Our Voices

A Closer Look At New Calif. Pension Fund Climate Law

By Kristie Blase, Jeanne Solomon, Anthony Caldwell and Joe Tagliaferro III

Landmark new California legislation signed into law on Sept. 23, 2018, and going into effect Jan. 1, 2019, requires the two largest pension funds in the country with over $550 billion in combined assets under management — the California Public Employees’ Retirement System, or CalPERS, and the California State Teachers’ Retirement System, or CalSTRS — to publicly report on their climate-related financial risks every three years starting in 2019.

This legislation was enacted approximately one year after the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, or the TCFD, released its recommendations on climate-related financial disclosures. We expect that the new California law will result in more widespread adoption of the TCFD recommendations. This article discusses the new California legislation, the TCFD recommendations and the interplay between the two.

California Pension Fund Climate Law


Gov. Jerry Brown signed California Bill 964, or the pension fund climate law, into law on Sept. 23, 2018.[1] The pension fund climate law adds Section 7510.5 to the Government Code, which requires CalPERS and CalSTRS to (1) undertake a climate-related financial risk assessment before making investments; and (2) publicly report on their analysis of the climate-related financial risk of their public market portfolios.

The new law’s goals are to protect California’s economy and its state employees from climate change-related financial losses. To accomplish this, California requires the boards of CalPERS and CalSTRS to analyze climate-related financial risk identified by the board as a material risk to the fund. To make this analysis, the CalPERS and CalSTRS boards will need to obtain reliable information from the public and private companies in their portfolios, shifting the burden to the private sector to consider (and hopefully take action to reduce) climate change.

The new law also requires the CalPERS and CalSTRS boards to publicly report on their analyses of the climate-related financial risk of each fund’s public market portfolio (including the fund’s alignment with the Paris climate agreement and California climate policy goals and the fund’s exposure to long-term risks) by Jan. 1, 2020, and every three years thereafter. To obtain this information, CalPERS and CalSTRS will require reliable information from public companies. Each public report must include the methods and results of the board’s engagement related to climate-related financial risk with publicly traded companies that are the most carbon-intense (such as utilities, oil and gas producers) within the fund. This component of the report must include a summary of engagement activities undertaken with respect to climate-related financial risk, and a description of additional action taken (or planned to be taken) by the board to address climate-related financial risk (including a list of proxy votes and shareholder proposals initiated by the board). Neither the CalPERS nor CalSTRS boards will be required to take action under the pension fund climate law unless they determine, in good faith, that such action is consistent with and required by the board’s fiduciary responsibilities as described in Article XVI, Section 17 of the California Constitution.

The pension fund climate law provides a comprehensive statutory definition of “climate-related financial risk” as “risk that may include material financial risk posed to the fund by the effects of the changing climate, such as intense storms, rising sea levels, higher global temperatures, economic damages from carbon emissions, and other financial and transition risks due to public policies to address climate change, shifting consumer attitudes, changing economics of traditional carbon-intense industries.” The law recites that climate change presents an array of material financial risks that reasonable investors must take into account when making investment decisions and that failure to acknowledge and address these risks will result in exposure to subsequent liabilities and financial risk. These risks include:

  • Transition Risk: risks to companies that do not shift sufficiently from carbon reliance to renewable energy;
  • Physical Risk: risks arising from climate change’s physical impact; for example, risks to property and transportation systems;
  • Litigation Risk: risks of lawsuits against companies that have helped contribute to climate change[2]; and
  • Regulatory Risk: risks to major sectors of the global economy due to regulatory changes to limit global warming, such as regulations halting the extraction and development of carbon reserves.

The pension fund climate law recites that these risks are especially salient in the retirement system context and that retirement boards have a fiduciary duty to administer retirement funds solely in the interest of system participants and their beneficiaries. To meet these requirements and ensure sufficient funding of both current and future retirees’ financial benefits, the pension fund climate law requires retirement boards to consider both short-term and long-term effects and risks of retirement fund investments. The law indicates that pension funds’ influence in the markets can induce firms to accurately report their carbon risk to the public, and retirement boards cannot disregard financial climate risks.

