Global Climate Change Policies Could Prove Costly For CalSTRS, Says Study

Numerous surveys in recent months have found that more than ever, pension funds are figuring environmental, social, and governance (ESG) risks into their investment analysis.

There’s good reason for that: as a new study commissioned by CalSTRS demonstrates, climate change will likely expose pension funds to equity losses.

Mercer studied the potential effect of climate change policies on CalSTRS portfolio. Details from ai-cio.com:

The California State Teachers’ Retirement System (CalSTRS) could lose as much as $123 billion by 2050 as a result of climate change policies necessitated by the Paris Agreement, according to Mercer.

In particular, Mercer said US and developed-market equities—which make up up nearly half of CalSTRS’ total exposures—would be negatively impacted by policies aimed at preventing a temperature increase above 2 degrees, as companies would have to significantly reduce their emissions in short time span. When private equity is also taken into account, exposures with significant negative impacts over 35- and 10-year horizons “would account for more than 60% of CalSTRS total fund,” Mercer said.

While the $179.4 billion pension fund is “reasonably well insulated” against scenarios in which temperatures rise above 2 degrees Celsius, a Mercer assessment found that the “strength and scale of response” required to keep global warming below that benchmark would expose CalSTRS to significant equity losses.

To address these risks, the consultant recommended that CalSTRS reallocate some passive exposures toward lower-carbon indexes, allocate a larger portion of active equities to managers focused on sustainability, and increase its exposures to emerging market equity.

Read the full study here.

Photo by Stephen Curtin via Flickr CC License