November 12, 2025 • 32 mins
What does putting $100 billion toward climate solutions entail? On this week’s episode of the ESG Currents podcast, Peter Cashion, head of sustainable investing at CalPERS, joins Shaheen Contractor, senior ESG analyst at Bloomberg Intelligence, to unpack how one of the world’s largest pension funds is translating climate ambition into investment decisions. Learn more about the practical aspects of putting this kind of plan into action, what mobilizing capital means in practice, how returns interface with impact and much more.
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Speaker 1 (00:09):
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:33):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I am shiny In contractor, senior ESG analyst,
and your host for today's episode. Today, we're going to
be diving into what I think is one of the
more ambitious climate strategies out there. It's Calfer's one hundred
(00:55):
billion climate action Plan, and joining me is Peter Cashening,
Director for Sustainable Investments at CALPUS. Now. Peter has spent
many years leading climate strategy at places like IFC and
now at CALPUS, which I would say is one of
the world's largest pension funds globally, and today I'm excited
(01:18):
to explore how CALPUS plans to mobilize this one hundred
billion towards climate solutions. What this means in practice, for example,
just how you know returns might interface with real world
impact and a lot more so, Peter, thank you for
joining us.
Speaker 2 (01:33):
Great, Thank you, Shane. It's a real pleasure to be
with you today.
Speaker 1 (01:36):
Supeter. Maybe we can just start by telling us a
little more about this one hundred billion cool Can you
break down the targets for us? Tell us you know
what the strategy is to get there?
Speaker 2 (01:48):
Sure? So. Two years ago, November twenty twenty three, we
presented the Sustainable Investments twenty thirty strategy to the Calper's
Board and one of the headline of this strategy was
to invest one hundred billion in climate solutions by twenty thirty.
And the real motivation for making this commitment is because
(02:09):
we see an opportunity to generate out performance or alpha
for the portfolio. And we've worked internally with each of
the asset classes to come up with a plan at
the asset class level, and in the run up to
this November twenty twenty three board, we realized that there
(02:31):
was significant opportunities across all asset classes. So we worked
with them, tabulated up a number and kind of lo
and behold, it came up to a number very close
to one hundred billion in terms of our what we'd
reach it by twenty thirty. So that's how we got
comfortable with such a target. I'll certainly add that we
(02:53):
were not starting from zero. We're actually at that point
we had about forty seven billion on the books. And
the way we define climate is anything the company that's
involved in mitigation, adaptation, or transition. So mitigation, of course
is reducing emissions thank renewable energy. Adaptation is adjusting and
(03:14):
adapting to these new higher temperatures, could be reinforced infrastructure,
heat resistant crops, and transition as high emitters going to
lower emissions. So we've set out on this path. We're
two years in basically, and next month will give an
update to our board. We've we're approaching sixty billion so
(03:37):
far in terms of our tracking towards the hundred, so
not bad for two years in. And that's a combination
of just the portfolio itself growing, but also us deliberately
intentionally investing more in climate, and we do this primarily
through our asset managers, through by investing in dedicated funds
(03:59):
and also invest So you know, so far, so good.
The team itself at CalPERS. We've built that out a lot.
The sustainable investments team. When I started, we had eight
people and now we're twenty, and those new additions are
really focused on investing in climate. And one thing that's
(04:20):
unique Geane and cut me off if I go on
too long, but you know, it's compassionate about this. But
one thing that's really I think unique about our approach
at CalPERS is that we're doing this across the asset
classes in collaboration with them. So the alternative would have
been to do to give an allocation to sustainable investments,
(04:41):
and we could have had you know, four or five
maybe in a good day ten million to invest over
multiple years. But we decided that actually, what would be
better is if we leverage the skill set of the
asset classes who were highly skilled in each of their
individual domains, and combine that with the expertise of climate investors,
(05:03):
and by so doing you kind of get the best
of both worlds and instead of deploying three, five, ten billion,
you can talk one hundred billion target. So that's what's
been really quite exciting for us to kind of work
at a bigger scale, and you know, always in the
(05:24):
motivation of generating out performance. Maybe I'll add just one
or two other points is that we also have a
net zero target, and our net zero target involved by
twenty thirty cutting emissions intensity by half, and this twenty
thirty strategy, the one hundred billion investment, really puts us
(05:46):
on that trajectory because the emissions intensity of those investments
is less. And the reason I point that out is
that for us, this is an outcome of an investment
process and investment strategy. Ain motivation was not to reduce emissions,
but rather to target really high quality investments and in
the process that actually reduces our overall overall emissions. So yeah,
(06:13):
I think that's that's how we kind of got to
where we are, and so far it's been been so far,
so good.
Speaker 1 (06:22):
Thank you, Thank you for that. Sounds fascinating. So if
I understand it's right, that's you've almost taken each as
a class and you've put a piece of it to
climate rather than treating it as like a separate investment strategy.
Speaker 2 (06:34):
Yes, correct, because because we could have the CIO could
have said, Okay, I'm going to give x billion to sustainability.
You guys go off in your corner. You do your work.
Everyone else will stay in their corner. But we were
also considering adopting the total portfolio approach across CalPERS, which
really promotes this cross asset class collaboration and work. So
(07:00):
our approach on climate investing I think is extremely compatible
with the with the TPA that we're currently considering.
Speaker 1 (07:07):
That sounds lovely. Peter, you mentioned that you aim to
do this largely through your asset managers, right, so by
investing in funds now, I want to sort of distinguish
and understand how you know, the public fund universe compares
to the private fund universe, if that makes sense, So
(07:28):
correct me if I'm long. But you know, when it
comes to the public markets and climate strategies, my question
is are there enough strategies out there that meet your needs?
