systems manage $700 billion in investment assets – an amount greater than the annual economic output of 40 other states and nearly one-fourth of California’s annual Gross Domestic Product.
The state’s pension funds are already engaged in a variety of activities to mitigate the risks that climate change poses to their investment portfolios. At the same time, all three pension systems face substantial and growing risks to their investment portfolios associated with the direct impacts of climate change. California is facing a 2020 fire season that is on track to be the most devastating on record in terms of the number of acres burned, and the 2018 fire season cost was approximately $24 billion in home and infrastructure destruction, along with firefighting costs.
The Framework advances efforts to establish climate change as a commonly recognized and defined financial risk that should be considered and evaluated alongside other long-established investment risks.
Recognizing that maintaining the funds’ long-term security and addressing the growing financial risks from climate change are not mutually exclusive, the Framework puts forth recommendations for the state and the pension funds to mitigate the impacts of climate change while building a sustainable, inclusive economy.
Consistent with the recommendations made in the Framework, the Governor is calling for the following actions:
- Establish a California working group to develop a practical and comprehensive climate risk disclosure standard. Climate risk must be better measured in financial terms in order for investment policy to further the state’s climate goals while protecting the funds’ beneficiaries. This requires a collective effort to standardize the terms and definitions used to discuss climate change from an investment perspective. A working group, comprised of relevant government agencies, pension funds, international climate disclosure researchers, non-profit organizations and institutional investors, would develop common climate risk disclosure standards that would be an international template for investors to use in assessing the financial risk associated with climate change.
- Increase use of low-carbon strategies by the state’s pension funds. The state’s pension funds should increase their allocation to low-carbon indexes and increase their investments in sustainable technologies and other green assets.
- Become a signatory to the Coalition for Climate Resilient Investment. California today signed on to join the public-private Coalition for Climate Resilient Investment, launched at the UN Climate Action Summit last year to form a cohesive fiscal understanding of climate risk for use by investors. This World Economic Forum-supported coalition was created to produce the necessary solutions to facilitate the integration of climate risk into investment policy, and will enable the state to advance the inclusion of climate risk standards into investment decisions that can mitigate the impacts of climate change.
The release of the Framework follows the Governor’s historic announcement yesterday directing the state to require that, by 2035, all new cars and passenger trucks sold in California be zero-emission vehicles – joining 15 countries that have already committed to phase out gasoline-powered cars and using our market power to push zero-emission vehicle innovation and drive down costs for everyone. The Governor is today hosting a series of virtual discussions with world, state, tribal and local leaders, business executives and other experts covering a wide array of climate issues and highlighting the state’s bold agenda of action.
The full text of the California Climate Investment Framework can be found here.