The pension fund climate law recognizes that the governance directives of CalPERS and CalSTRS (including CalPERS’s Investment Belief 9 and CalSTRS’s “Environmental” Risk Factor) advise the funds’ boards to take climate risk (among other risks) into account when making investment decisions. The new law is expected to ensure that the public is informed whether future boards will continue to consider climate-related financial risk in investment decisions, because climate change is a long-term problem that will affect our environment, health and economy for decades to come and the financial sector is not insulated from climate change’s adverse effects.[3]

Background on California Legislation

California’s History of Climate Change Innovation 

California has been an international innovator and leader in market-based policies to mitigate climate change since at least 2006 when it passed the landmark Global Warming Solutions Act of 2006 (Assembly Bill 32) introducing a cap-and-trade program effective 2012 and setting a statewide goal that greenhouse gas emissions return to 1990 levels by 2020.[4] In 2016, California changed its greenhouse gas emissions goal to 40 percent below 1990 levels by the year 2030 and extended its cap-and-trade program to 2030 (Senate Bill 32).[5]

In 2015, California passed the Clean Energy & Pollution Reduction Act (Senate Bill 350), which established new clean energy, clean air and greenhouse gas reduction goals for 2030 and beyond. Senate Bill 350 codified Gov. Jerry Brown’s aggressive clean energy goals and is a key part of California’s strategy to address climate change as represented by Brown’s “climate change pillars.” The pillars recognize that several major areas of the California economy will need to reduce emissions to meet the 2030 greenhouse gas emissions target. The pillars include (1) reducing petroleum use in cars and trucks by up to 50 percent; (2) increasing from one-third to 50 percent of the state’s electricity derived from renewable sources; (3) doubling the energy efficiency savings achieved at existing buildings and making heating fuels cleaner; (4) reducing the release of methane, black carbon and other short-lived climate pollutants; (5) managing farm, rangelands, forests and wetlands so they can store carbon; and (6) periodically updating the state's climate adaptation strategy: Safeguarding California.

On Sept. 10, 2018, Senate Bill 100 was signed into law, requiring California to procure 60 percent of its electricity from renewable energy by 2030 and all of its electricity from climate-friendly sources by 2045.[6] California also has successfully negotiated bilateral agreements with other states, sovereign countries and subnational territories (including Mexico; China and its Guangdong and Shenzhen provinces; British Columbia, Oregon and Washington; Japan, the Netherlands and Peru) with regard to climate change policy goals. In addition, California and Quebec have had a unique joint cap-and-trade program since 2014.[7]

California Fills Gap Left by Federal Policies

California has long recognized that climate change is “transforming where and how we live and presents growing challenges to human health and quality of life, the economy, and the natural systems that support us,” as described by the recently released federal Fourth National Climate Assessment, or NCA4.[8] The Golden State’s posture on climate change diverges significantly from that of the Trump administration, which announced on June 1, 2017, that the United States would withdraw from the 2015 Paris agreement on climate change on or after Nov. 4, 2020[9], and is currently distancing itself from the November 2018 National Climate Assessment.[10] Following the U.S.’s announcement of its intention to leave the Paris agreement, Syria and Nicaragua (previously the only holdouts) signed the Paris agreement, leaving the U.S. as the only country in the world now opposing the Paris agreement. California’s ability to dictate market outcomes and bolster sustainability comes from its population of almost 40 million, the global dominance of Silicon Valley, and its massive economy — at almost $3 trillion, California boasts the fifth largest economy in the world (larger than the U.K.[11]).

Engagement by CalPERS and CalSTRS 

CalPERS and CalSTRS are already actively advocating for better disclosure and responsible investing to reflect the realities of climate change and engaging with companies regarding climate change. Among other things, both are signatories to the United Nations-supported Principles for Responsible Investing and are members of the Investor Network on Climate Risk, a network of 130 U.S. institutional investors[12] that call on governments and regulators to introduce carbon pricing and disclosure.[13]

Other Western Countries

Other Western countries are not far behind California. For example, the U.K. government has proposed amendments to domestic investment regulations requiring pension funds to explain how they take into account financially material considerations such as climate change,[14] while the European Parliament is reviewing proposed amendments requiring pension funds to carry out due diligence with regard to environmental, social and corporate governance, or ESG, factors.[15]