And if not, what is missing in the public markets world,
which is I find very confusing when it comes to climate.
Speaker 2 (07:47):
So you know, if you look at data and reporting
and just availability of data, the publics are fantastic. You know,
there's lots of data providers that cover it. But perhaps ironically,
the number of dedicated strategies for climate in public markets
that is not that significant. You can go and find
(08:10):
ESG related strategies either that have a screen or that
do scoring. But what we do is not really an
ESG strategy. ESG. We just incorporate across all of our work,
public and private as a baseline. But we're seeking something
incremental here, which is this deliberate targeting about performance by
investing in climate transition. And to your question, the public markets,
(08:35):
there are fewer options as compared to privates in public equity.
It's quite good. We're actually i'll share two kind of
recent stories from that area. We're currently doing an active
manager search in the public equity side for dedicated climate strategies,
(08:55):
often concentrated strategies, and we found well over seventy managers
or seventy such strategies, which is material and that's good.
So we're currently diligencing some of those on the fixed
income side. It is definitely not as many as we
(09:16):
would like to see. And you definitely you do have
the green bond strategies, sustainable linked strategies, and those are
fine and good, but frankly, when we evaluated those, there
wasn't this compelling alpha thesis. So you know, we invest
in them incidentally, but not I think as a kind
of a deliberate intentional strategy. Over a year ago, we thought, okay,
(09:43):
at least let's start in public equity and figure out
how we could invest at scale and take a more
index passive approach to target climate investing. So we developed
with foot Seat what we call the Climate Transition Index,
and we deployed in July twenty twenty four or five
(10:04):
billion to this strategy. And what we do is we
take our kind of generic cap weighted index and we
make a series of series of adjustments. So first we
overweight climate solutions in the portfolio, and we underweight high
emitters that do not have a transition plan, conversely overweight
(10:26):
those that do, at the same time maintaining the overall
segment or exposure by category, so oil and gas, for example,
it still has the same exposure, just with a series
of under and overweights. And we did this really to
keep tracking error relatively low to our overall benchmark in
(10:49):
the range of sixty seventy basis points, but also seek
out that outperformance. So it was an interesting year because
you know, we did a little over a year ago
and was we had outperformance up to fifty basis points.
We had underperformance to minus fifty and we finished the
(11:10):
fiscal year at minus two basis points. Okay, that basically
brought it back call which listen, we thought in this
context and environment was pretty good. It showed that it
could be defensive while still tapping into two potential outperformance.
So we're very comfortable to kind of maintain that as
(11:31):
we go, and as I said, compliment it with this
new active search that we have underway.
Speaker 1 (11:37):
And Peter, this is the public markets right now. I'm
curious as to the private markets, and I'm guessing the
private markets has a whole array of strategies out of this.
I won't ask, but I guess, out of the whole array,
what are you prioritizing right now? In other words, you
know what themes have more alpha generating opportunity is versus
(12:00):
others that I may be full right now.
Speaker 2 (12:04):
So you have the whole conversation starts with energy and electricity,
the fact that there's a supplied demand and balance that's
building and that's coming about for a few reasons. Of course,
a demand is on the AI, increased domestic manufacturing, increased
electrification throughout the economy. I'm speaking for the moment in
(12:27):
the US and supply you know, is somewhat challenged, and
in fact, post IRA changes will be there'll be less
renewable provision. You know, wo MAC estimates about thirty percent
less as compared to twenty thirty, so we're going to
see inevitably this increase in energy electricity prices. So being
(12:50):
you know, despite these changes to the IRA, we still
see really strong interesting opportunities in renewable energy because it
can be constructed in a timeframe that can help meet
this demand. As we know, natural gas speakers take up
to five years to come online, nuclear is closer to ten,
whereas renewables can be much much shorter. So the first
(13:13):
obvious asset class for this is infrastructure. Relatedly, we have
private debt because a lot of these these companies, developers
or or UH producers are tapping into the private debt
market where we're seeing very attractive risk returns in the
private equity segment. It's the whole supply chain and service
(13:36):
providers related to these companies, so it's a it's really
like an ecosystem that you can tap into and support
from from multiple levels. And you know, it's also good
to see that the IPO market may be maybe returning
somewhat after you know, being being quieter the last few years. Yeah.
(14:01):
Maybe one other itemal ad is despite and again related
to energy. So despite this kind of market price, all
this allocation on the public equity side for renewable companies,
as we've seen the last couple of years have been
generally down, sometimes significantly for renewables. Okay, there's a recent uptick,
(14:23):
but over the last year this is presented some interesting
take private opportunities. So taking a listed renewable company private
through usually with one of our private equity general partners,
so you know, you can come at it from kind
of multiple multiple angles.
Speaker 1 (14:43):
That sounds exciting, and taking a little more into this
alpha generation, which I know is quite pivotal to your strategy.
So my question is how do you attribute alpha to
climate factors? If that makes sense? So how do you
maybe you know, adjust capital allocation model or something like that.
(15:05):
How is it not just market dynamics? How do you
separate that this is really because of climate?
Speaker 2 (15:12):
Right? Yeah, No, it's easy to say, hard to do.
So maybe i'll say that easy to say, though, I'll
say a few quick words on why we think we
can generate alpha. So you know, we see climate as
one of the mega trends, alongside AI and deglobalization. In
terms of market growth, it's gone from nine hundred billion
(15:34):
and twenty nineteen to over two point two trillion projected
this year. Companies that are focused on resource and energy
efficiency in public markets do better, there's clear data and
evidence of that. And finally, companies that are focused on
climate risk, be it physical or transition, are much better positioned.
