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Bringing accountability to the oil industry protects CalSTRS investments

Pension Sense blog | October 29, 2021

Climate accountability is coming to the oil industry. We are helping to launch this new era through our “activist stewardship” approach, which combines our role as a constructive, engaged shareholder with activist tools.

Evidence of the new era emerged in September 2021 when Phillips 66 became the first U.S.-based oil refiner to commit to lowering emissions that come largely from the use of the oil, natural gas, and other products it sells. These are part of what is known as Scope 3 emissions, which include those created by driving a car, and account for as much as 90% of an oil and gas company’s lifecycle emissions. Phillips 66 committed to reducing these emissions to 15% below 2019 levels by 2030. Eleven days later, Chevron pledged to cut these emissions to 5% below 2016 levels by 2028.

Previously, Phillips 66 and other U.S.-based oil refiners had only agreed to lowering emissions from their own operations. These are called Scope 1, direct emissions from a company’s activities; and Scope 2, indirect emissions from the generation of the power a company uses.

Activist stewardship will become even more important now that the Teachers’ Retirement Board, which governs CalSTRS, has pledged to build a net-zero investment portfolio by 2050 or sooner. Net zero means the amount of greenhouse gases emitted by humans is fully offset by the amount taken away, either by natural means, such as forests, or by technology, such as carbon capture and storage.

A net-zero commitment, the board believes, is the best way to protect our long-term investments by ensuring publicly traded companies we are invested in are planning appropriately for the future. To get there, we are increasing our engagement activities, expanding investments in low-carbon solutions, evaluating risks, and developing an action plan to establish a baseline and milestones.

One of the most important activist tools we use is building coalitions. That’s why we work closely with many organizations, including the nonprofit group, Ceres, which advocates for sustainable policies and practices worldwide, and why we are part of Climate Action 100+, the largest global investor initiative on climate change.

As a member of Climate Action 100+, we lead engagements with eight corporations and have secured significant commitments from each to reduce greenhouse gas emissions. Phillips 66 is the latest. But it was a challenge. The company did not set emissions reductions goals until we and others applied pressure.

At the May 2021 Phillips 66 shareholder meeting, we used another activist tool: proxy voting. We sponsored and gathered support for a shareholder proposal requesting the company issue a report on whether its lobbying activities are consistent with the goals of the Paris Climate Agreement. In addition, we supported another proposal requesting that the company set emission-reduction targets.

Both proposals passed. But Phillips 66 opposed them. So the company’s recent announcement to reduce carbon emissions from the use of its products was a welcome validation of corporate engagement. A handful of oil companies have set targets for these types of emissions, including Shell, but no refiners had in the U.S. before Phillips 66 made its announcement.

Phillips 66 has also begun another positive action: converting a refinery in Rodeo in Contra Costa County to a renewable fuels plant reliant on cooking oil and food waste rather than crude oil.

The actions by Phillips 66 are small steps forward, but a big example of how activist stewardship can be effective. Along with partners like Ceres, we will continue to insist that oil companies—and all publicly traded companies—plan for a net-zero future. It’s the right thing for our pension system and our planet.