TCFD Task Force Recommendations

The new California law should help facilitate more widespread global adoption of the TCFD recommendations.[16] The Financial Stability Board, or FSB, an international body that monitors and makes recommendations about the global financial system, established the TCFD in June 2017 to help develop consistent, voluntary climate-related financial disclosures and identify information needed by stakeholders to appropriately assess climate-related risks. The FSB chose the TCFD’s 32 members to include both users and preparers of disclosures from across the G20’s constituency covering a broad range of economic sectors and financial markets. The TCFD’s detailed implementation guidelines include guidance for asset owners, asset managers, lenders and insurers (in addition to issuers) regarding how these capital market participants incorporate climate risk into their investment strategies, underwriting and risk management.[17]

A key TCFD goal was to foster standardized disclosures globally in financial regulatory filings as well as voluntary reporting channels, because the current lack of disclosure standardization has rendered it challenging for global investors to compare and analyze corporate disclosures (particularly relating to climate change).[18] The TCFD recommendations are structured around four core thematic areas in an organization:

  • Governance: disclosing the organization’s governance around climate-related risks and opportunities;
  • Strategy: disclosing the actual and potential impacts of climate-related risks and opportunities on the organization’s businesses, strategy and financial planning where such information is material;
  • Risk Management: disclosing how the organization identifies, assesses and manages climate-related risks; and
  • Metrics and Targets: disclosing the metrics and targets used to assess and manage relevant climate-related risks and opportunities where such information is material. [19]

The TCFD recommendations’ goals include focusing the financial markets on pricing risk, so as to allow investors to make optimal decisions as to allocation and valuation of capital, and increasing transparency. The TCFD recommendations seek to advance the cause of climate-related financial disclosures both in the near-term and long-term, to encourage stakeholders to engage with companies as to climate-related disclosures and risks, and to shift the disclosure of climate-related concerns into mainstream financial disclosures in order to shed light onto such concerns, to allow the better consideration of climate-related risks and opportunities by investors and other stakeholders.

The TCFD recommendations urge companies to provide climate-related financial disclosures in their regular filings and pursuant to their local and/or applicable disclosure requirements, with a goal of fostering stakeholder engagement and promoting more informed understandings of risks and opportunities. For example, the TCFD recommends that a U.S. public company provide such disclosure in its periodic public filings (which already must disclose material information, including material climate-related information). The TCFD believes that climate-related financial disclosures should be subject to oversight by appropriate financial personnel, and that companies should consider how different climate scenarios could impact their strategies.

On Sept. 26, 2018, the task force released its first status report, providing an overview of current disclosure practices and their alignment with the core elements of the TCFD recommendations, and announced that 513 organizations have expressed their support for the TCFD recommendations (up from 100 organizations supporting the final recommendations in 2017), signaling growing momentum for climate-related disclosures. Supporting organizations include both CalPERS and CalSTRS, as well as the California Department of Insurance and the Regents of the University of California; the governments of France, Sweden and the U.K.; nonprofit organizations; banks (including ABN Amro Bank NV, Bank of America, Barclays, Credit Suisse Group AG and HSBC Holdings PLC); one of the top three rating agencies (Fitch); proxy advisory services (including ISS and Glass Lewis); investment management companies (including Blackrock and Fidelity); accounting firms (including Deloitte Global); consulting firms (including Accenture); and other companies (including ArcelorMittal, Glencore, Dow Chemical Company, Eastman, eBay, Burberry Group PLC and Bloomberg LP).[20]

This widespread support for the TCFD recommendations signals growing support for climate-related disclosures and understanding of their importance to businesses’ bottom lines. What is less clear is how companies will implement climate-related disclosures over time, but we expect that California’s pension fund climate law will help develop and standardize the type and depth of disclosures, which will assist companies, investors and the public to understand and act on climate-based risks and opportunities.

What This Means for You: Impacts of the New Legislation

More Companies Reporting

We believe that the new California law will improve both the quantity and quality of climate change information provided by private and public companies in the U.S. and abroad. CalPERS and CalSTRS, the two largest investors in the U.S. with more than $500 billion under management, must obtain climate change risk information in order to report on it. The new law provides CalPERS and CalSTRS with additional leverage to force adoption of good reporting and (more importantly) frank assessment of climate change-related risk.[21] In addition, it ensures that both funds will continue to obtain such information in the future (at least through 2035).