(15:54):
So that's why we think alpha is possible and can
be generated in terms of the attribution. So we've actually
spent like the last year figuring this out by asset
class and on the public side, it's actually pretty straightforward
because you can monitor pricing, you know, on a daily
(16:16):
or minute basis if you like, And our approach has
been simply to compare the performance of our climate investments.
So in this case, I'll use the climate transition index
that we did last year with our broader index are
cap weighted and there you can track, you know, comparative
(16:37):
performance on a daily and ongoing basis. Similarly, in fixed income,
you know, if we had such a strategy, and we
are actually kind of looking into that. So that's on
the public side, on the private So you can invest
in climate a few different ways as akelpers. You can
invest in climate dedicated funds or climate related co investments
(17:02):
could be renewable energy, could be a service provider for
electric vehicle charging stations, et cetera. So what we'll do
if a fund is if a fund is primarily or
fully climate related, will simply compare the performance of that
fund to the overall performance of say the private equity
(17:25):
benchmark and the overall private equity portfolio, assuming it's a
private equity fund, and similarly, for co invest will compare
it to their peer investments in that same asset class. So,
you know, because this is a really important to have
this mechanism in place, and you know, you have to
(17:46):
really work within the systems and operations for the with
internally in terms of tagging these investments and then monitoring
them on an ongoing basis. If it's a fund, you
have to factor in the j curb effect because for
the first couple of years you probably won't have great returns.
So right out of the gate, like minus five percent
(18:08):
on this fund, but it doesn't seem like outperformance. So yeah,
privates is definitely more intellectual but I think we have
the format in place to measure it.
Speaker 1 (18:22):
That sounds great and a bitter another question, maybe on
the same grounds. But when I was reading the objectives,
so one thing that you know stood out to me
was one of your objectives, which is integrating climate scenarios
into capital market assumptions. Can you break that down for
me without maybe being two technical?
Speaker 2 (18:45):
Sure? Sure, yes. So we come out of a few ways.
So the first is we do a climate value at
risk analysis of our public portfolio, both fixed income and equity.
And you know, I'll be the first to admit there's
a lot of assumptions that go into that because you're
(19:05):
looking out to twenty one hundred and what's currently priced
in already, so you have to make an estimate of that.
But we do monitor that on an ongoing basis and
report on it. You know, frankly, I wouldn't say we've
taken any action. We're just kind of like, you know,
monitoring aware and then posing the question to ourselves, you know,
(19:30):
what does this imply today? And I guess this is
a plus of having a portfolio that is say lower
carbon intensity. Then say appears or someone that's not at
all focused on climate, because inevitably you'll have a little
less climate value at risk because your portfolio of lower
missions and hence either lower transition risk and in some
(19:53):
case physical risk. We definitely do get, you know, the
inputs from our our partners on on CMA's capital market assumptions,
and it's hard to say how much they include climate
and in the climate risk in their assessments. I guess
(20:17):
as much as the data perhaps from an M S
c I or a foot sea would would already include
in bed. But yeah, it's it's it's it's still I
guess a work in process, both for the whole the
market at large and ourselves.
Speaker 1 (20:32):
Spitta. Another question would be around your the transition bucket.
Now I read that you know you focus this on
certain activities, so I saw cement production, aviation, fossil based
bower generation. Now I'm curious as to why you know
these three specific topics were selected and just how you
(20:55):
would define transition at large.
Speaker 2 (20:58):
Yes, now this is an important component, it's still it's
relatively small. If we if we looked at our original
forty seven billion, it's just a few billion of that
would was transition. And not everyone includes this category as
a climate solution when we looked at peers in one.
(21:19):
I don't know if it's a positive or negative. Maybe
a negative topic is that if you include transition, it
means that you're going to be buying into high emitters
at a at a at a faster rate, or you're
going to deliberately be investing in them, so your emission's
intensity actually goes up, and you know, your target was
to make it go down. So but you know, for us,
(21:43):
we felt it was really important to not just be
cosmetically decarbonizing our own portfolio, but also contributing to the
overall decarbonization of the economy. And we believe that you
can do this in a in a profitable, value additive way.
So we we explicitly decided to include this. And you know,
(22:04):
then the question is, okay, so how do you define it?
And really we we rely a lot on the you know,
two leading kind of names in the space s BTI
Science based UH Transition Initiative and TPI. So they essentially
take the category of high emitters and as you inferred,
(22:26):
could be cement steel of course, oil and gas utilities
and assesses whether these companies have a net zero plan
and also the quality of it and whether they're currently
on track for this. So that's one of the main
things that that we assess as a first order, and
(22:50):
if they do, we feel comfortable including it as a
transition asset in terms of our climate account and that's
going to be monitored and reassessed each year along with
the inputs from u TTI and SBTi. So yeah, that's
how we kind of got comfortable with it and why
(23:11):
we decided to include it.
Speaker 1 (23:13):
Butter, I like your point on you know, you don't
want to artificially lower your emission intensity by just excluding
all these resource intensive sectors because I find a lot
of the ESG funds out that they, you know, just
have a very low way to the all these sector
sec utilities, materials, et cetera. So I like that point.
(23:36):
I guess one other question on this is I'm guessing
a lot of what you would do is also engaging
with these companies right specifically the transition the ones in
the transition bucket. So I'm curious as to, you know,
what would make you, as an asset owner go from
(23:57):
engage to divest. What does the company have to not
be doing for you to divest them? And where does
that Where does that line drawn?
Speaker 2 (24:08):
I guess sure. So, yes, we have a very active
engagement program within KALPERS that goes back many years decades.
