The investment committee of the California State Teachers’ Retirement System (CalSTRS) has agreed to commit $2.5 billion to a low-carbon index in a bid to reduce exposure to climate change risks.
The $188.8 billion pension, the US’ third-largest, is allocating these funds to a passively managed equity portfolio invested in the MSCI ACWI Low-Carbon index. The index offers developed and emerging market opportunities for investors seeking to limit risks associated with the shift to a low carbon economy.
CalSTRS said its global equity staff will manage the portfolio. It will first invest in developed markets and seek exposure to emerging markets later.
“Market realities” concerning climate change and policies resulting from last December’s COP21 conference in Paris were a key factor in adopting the low-carbon index, according to CalSTRS.
“Climate change remains at the forefront of global economic concerns and ongoing discussions, and CalSTRS is investing its resources and influence behind the inevitable transition to a low-carbon, climate-resilient future,” CalSTRS investment committee chair Harry Keiley said in a statement.
Citing the coal industry’s decline, Keiley said the pension fund is protecting its portfolio from similar impacts from the broader carbon market. CalSTRS also said this strategy will be beneficial if a carbon or emissions tax is ever enacted.
CalSTRS’ initiative follows a similar move by the $178.1 billion New York State Common Retirement Fund, which launched its own $2 billion low-carbon index last December.
In March, financial consulting firm Mercer studied CalSTRS’ investments, along with 17 other participants, and provided details as to how investors could “capture low-carbon economic opportunities and mitigate long-term risks”.
The Task Force on Climate-related Finance Disclosures (TCFD), an initiative created by the Financial Stability Board, last week warned that investors still lack information from companies to make investments with climate risks in mind.