More Information Available to the Public

Because the new law requires public disclosure, the valuable climate risk information CalPERS and CalSTRS are expected to report will be available to smaller investors (and aid in their decision-making), creating a more transparent process for climate-related financial information. As Michael Bloomberg, the former New York City mayor and chairman of the TCFD, has explained, increasing transparency makes markets more efficient and economies more stable and resilient.[22]

Providing a Road Map for Other Jurisdictions

The new California law may be used to set an appropriate standard for investment fund climate risk assessment. Variations of the California law may be adopted by other states. The new law also should help strengthen the “America’s Pledge” initiative launched by California Gov. Jerry Brown and former New York City Mayor Michael Bloomberg and the bipartisan “We Are Still In” coalition of more than 3,500 CEOs, mayors, governors, college presidents and other leaders (representing a constituency of more than half of all Americans and over $6 trillion) committed to climate action. Both initiatives aim to combine the power of public and private actors at the state and municipal levels in meeting America’s pledge under the Paris agreement.[23]

Possible SEC Initiatives

U.S. public companies must disclose important financial information in their public filings with the U.S. Securities and Exchange Commission, and investment companies must disclose their financial condition and investment policies to their investors.[24] In 2010, the SEC issued its “Commission Guidance Regarding Disclosure Related to Climate Change” outlining the SEC’s views on the existing disclosure requirements under federal securities laws as they apply to climate change.[25] However, in recent years, the SEC has stopped issuing public comment letters regarding such disclosures.[26] State law requirements for large investors to disclose climate-related financial information may lead to a shift in SEC rules or interpretations to mandate climate-related financial disclosure for all companies with publicly registered securities.

More Shareholder Proposals

The new California legislation may lead to more shareholder proposals seeking disclosure of climate change-related information and the adoption thereof. While such shareholder proposals historically have failed to garner majority votes, some such shareholder proposals have succeeded (e.g., Occidental Petroleum, ExxonMobil Corp. and PPL Corporation) or procured large minority votes (e.g., AES, FirstEnergy, Southern, Devon Energy and Dominion Energy Corp., which missed majority approval but reached 40 percent or higher) in 2017. In 2018, additional shareholder proposals have succeeded (e.g., Anadarko Petroleum Corp., with 53 percent; Kinder Morgan Inc. with almost 60 percent), and some companies agreed to make the changes requested in the shareholder proposals without going to a vote (e.g., Dominion Energy Corp., DTE Energy and Southwestern Energy)).[27]

Acknowledgment is given to Nicole Cvercko, a law student at CKR Law, for her efforts in the preparation of this article.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Senate Bill 964, “Public Employees’ Retirement Fund and Teachers’ Retirement Fund: investments: climate-related financial risk”, titled “An act to add and repeal Section 7510.5 of the Government Code, relating to public retirement systems”, Chaptered on Sept. 23, 2018, by Secretary of State. Chapter 731, statutes of 2018, at http://leginfo.legislature.ca.gov/faces/billHistoryClient.xhtml?bill_id=201720180SB964.

[2] Such types of lawsuits are already in progress in the U.S. against companies such as fossil fuel companies. See, e.g., David Hasemyer, “Fossil Fuels on Trial: Where the Major Climate Change Lawsuits Stand Today” (Nov. 6, 2018), at https://insideclimatenews.org/news/04042018/climate-change-fossil-fuel-company-lawsuits-timeline-exxon-children-california-cities-attorney-general.

[3] See footnote 1.

[4] See “Assembly Bill 32 Overview” at https://www.arb.ca.gov/cc/ab32/ab32.htm.

[5] See “AB 32 Scoping Plan” at https://www.arb.ca.gov/cc/scopingplan/scopingplan.htm.

[6] Senate Bill 100, entitled “The 100 Percent Clean Energy Act of 2018” at http://leginfo.legislature.ca.gov/faces/billTextClient.xhtml?bill_id=201720180SB100.

[7] See “California and Quebec announce first joint cap-and-trade auction” (Sept. 18, 2014) at https://ww2.arb.ca.gov/news/california-and-quebec-announce-first-joint-cap-and-trade-auction.

[8] The federal government released the National Climate Assessment, produced by 13 federal departments and agencies and overseen by the U.S. Global Change Research Program, on Nov. 23, 2018. It is available at https://nca2018.globalchange.gov.

[9] See “Statement by President Trump on the Paris Climate Accord” (June 1, 2017), at https://www.whitehouse.gov/briefings-statements/statement-president-trump-paris-climate-accord/.

[10] See “Trump on own administration’s climate report: ‘I don’t believe it’” (Nov. 26, 2018), at https://www.theguardian.com/us-news/2018/nov/26/trump-national-climate-assessment-dont-believe.