We do over four hundred engagements a year with public
companies and that covers over half of our two twenty
billion portfolio. And the priority items often in these engagement
(24:31):
calls and interactions is climate, whether they have a net
zero plan if they are an emitter a high emitter,
also executive pay, diversity, particularly diversity on boards. So we
have a long history of engagement and as you may know,
we were co founders of Climate Action one hundred seven
(24:53):
eight years ago with Series and that progriate that that
group engages again with these these high emitters and encourages
them to adopt net zero plans, to put them on
that that pathway and that target. Divestment. Divestment is a
you know, is a is a big, a big word.
(25:14):
And you know, if you choose to divest, then you've
pretty much decided that, you know, the engagement is no
longer worthwhile and worth pursuing, because once you divest, you
do no longer have that ability to engage. You know,
you're no longer a shareholder and you've probably divested to
(25:34):
someone who doesn't share those concerns, and you know they'll
they'll the company will just kind of proceed as as
normal as status quo. So divestment is a really, uh
a big decision. We have divested from private prisons, we
divested from tobacco, and we've divested from uh energy firms
(26:01):
generating more than fifty percent of their revenue from from coal.
I would say cool coal mining companies generating more than
fifty percent of the revenue from thermal coal. So in
what we do, we do have a discipline internally in
that anytime we dive asked, we assessed on an ongoing
basis thereafter what the performance of that asset was and
(26:25):
to you know, show that there could be a cost
through divestment. And I know in the case of tobacco,
for example, uh, you know, there is a there is
a significant lost investment return by by so doing so.
You know, we do get calls for divestment, particularly from
(26:46):
from oil and gas investments. But you know, our our
definite decision is that we are engaging. We've really encouraged
these a lot of these firms to adopt net zero
plans and that is very much our preferred approach.
Speaker 1 (27:03):
So, Peter, early in the conversation, you mentioned, you know,
the renewable ecosystem. I guess, what is one policy tailwind
that you see right now for climate? I know you
mentioned that you know your portfolio was some basis points
up and then down and then you're about equal. But
if you had to say, if you had to give
(27:24):
me one policy tail tailwind, what would that be?
Speaker 2 (27:27):
The tailwinds that we're seeing in terms of renewable energy.
If we look at the IRA, the changes that have
come about, it's actually been beneficial for multiple areas, including geothermal,
the grid itself, and also carbon capture, so those will
be beneficiaries. The other major tailwind that I commented on
(27:52):
earlier was just the whole supply demand dynamics surrounding surrounding
power and energy. And if you want to look beyond
the US, which of course you should and we do
because they're a global investor, there's lots of policy tail
winds outside of the US. In fact, we've traveled extensively
(28:12):
to get a feel for what's happening globally, and it's
all systems go in terms of transition and investing in this,
whether it's Japan with their one trillion GX program or
emerging markets, so you know, we see still significant opportunities.
Speaker 1 (28:32):
Sounds great. Bitter. For the last five minutes, I want
to shift a little bit maybe to your personal journey
and just ask you. I think we have time for
two questions there, so Bitter. I know you were previously
at the ifccrect you were the CIO of the Financial
Institutions Group, and you'll let it a lot of the
climate work. I guess what is something that you learned
(28:56):
that the ISICO is throughout your career when it comes
to climate investing you've been able to bring to your
current role. What has really helped you? I guess do
your job at CAPUS today?
Speaker 2 (29:08):
Sure? Sure, so yeah, I think you know. I was
at the IFC for twenty seven years, which is a
long time, and what was really one of the many
things I loved about IFC is that it showed very
clearly that you can do climate or any type of
other impact investing on a very profitable basis. So this
(29:29):
isn't charity, it's not just impact, but you can be
profitable do it at scale across all asset classes. For
my last few years at IFC, I was the global
head of Climate Finance and by that point climate was
over forty percent of IFC's annual commitments of thirty billion
(29:50):
per year. And we did it across again, all different
sectors and segments. So that's why it was so interesting
to have an opportunity like helpers the size scale that
they have to roll this out on an even bigger scale.
So yeah, no, And I guess the other takeaway from
(30:11):
IFC is just the importance of emerging markets in the
transition and they have the benefit of a build out
because they you know, they have such increasing demand and
limited supply, and a lot of that is fossil based.
So the potential to invest and invest profitably is really
(30:32):
significant in emerging markets.
Speaker 1 (30:35):
Invest profitably, I think that would be my takeaway from
this podcast. That's quite hardening, Peter. Last question. I guess
we live in a let's just call it a changing
climate economy for lack of better terms. I guess what
piece of advice would you have for practitioners or leaders
in the space right now?
Speaker 2 (30:56):
Yeah, so I would say that be focused on returns
and investments that make investment sense, you know, targets and
decarbonization goals are good, but that can't be the lead.
It needs to be about being pragmatic. What makes most
(31:18):
financial sense. How do we save on resource efficiency, energy efficiency,
doing more with less, especially when we have these supply
demand constraints in the power area, and that if your
stay focused on those things, one can be profitable. Two.
It's hard to criticize that. And it's actually completely in
(31:40):
one hundred percent aligned with a fiduciary duty. If you
happen to be an asset manager or an asset owner,
you know, and hey, in the end, it's it's going
to have a positive outcome as well, because as a
pension fund, you know, we're investing for the super long term,
so a properly decarbonized portfolio and economy is really critically
(32:02):
important for the long term.
Speaker 1 (32:03):
I like that, PETERA. I like that list of priorities.
Speaker 2 (32:07):
Probably I may have given.
Speaker 1 (32:10):
Enough. That's great, Peter, thank you, Thank you so much
for joining us super and for our listeners. You can
find more information and sustainability issues on BI space ESG
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quandary you'd like to ask BI expert analysts or learn
more about our research. Send us an email at ESG
(32:32):
Currents at bloomberg dot net. And if you liked this episode,
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Thank you, everybody,
ESG is constantly evolving. Over the years, it has shifted
from socially responsible investing to impact to sustainable finance. While
the terminology continues to change, what hasn't changed are the
underlying science, market pressures, and tangible physical and financial impacts
of the climate crisis, increasing regulatory scrutiny, and rising consumer expectations.
