Should Investors De-Carbonize Their Portfolios?

Blog entry Jack Ehnes
Should Investors De-Carbonize Their Portfolios?

No doubt the introduction of proposed legislation included in Senate Bill 185, the Public Divestiture of Thermal Coal Companies Act, turns up the heat in the discussion on how investors might approach de-carbonization of their portfolios in response to climate change issues. If passed, this bill would require the CalSTRS and CalPERS boards to engage with thermal coal companies and, if consistent with their fiduciary duties, to divest from those thermal coal companies that are not transitioning to clean energy generation.

We sat down with Generation Investment Management Senior Partner, David Blood, who shared his views on thermal coal investments. This interview examines this issue from the perspective of an active sustainable investor. Keep in mind this video is not intended to reflect the views of CalSTRS.

In fact, CalSTRS’ actions around divestment must be carefully weighed in the context of our fiduciary duty to invest system assets in the best long-term interests of our members, retirees and beneficiaries with consideration of the best tools and approaches available where appropriate. What we find relevant regarding this discussion is that we are listening to all views on the subject of climate change risk, not only in regards to thermal coal, but those presented more broadly concerning fossil fuels.

Climate change and sustainable investing are formally recognized and addressed within the CalSTRS Investment Policy and Management Plan and then, more specifically, the CalSTRS Investment Policy for Mitigating Environmental, Social and Governance Risks. This policy and risk factor model guide the Teachers’ Retirement Board’s investment decisions.

In order to dive deeper into sustainable investment and climate change risk, guest speakers, beginning with former U.S. Vice President and Generation Investment Management Chairman, Al Gore, have been invited to speak with the Teachers’ Retirement Board throughout the year. The goal is to hear points of view from speakers who can both inform and challenge us on cutting edge ESG issues and risks such as climate change.

Along with the risks presented by climate change are also opportunities to shape the future. From our perspective, the ultimate goal is to manage prudently the investments within the fund in the best long-term interests of CalSTRS, which requires us to assess the risks that climate change presents to our portfolio and implement strategies that address these risks, while at the same time preserving our valuable natural resources. In the next five to 15 years, we expect that diversified investors will see a decrease in their exposure to fossil fuels along with an increase in exposure to alternative energy sources, but the rate at which this change will occur proves difficult to predict.

As we undertake this journey, we anticipate encountering a diversity of views. While consensus on issues such as engagement versus divestment may not be immediately solidified, it is clear that right now our economy is tilted toward carbon assets, or fossil fuels. For any investor of our size, those carbon assets are a substantial component in our portfolio of investments. What does that mean for an investment in a portfolio like ours? That is the question we’ll be exploring.