Institutional investors are under increasing pressure to divest their holdings in fossil fuel-related companies. A network of concerned activists are seeking to focus attention on what shareholders should do to address climate change. Their advice is simple: big investors such as Calpers should “exit” the global energy sector and sell our shares in fossil fuel companies.
Such lobbying is well intentioned but flawed. If investors sell, we will simply pass the buck to those who buy. A more constructive and proven approach is for us to engage with the companies we own. Here is why.
First and foremost, we have a fiduciary duty to be a principled and effective investor to meet our financial commitments to our members and employer partners. This gives us an avenue to address issues such as climate change, since we recognise that as well as global environmental risks, it also presents financial risks and opportunities for a long-term investor like Calpers — risks that cut across all sectors and impact on the capital we deploy on behalf of our members and their families.
As a long-term investor, a seat at the table is the most effective way to shape how our investment capital gets put to use in a sustainable manner.
We firmly believe that strong governance, along with effective management of environmental and human capital factors, increases the likelihood that companies will perform over the long-term and manage risk effectively.
Engagement is the first call of action and is the most effective form of communicating concerns with the companies in which we invest. That is why, when it comes to climate change and its risks, Calpers’ view is that the path to change lies in engaging energy companies, instead of divesting them. If we sell our shares then we lose our ability as shareowners to influence companies to act responsibly.
Over the past two decades, we have sought to address governance issues and climate change through advocacy, engagement with companies and investing in climate-change solutions. Our initiatives produce real, substantive results, and are more beneficial to the cause than simply selling off shares to the next buyer — one who may or may not share the same values regarding climate change. For example, after investor pressure and engagement, BP and Shell recently confirmed their support for shareholder resolutions requesting that they analyse whether their business models were compatible with international pledges to limit global warming.
These efforts are ultimately intended to have an impact on climate change, by addressing the emissions that contribute to global warming and the resulting extreme weather events, rising sea levels and the melting of arctic glaciers. And creating the proper economic and market conditions is the precursor to tangible environmental change.
Calpers’ Investment Beliefs — a framework for our decision making — state that to ensure long-term, sustainable value creation, the companies we invest in need to manage their financial, human and physical capital effectively. We see climate change as only an investment issue. As an investor, we have a critical interest in ensuring that environmental issues are addressed so we can meet our target rate of return on behalf of our members.
There is still much work to be done to address our shared concern over climate change issues. The transition to low- and no-carbon energy sources will be difficult, but necessary. Walking away by simply selling off assets through divestment will not help. Calpers will continue constructively to engage our portfolio companies and partner with other like-minded, long-term investors to advocate for change through our voice and our seat at the table as shareholders.
The writer is chief executive officer for the California Public Employees’ Retirement System
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