(00:33):
We aim to filter out the noise by speaking with
industry experts to identify what is really driving value. Welcome
to ESG Currents. I am shiny In contractor, senior ESG analyst,
and your host for today's episode. Today, we're going to
be diving into what I think is one of the
more ambitious climate strategies out there. It's Calfer's one hundred
(00:55):
billion climate action Plan, and joining me is Peter Cashening,
Director for Sustainable Investments at CALPUS. Now. Peter has spent
many years leading climate strategy at places like IFC and
now at CALPUS, which I would say is one of
the world's largest pension funds globally, and today I'm excited
(01:18):
to explore how CALPUS plans to mobilize this one hundred
billion towards climate solutions. What this means in practice, for example,
just how you know returns might interface with real world
impact and a lot more so, Peter, thank you for
joining us.
Speaker 2 (01:33):
Great, Thank you, Shane. It's a real pleasure to be
with you today.
Speaker 1 (01:36):
Supeter. Maybe we can just start by telling us a
little more about this one hundred billion cool Can you
break down the targets for us? Tell us you know
what the strategy is to get there?
Speaker 2 (01:48):
Sure? So. Two years ago, November twenty twenty three, we
presented the Sustainable Investments twenty thirty strategy to the Calper's
Board and one of the headline of this strategy was
to invest one hundred billion in climate solutions by twenty thirty.
And the real motivation for making this commitment is because
(02:09):
we see an opportunity to generate out performance or alpha
for the portfolio. And we've worked internally with each of
the asset classes to come up with a plan at
the asset class level, and in the run up to
this November twenty twenty three board, we realized that there
(02:31):
was significant opportunities across all asset classes. So we worked
with them, tabulated up a number and kind of lo
and behold, it came up to a number very close
to one hundred billion in terms of our what we'd
reach it by twenty thirty. So that's how we got
comfortable with such a target. I'll certainly add that we
(02:53):
were not starting from zero. We're actually at that point
we had about forty seven billion on the books. And
the way we define climate is anything the company that's
involved in mitigation, adaptation, or transition. So mitigation, of course
is reducing emissions thank renewable energy. Adaptation is adjusting and
(03:14):
adapting to these new higher temperatures, could be reinforced infrastructure,
heat resistant crops, and transition as high emitters going to
lower emissions. So we've set out on this path. We're
two years in basically, and next month will give an
update to our board. We've we're approaching sixty billion so
(03:37):
far in terms of our tracking towards the hundred, so
not bad for two years in. And that's a combination
of just the portfolio itself growing, but also us deliberately
intentionally investing more in climate, and we do this primarily
through our asset managers, through by investing in dedicated funds
(03:59):
and also invest So you know, so far, so good.
The team itself at CalPERS. We've built that out a lot.
The sustainable investments team. When I started, we had eight
people and now we're twenty, and those new additions are
really focused on investing in climate. And one thing that's
(04:20):
unique Geane and cut me off if I go on
too long, but you know, it's compassionate about this. But
one thing that's really I think unique about our approach
at CalPERS is that we're doing this across the asset
classes in collaboration with them. So the alternative would have
been to do to give an allocation to sustainable investments,
(04:41):
and we could have had you know, four or five
maybe in a good day ten million to invest over
multiple years. But we decided that actually, what would be
better is if we leverage the skill set of the
asset classes who were highly skilled in each of their
individual domains, and combine that with the expertise of climate investors,
(05:03):
and by so doing you kind of get the best
of both worlds and instead of deploying three, five, ten billion,
you can talk one hundred billion target. So that's what's
been really quite exciting for us to kind of work
at a bigger scale, and you know, always in the
(05:24):
motivation of generating out performance. Maybe I'll add just one
or two other points is that we also have a
net zero target, and our net zero target involved by
twenty thirty cutting emissions intensity by half, and this twenty
thirty strategy, the one hundred billion investment, really puts us
(05:46):
on that trajectory because the emissions intensity of those investments
is less. And the reason I point that out is
that for us, this is an outcome of an investment
process and investment strategy. Ain motivation was not to reduce emissions,
but rather to target really high quality investments and in
the process that actually reduces our overall overall emissions. So yeah,
(06:13):
I think that's that's how we kind of got to
where we are, and so far it's been been so far,
so good.
Speaker 1 (06:22):
Thank you, Thank you for that. Sounds fascinating. So if
I understand it's right, that's you've almost taken each as
a class and you've put a piece of it to
climate rather than treating it as like a separate investment strategy.
Speaker 2 (06:34):
Yes, correct, because because we could have the CIO could
have said, Okay, I'm going to give x billion to sustainability.
You guys go off in your corner. You do your work.
Everyone else will stay in their corner. But we were
also considering adopting the total portfolio approach across CalPERS, which
really promotes this cross asset class collaboration and work. So
(07:00):
our approach on climate investing I think is extremely compatible
with the with the TPA that we're currently considering.
Speaker 1 (07:07):
That sounds lovely. Peter, you mentioned that you aim to
do this largely through your asset managers, right, so by
investing in funds now, I want to sort of distinguish
and understand how you know, the public fund universe compares
to the private fund universe, if that makes sense, So
(07:28):
correct me if I'm long. But you know, when it
comes to the public markets and climate strategies, my question
is are there enough strategies out there that meet your needs?
And if not, what is missing in the public markets world,
which is I find very confusing when it comes to climate.
