CalSTRS' Ailman fears ESG bans could hurt energy transition

CalSTRS has set a new goal to halve the greenhouse gas emissions across its portfolio by 2030, but a strengthening political movement in the U.S. banning ESG considerations could impede the world’s transition away from fossil fuels as an energy source, said Christopher J. Ailman, CIO of the $311.7 billion California State Teachers’ Retirement System, West Sacramento

"I'm not a political guy. I'm an investment guy," Mr. Ailman said in response to a reporter's question during a media briefing on Thursday. "I hope and pray this will be a smooth transition," referring to global climate transition efforts.

“I have grandchildren,” he said. “I am worried about their future.”

Climate change will be “huge in their lives for the next 50 years,” Mr. Ailman said.

In August, Texas Comptroller Glenn Hegar released a list of 10 financial companies, including BlackRock, he has determined “boycott energy companies” as part of the enforcement of a 2021 state law restricting the state’s pension funds and other state entities from investing in companies that divest from fossil fuels.

Also in August, the Florida State Board of Administration, Tallahassee, banned the $180 billion Florida Retirement System from including ESG considerations in its investment management decisions.

Investment professionals understand that the energy transition not only presents risks to their portfolios, but that there is a huge investment opportunity, said Kirsty Jenkinson, investment director of sustainable investment and stewardship strategies at CalSTRS, during the briefing. And she noted that despite the political actions, Texas is a big producer of U.S. wind energy.

In recognition of the risks and potential rewards of the coming energy transition, CalSTRS’ investment committee further refined its climate approach to consider reduction of greenhouse emissions in its investment decisions across its entire portfolio and will embed these considerations in the asset-liability study CalSTRS is launching in the fall.

On Aug. 31, the investment committee voted to reduce greenhouse gas emissions across its investment portfolio by 50% — including within its alternative investment portfolio by 50% — by 2030, consistent with the latest findings of the United Nations’ Intergovernmental Panel on Climate Change.

CalSTRS is starting with its $115.7 billion public equity portfolio because it’s the largest asset class in its portfolio and it is the area with the most data, Mr. Ailman said.

Fairly soon, CalSTRS will move on to its fixed-income portfolio, with alternative investments last since reporting is “thin” in the private markets, Mr. Ailman said.

This is a step up from CalSTRS’ commitment last summer to achieve a net-zero portfolio by 2050 or sooner. Also on Aug. 31, the committee adopted a 20% suballocation within its public equity portfolio to the MSCI ACWI Low Carbon Target index.

As of June 30, CalSTRS had 38.4% invested in global stocks, with a 43% public equity target. The new suballocation would equal a target of nearly $27 billion invested in the low-carbon index strategy.

As of June 30, CalSTRS had $3.9 billion invested in the MSCI ACWI Low Carbon Target index as part of its sustainable investment and stewardship strategies public portfolio. The $3.9 billion investment represented 44% of the SISS public portfolio and approximately 3% of CalSTRS’ total public equity exposure, according to a staff report. Staff will develop an implementation plan for a future investment committee meeting.

Additionally, in May 2023, staff plans to present to the investment committee the results of modeling an allocation to a low-carbon fixed-income index and determine an appropriate investment recommendation, according to a staff report to the investment committee.