[11] Lisa Marie Segarra, “California’s Economy is Now Bigger than All of the U.K.” Fortune (May 5, 2018) at http://fortune.com/2018/05/05/california-fifth-biggest-economy-passes-united-kingdom/.

[12] See http://climateinitiativesplatform.org/index.php/Investor_Network_on_Climate_Risk_(INCR) (last updated Sept. 10, 2018).

[13] “The Importance of Corporate Engagement on Climate Change”, CalPERS and CalSTRS at https://www.calpers.ca.gov/docs/corporate-engagement-climate-change.pdf.

[14] Susanna Rust, “UK government lays out trustee duties on climate change, ESG” Investment & Pensions Europe (June 18, 2018) at https://www.ipe.com/countries/uk/uk-government-lays-out-trustee-duties-on-climate-change-esg/10025258.article.

[15] Susanna Rust, “ECON rapporteur sets out stall on investor ESG duties proposal” Investment & Pensions Europe (Aug. 7, 2018) at https://www.ipe.com/news/esg/econ-rapporteur-sets-out-stall-on-investor-esg-duties-proposal/10026090.article.

[16] “FSB Guidance on Climate-Related Financial Reporting: Game-Changer for Voluntary Sustainability Reporting?” American Bar Association, International Environmental Law Committee Newsletter (Volume 4(1), November 2017), Robert Blanchard, Kristie Blase, Karen Bridges, Naicheng Deng, Virginia Harper Ho, Linda Lowson, Jeanne Solomon and Paul Wehrmann (jointly authored by the members of the ABA 2016 Working Group on Climate Change and Sustainability Financial Reporting).

[17] “FSB Guidance …” (ABA publication) at 8.

[18] “FSB Guidance …” (ABA publication) at 5.

[19] “Final Report: Recommendations of the Task Force on Climate-Related Financial Disclosures” Task Force on Climate-Related Financial Disclosures iv-v (June 2017) at https://www.fsb-tcfd.org/wp-content/uploads/2017/06/FINAL-TCFD-Report-062817.pdf; see also https://www.fsb-tcfd.org/publications/final-recommendations-report/.

[20] See https://www.fsb-tcfd.org/tcfd-supporters/.

[21] “The Importance of Corporate Engagement on Climate Change” CalPERS and CalSTRS, at https://www.calpers.ca.gov/docs/corporate-engagement-climate-change.pdf.

[22] Task Force on Climate-Related Financial Disclosures 2017, at https://www.fsb-tcfd.org/.

[23] Bloomberg Philanthropies, “Michael R. Bloomberg provides funding for UN Climate Change Secretariat to ensure U.S. will honor Paris commitment” (April 22, 2018) at https://www.bloomberg.org/press/releases/bloomberg-funding-un-climate-change-secretariat-ensure-us-will-honor-paris-commitment/.

[24] U.S. Securities and Exchange Commission, “The Laws That Govern the Securities Industry” https://www.sec.gov/answers/about-lawsshtml.html#invcoact1940 (last modified Oct. 1, 2013).

[25] U.S. Securities and Exchange Commission, “Commission Guidance Regarding Disclosure Related to Climate Change” Release Nos. 33-9106, 34-61469, FR-82 (Feb. 8, 2010) at https://www.sec.gov/rules/interp/2010/33-9106fr.pdf.

[26] Alexandra Semenova, “SEC Stops Prodding Companies to Detail Climate Change Impacts” Corporate on Bloomberg Law (July 16, 2018) at https://www.bna.com/sec-stops-prodding-n73014477478/.

[27] See, e.g., Mara Lemos Stein, “More Shareholder Proposals Spotlight Climate Change” The Wall Street Journal (Feb. 8, 2018) at https://blogs.wsj.com/riskandcompliance/2018/02/08/more-shareholder-proposals-spotlight-climate-change/?ns=prod/accounts-wsj; and Andrew Logan, “The Hidden Story of Climate Proposals in the 2018 Proxy Season” (May 29, 2018) at https://www.ceres.org/news-center/blog/hidden-story-climate-proposals-2018-proxy-season.

This article originally appeared on: https://www.law360.com/securities/articles/1108090/a-closer-look-at-new-calif-pension-fund-climate-law?nl_pk=4b35ec8f-7564-47d7-b06a-824afbfa9f1b&utm_source=newsletter&utm_medium=email&utm_campaign=securities&read_more=1