Speaker 2 (07:47):
So you know, if you look at data and reporting
and just availability of data, the publics are fantastic. You know,
there's lots of data providers that cover it. But perhaps ironically,
the number of dedicated strategies for climate in public markets
that is not that significant. You can go and find
(08:10):
ESG related strategies either that have a screen or that
do scoring. But what we do is not really an
ESG strategy. ESG. We just incorporate across all of our work,
public and private as a baseline. But we're seeking something
incremental here, which is this deliberate targeting about performance by
investing in climate transition. And to your question, the public markets,
(08:35):
there are fewer options as compared to privates in public equity.
It's quite good. We're actually i'll share two kind of
recent stories from that area. We're currently doing an active
manager search in the public equity side for dedicated climate strategies,
(08:55):
often concentrated strategies, and we found well over seventy managers
or seventy such strategies, which is material and that's good.
So we're currently diligencing some of those on the fixed
income side. It is definitely not as many as we
(09:16):
would like to see. And you definitely you do have
the green bond strategies, sustainable linked strategies, and those are
fine and good, but frankly, when we evaluated those, there
wasn't this compelling alpha thesis. So you know, we invest
in them incidentally, but not I think as a kind
of a deliberate intentional strategy. Over a year ago, we thought, okay,
(09:43):
at least let's start in public equity and figure out
how we could invest at scale and take a more
index passive approach to target climate investing. So we developed
with foot Seat what we call the Climate Transition Index,
and we deployed in July twenty twenty four or five
(10:04):
billion to this strategy. And what we do is we
take our kind of generic cap weighted index and we
make a series of series of adjustments. So first we
overweight climate solutions in the portfolio, and we underweight high
emitters that do not have a transition plan, conversely overweight
(10:26):
those that do, at the same time maintaining the overall
segment or exposure by category, so oil and gas, for example,
it still has the same exposure, just with a series
of under and overweights. And we did this really to
keep tracking error relatively low to our overall benchmark in
(10:49):
the range of sixty seventy basis points, but also seek
out that outperformance. So it was an interesting year because
you know, we did a little over a year ago
and was we had outperformance up to fifty basis points.
We had underperformance to minus fifty and we finished the
(11:10):
fiscal year at minus two basis points. Okay, that basically
brought it back call which listen, we thought in this
context and environment was pretty good. It showed that it
could be defensive while still tapping into two potential outperformance.
So we're very comfortable to kind of maintain that as
(11:31):
we go, and as I said, compliment it with this
new active search that we have underway.
Speaker 1 (11:37):
And Peter, this is the public markets right now. I'm
curious as to the private markets, and I'm guessing the
private markets has a whole array of strategies out of this.
I won't ask, but I guess, out of the whole array,
what are you prioritizing right now? In other words, you
know what themes have more alpha generating opportunity is versus
(12:00):
others that I may be full right now.
Speaker 2 (12:04):
So you have the whole conversation starts with energy and electricity,
the fact that there's a supplied demand and balance that's
building and that's coming about for a few reasons. Of course,
a demand is on the AI, increased domestic manufacturing, increased
electrification throughout the economy. I'm speaking for the moment in
(12:27):
the US and supply you know, is somewhat challenged, and
in fact, post IRA changes will be there'll be less
renewable provision. You know, wo MAC estimates about thirty percent
less as compared to twenty thirty, so we're going to
see inevitably this increase in energy electricity prices. So being
(12:50):
you know, despite these changes to the IRA, we still
see really strong interesting opportunities in renewable energy because it
can be constructed in a timeframe that can help meet
this demand. As we know, natural gas speakers take up
to five years to come online, nuclear is closer to ten,
whereas renewables can be much much shorter. So the first
(13:13):
obvious asset class for this is infrastructure. Relatedly, we have
private debt because a lot of these these companies, developers
or or UH producers are tapping into the private debt
market where we're seeing very attractive risk returns in the
private equity segment. It's the whole supply chain and service
(13:36):
providers related to these companies, so it's a it's really
like an ecosystem that you can tap into and support
from from multiple levels. And you know, it's also good
to see that the IPO market may be maybe returning
somewhat after you know, being being quieter the last few years. Yeah.
(14:01):
Maybe one other itemal ad is despite and again related
to energy. So despite this kind of market price, all
this allocation on the public equity side for renewable companies,
as we've seen the last couple of years have been
generally down, sometimes significantly for renewables. Okay, there's a recent uptick,
(14:23):
but over the last year this is presented some interesting
take private opportunities. So taking a listed renewable company private
through usually with one of our private equity general partners,
so you know, you can come at it from kind
of multiple multiple angles.
Speaker 1 (14:43):
That sounds exciting, and taking a little more into this
alpha generation, which I know is quite pivotal to your strategy.
So my question is how do you attribute alpha to
climate factors? If that makes sense? So how do you
maybe you know, adjust capital allocation model or something like that.
(15:05):
How is it not just market dynamics? How do you
separate that this is really because of climate?
Speaker 2 (15:12):
Right? Yeah, No, it's easy to say, hard to do.
So maybe i'll say that easy to say, though, I'll
say a few quick words on why we think we
can generate alpha. So you know, we see climate as
one of the mega trends, alongside AI and deglobalization. In
terms of market growth, it's gone from nine hundred billion
(15:34):
and twenty nineteen to over two point two trillion projected
this year. Companies that are focused on resource and energy
efficiency in public markets do better, there's clear data and
evidence of that. And finally, companies that are focused on
climate risk, be it physical or transition, are much better positioned.
(15:54):
So that's why we think alpha is possible and can
be generated in terms of the attribution. So we've actually
spent like the last year figuring this out by asset
class and on the public side, it's actually pretty straightforward
because you can monitor pricing, you know, on a daily
(16:16):
or minute basis if you like, And our approach has
been simply to compare the performance of our climate investments.
