Securities and Exchange Commission adopts landmark climate rule

In March, the Securities and Exchange Commission voted to adopt a new climate-related disclosure rule—a landmark breakthrough in climate-related disclosure in the United States. The rule is a crucial step toward more reliable, consistent and comparable information to assess the risk and opportunities to our portfolio companies, so we can help ensure a secure retirement for California’s public educators. Disclosure is essential for investors to make informed decisions about current and potential investments.

The final rule comes nearly two years after the SEC first published a proposed rule. The rule garnered unprecedented interest, with the SEC receiving a record setting 24,000 comment letters. We sent comment letters to encourage the drafting of a rule in general and to support the draft rule when it was published. In the final rule, the SEC referenced CalSTRS nearly 70 times. The rule includes requirements for companies to report greenhouse gas emissions directly from operations (scope 1) and those generated from energy purchased (scope 2). The rule also requires companies to acquire assurance (meaning third-party validation) of their emission disclosures. Assurance is important because it provides investors with a degree of confidence that the processes used by companies to measure and report their emissions are sound.

Some additional disclosures include:

• Climate-related risks that have or are reasonably likely to have a material impact on the company’s business strategy, results of operations or financial condition.
• The actual and potential material impacts of any identified climate-related risks on the company’s strategy, business model and outlook.
• Any oversight by the board of directors of climate-related risks and any role by management in assessing and managing the company’s climate-related risks.

We’ll closely monitor the implementation and progress of the rule. In an expected development, some business groups and state attorneys general have either committed to or have already launched legal challenges to the rule. We believe the SEC’s rulemaking process was thorough and thoughtful and that the rule is in line with the SEC’s mission of protecting investors and maintaining fair, orderly and efficient markets. We remain committed to supporting the rule and better corporate climate-related disclosures.

Latest Climate Action 100+ progress and look ahead

Climate Action 100+, the investor-led initiative to encourage the world’s highest corporate greenhouse gas emitters to take necessary action on climate change, is showing engagement continues to make a difference. More than 700 investors are working with 170 focus companies to improve climate change governance, reduce emissions and strengthen climate-related financial disclosures to manage risk and create long-term shareholder value. We are long-standing members of the initiative and lead the engagement at 10 of the focus companies. Climate Action 100+ recently released its 2023 progress update.

The highlights are:

• 77% of focus companies have committed to net zero by 2050 or sooner across at least scope 1 and 2 emissions, up from 52% in 2021.
• 93% of Climate Action 100+ companies have board oversight of climate change risks and opportunities.
• 90% of focus companies have committed to aligning their disclosures with the Task Force on Climate-Related Financial Disclosures recommendations.
• 52% of electric utilities have developed a coal phase-out plan, including full retirement of coal-burning assets.

Climate Action 100+ recognizes there is more work to be accomplished to turn commitments into results. Investors will be working with companies during the second phase of the initiative (from 2023 through 2030) to improve short-term greenhouse gas reduction targets. Investors are also engaging companies to improve disclosures around energy transition activities that affect their workforce and local communities.

During the quarter, several prominent asset managers, including JP Morgan, State Street, Invesco and PIMCO, announced their plans to depart from Climate Action 100+. These managers issued statements of their intent to pursue their own sustainability-related engagement efforts. Since the launch of the second phase of Climate Action 100+, 60 new signatories have joined. We remain steadfast in our commitment to Climate Action 100+ and believe that collaborative engagement is a powerful tool in advancing sustainable business practices.

Chevron joins OGMP 2.0

Chevron Corporation joined the Oil and Gas Methane Partnership 2.0 framework on methane emissions last month. OGMP 2.0 is an independent initiative that requires members to measure their methane emissions (as opposed to simply estimating them) and set credible reduction targets. Reducing methane emissions is one of the most economically viable and immediate means to slow climate change. With this move, all the integrated oil companies (BP, Chevron, ExxonMobil, Shell, TotalEnergies) have joined OGMP 2.0. We sent a letter to Chevron's CEO in November encouraging the company to adopt the framework and had a follow-up meeting with members of Chevron's management team to discuss. Additionally, we conducted engagement with other like-minded investors to understand investor expectations around the company joining, and with OGMP 2.0 officials to better understand the company's initial concerns about adopting the framework. Understanding the company’s concerns, and how they overcame those concerns, will be helpful when engaging other companies who may also initially resist joining OGMP 2.0.

Progress with companies on methane

We filed shareholder proposals related to methane emissions at three U.S. oil and gas producers. A shareholder proposal is when a shareholder, like CalSTRS, puts an item up for a vote at a company’s annual general meeting. Ultimately, we withdrew all three shareholder proposals before they could go to a vote after reaching positive outcomes with each company.

The first proposal was filed at a company that mainly produces natural gas. We had concerns around potential conflicts of interest as the company was purchasing methane detection equipment from the same vendor that was certifying the emissions intensity of the company’s production. We withdrew the proposal after the company agreed to be acquired by another producer that was already part of the OGMP 2.0 framework on methane emissions.

The second proposal was filed at a company with assets in North Dakota. We had concerns with the producer’s high rate of natural gas flaring. We withdrew the proposal after the company agreed to a series of commitments, including formally joining the World Bank’s Zero Routine Flaring by 2030 initiative. Flaring is the practice of burning off excess natural gas due to a range of issues from safety to infrastructure constraints and economics. Flaring results in the release of greenhouse gases and other pollutants.

The final proposal was filed at a company with assets in the western United States. We had concerns about the producer’s potential exposure to regulatory and reputational risk due to the company’s lack of third-party validation of its methane emission intensity disclosures. We withdrew the proposal after the company agreed to obtain certification of its methane intensity from MiQ, an independent nonprofit that requires third-party audits of company data.

Improving safety in the mining and tailing sector

The Investor Mining and Tailings Safety Initiative was launched in 2019 following the Brumadinho dam disaster that resulted in the death of 272 people. We expressed support for the initiative’s plan to create an industrywide response to the problem of tailings (the remaining waste product after an ore has been processed for natural resources) storage facilities by developing a set of global industry standards for disclosure on facilities, engineering and governance. This resulted in the creation of the Global Industry Standard on Tailings Management (GISTM). In December 2020, the initiative contacted more than 300 mining companies and requested they support and confirm their timeline of adoption of the GISTM.

In January, 77 companies, which represent a significant portion of the mining industry, committed to implement the GISTM following engagement by the group.

Building on this effort, we committed to support the Global Investor Commission on Mining 2030. The initiative plans to replicate the multistakeholder roundtable model that inspired the tailings initiative to address other mining-related issues. Mining 2030 will include deep sea mining, indigenous rights, automation, impact on land, climate change, critical minerals and child labor.