So in this case, I'll use the climate transition index
that we did last year with our broader index are
cap weighted and there you can track, you know, comparative
(16:37):
performance on a daily and ongoing basis. Similarly, in fixed income,
you know, if we had such a strategy, and we
are actually kind of looking into that. So that's on
the public side, on the private So you can invest
in climate a few different ways as akelpers. You can
invest in climate dedicated funds or climate related co investments
(17:02):
could be renewable energy, could be a service provider for
electric vehicle charging stations, et cetera. So what we'll do
if a fund is if a fund is primarily or
fully climate related, will simply compare the performance of that
fund to the overall performance of say the private equity
(17:25):
benchmark and the overall private equity portfolio, assuming it's a
private equity fund, and similarly, for co invest will compare
it to their peer investments in that same asset class. So,
you know, because this is a really important to have
this mechanism in place, and you know, you have to
(17:46):
really work within the systems and operations for the with
internally in terms of tagging these investments and then monitoring
them on an ongoing basis. If it's a fund, you
have to factor in the j curb effect because for
the first couple of years you probably won't have great returns.
So right out of the gate, like minus five percent
(18:08):
on this fund, but it doesn't seem like outperformance. So yeah,
privates is definitely more intellectual but I think we have
the format in place to measure it.
Speaker 1 (18:22):
That sounds great and a bitter another question, maybe on
the same grounds. But when I was reading the objectives,
so one thing that you know stood out to me
was one of your objectives, which is integrating climate scenarios
into capital market assumptions. Can you break that down for
me without maybe being two technical?
Speaker 2 (18:45):
Sure? Sure, yes. So we come out of a few ways.
So the first is we do a climate value at
risk analysis of our public portfolio, both fixed income and equity.
And you know, I'll be the first to admit there's
a lot of assumptions that go into that because you're
(19:05):
looking out to twenty one hundred and what's currently priced
in already, so you have to make an estimate of that.
But we do monitor that on an ongoing basis and
report on it. You know, frankly, I wouldn't say we've
taken any action. We're just kind of like, you know,
monitoring aware and then posing the question to ourselves, you know,
(19:30):
what does this imply today? And I guess this is
a plus of having a portfolio that is say lower
carbon intensity. Then say appears or someone that's not at
all focused on climate, because inevitably you'll have a little
less climate value at risk because your portfolio of lower
missions and hence either lower transition risk and in some
(19:53):
case physical risk. We definitely do get, you know, the
inputs from our our partners on on CMA's capital market assumptions,
and it's hard to say how much they include climate
and in the climate risk in their assessments. I guess
(20:17):
as much as the data perhaps from an M S
c I or a foot sea would would already include
in bed. But yeah, it's it's it's it's still I
guess a work in process, both for the whole the
market at large and ourselves.
Speaker 1 (20:32):
Spitta. Another question would be around your the transition bucket.
Now I read that you know you focus this on
certain activities, so I saw cement production, aviation, fossil based
bower generation. Now I'm curious as to why you know
these three specific topics were selected and just how you
(20:55):
would define transition at large.
Speaker 2 (20:58):
Yes, now this is an important component, it's still it's
relatively small. If we if we looked at our original
forty seven billion, it's just a few billion of that
would was transition. And not everyone includes this category as
a climate solution when we looked at peers in one.
(21:19):
I don't know if it's a positive or negative. Maybe
a negative topic is that if you include transition, it
means that you're going to be buying into high emitters
at a at a at a faster rate, or you're
going to deliberately be investing in them, so your emission's
intensity actually goes up, and you know, your target was
to make it go down. So but you know, for us,
(21:43):
we felt it was really important to not just be
cosmetically decarbonizing our own portfolio, but also contributing to the
overall decarbonization of the economy. And we believe that you
can do this in a in a profitable, value additive way.
So we we explicitly decided to include this. And you know,
(22:04):
then the question is, okay, so how do you define it?
And really we we rely a lot on the you know,
two leading kind of names in the space s BTI
Science based UH Transition Initiative and TPI. So they essentially
take the category of high emitters and as you inferred,
(22:26):
could be cement steel of course, oil and gas utilities
and assesses whether these companies have a net zero plan
and also the quality of it and whether they're currently
on track for this. So that's one of the main
things that that we assess as a first order, and
(22:50):
if they do, we feel comfortable including it as a
transition asset in terms of our climate account and that's
going to be monitored and reassessed each year along with
the inputs from u TTI and SBTi. So yeah, that's
how we kind of got comfortable with it and why
(23:11):
we decided to include it.
Speaker 1 (23:13):
Butter, I like your point on you know, you don't
want to artificially lower your emission intensity by just excluding
all these resource intensive sectors because I find a lot
of the ESG funds out that they, you know, just
have a very low way to the all these sector
sec utilities, materials, et cetera. So I like that point.
(23:36):
I guess one other question on this is I'm guessing
a lot of what you would do is also engaging
with these companies right specifically the transition the ones in
the transition bucket. So I'm curious as to, you know,
what would make you, as an asset owner go from
(23:57):
engage to divest. What does the company have to not
be doing for you to divest them? And where does
that Where does that line drawn?
Speaker 2 (24:08):
I guess sure. So, yes, we have a very active
engagement program within KALPERS that goes back many years decades.
We do over four hundred engagements a year with public
companies and that covers over half of our two twenty
billion portfolio. And the priority items often in these engagement
(24:31):
calls and interactions is climate, whether they have a net
zero plan if they are an emitter a high emitter,
also executive pay, diversity, particularly diversity on boards. So we
have a long history of engagement and as you may know,
we were co founders of Climate Action one hundred seven
(24:53):
eight years ago with Series and that progriate that that
group engages again with these these high emitters and encourages
them to adopt net zero plans, to put them on
that that pathway and that target. Divestment. Divestment is a
you know, is a is a big, a big word.
(25:14):
And you know, if you choose to divest, then you've
pretty much decided that, you know, the engagement is no
longer worthwhile and worth pursuing, because once you divest, you
do no longer have that ability to engage. You know,
you're no longer a shareholder and you've probably divested to
(25:34):
someone who doesn't share those concerns, and you know they'll
they'll the company will just kind of proceed as as
normal as status quo. So divestment is a really, uh
a big decision. We have divested from private prisons, we
divested from tobacco, and we've divested from uh energy firms
(26:01):
generating more than fifty percent of their revenue from from coal.
I would say cool coal mining companies generating more than
fifty percent of the revenue from thermal coal. So in
what we do, we do have a discipline internally in
that anytime we dive asked, we assessed on an ongoing
basis thereafter what the performance of that asset was and
(26:25):
to you know, show that there could be a cost
through divestment. And I know in the case of tobacco,
for example, uh, you know, there is a there is
a significant lost investment return by by so doing so.
You know, we do get calls for divestment, particularly from
(26:46):
from oil and gas investments. But you know, our our
definite decision is that we are engaging. We've really encouraged
these a lot of these firms to adopt net zero
plans and that is very much our preferred approach.
Speaker 1 (27:03):
So, Peter, early in the conversation, you mentioned, you know,
the renewable ecosystem. I guess, what is one policy tailwind
that you see right now for climate? I know you
mentioned that you know your portfolio was some basis points
up and then down and then you're about equal. But
if you had to say, if you had to give
(27:24):
me one policy tail tailwind, what would that be?
Speaker 2 (27:27):
The tailwinds that we're seeing in terms of renewable energy.
If we look at the IRA, the changes that have
come about, it's actually been beneficial for multiple areas, including geothermal,
the grid itself, and also carbon capture, so those will
be beneficiaries. The other major tailwind that I commented on
(27:52):
earlier was just the whole supply demand dynamics surrounding surrounding
power and energy. And if you want to look beyond
the US, which of course you should and we do
because they're a global investor, there's lots of policy tail
winds outside of the US. In fact, we've traveled extensively
(28:12):
to get a feel for what's happening globally, and it's
all systems go in terms of transition and investing in this,
whether it's Japan with their one trillion GX program or
emerging markets, so you know, we see still significant opportunities.
Speaker 1 (28:32):
Sounds great. Bitter. For the last five minutes, I want
to shift a little bit maybe to your personal journey
and just ask you. I think we have time for
two questions there, so Bitter. I know you were previously
at the ifccrect you were the CIO of the Financial
Institutions Group, and you'll let it a lot of the
climate work. I guess what is something that you learned
(28:56):
that the ISICO is throughout your career when it comes
to climate investing you've been able to bring to your
current role. What has really helped you? I guess do
your job at CAPUS today?
Speaker 2 (29:08):
Sure? Sure, so yeah, I think you know. I was
at the IFC for twenty seven years, which is a
long time, and what was really one of the many
things I loved about IFC is that it showed very
clearly that you can do climate or any type of
other impact investing on a very profitable basis. So this
(29:29):
isn't charity, it's not just impact, but you can be
profitable do it at scale across all asset classes. For
my last few years at IFC, I was the global
head of Climate Finance and by that point climate was
over forty percent of IFC's annual commitments of thirty billion
(29:50):
per year. And we did it across again, all different
sectors and segments. So that's why it was so interesting
to have an opportunity like helpers the size scale that
they have to roll this out on an even bigger scale.
So yeah, no, And I guess the other takeaway from
(30:11):
IFC is just the importance of emerging markets in the
transition and they have the benefit of a build out
because they you know, they have such increasing demand and
limited supply, and a lot of that is fossil based.
So the potential to invest and invest profitably is really
(30:32):
significant in emerging markets.
Speaker 1 (30:35):
Invest profitably, I think that would be my takeaway from
this podcast. That's quite hardening, Peter. Last question. I guess
we live in a let's just call it a changing
climate economy for lack of better terms. I guess what
piece of advice would you have for practitioners or leaders
in the space right now?
Speaker 2 (30:56):
Yeah, so I would say that be focused on returns
and investments that make investment sense, you know, targets and
decarbonization goals are good, but that can't be the lead.
It needs to be about being pragmatic. What makes most
(31:18):
financial sense. How do we save on resource efficiency, energy efficiency,
doing more with less, especially when we have these supply
demand constraints in the power area, and that if your
stay focused on those things, one can be profitable. Two.
It's hard to criticize that. And it's actually completely in
(31:40):
one hundred percent aligned with a fiduciary duty. If you
happen to be an asset manager or an asset owner,
you know, and hey, in the end, it's it's going
to have a positive outcome as well, because as a
pension fund, you know, we're investing for the super long term,
so a properly decarbonized portfolio and economy is really critically
(32:02):
important for the long term.
Speaker 1 (32:03):
I like that, PETERA. I like that list of priorities.
Speaker 2 (32:07):
Probably I may have given.
Speaker 1 (32:10):
Enough. That's great, Peter, thank you, Thank you so much
for joining us super and for our listeners. You can
find more information and sustainability issues on BI space ESG
on the Bloomberg terminal. If you have an e SG
quandary you'd like to ask BI expert analysts or learn
more about our research. Send us an email at ESG
(32:32):
Currents at bloomberg dot net. And if you liked this episode,
please subscribe on Apple, Spotify, or your favorite podcast platform.
Thank you, everybody,
Host
Eric Kane
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