Surfing the Sustainability Wave
CalSTRS Sustainable Investment Director Kirsty Jenkinson talks about taking a hard line on companies failing to disclose emissions properly and treating proxy voting as seriously as portfolio investments.
It’s been just over five years since Kirsty Jenkinson became Investment Director for the Sustainable Investment and Stewardship Strategies (SISS) team at the California State Teachers’ Retirement System (CalSTRS) – the largest educator-only public pension fund globally.
In her role, she is responsible for managing over US$10 billion in sustainability-focused investment strategies across public and private assets, and oversees CalSTRS’ stewardship activities – including corporate engagement, proxy voting, and outreach with the fund’s stakeholders.
“My mandate covers three areas: one is a dedicated allocation in the portfolio to sustainability-focused investments across public and private markets – up to 5% of the CalSTRS total fund,” she said. “I also oversee the teams that lead our stewardship, proxy voting and engagement activities – how we use CalSTRS’ influence to create sustainable business practices. The third area relates to strategic relationships with the media, legislature, stakeholders – and more broadly with those who are interested in sustainability at CalSTRS.”
Speaking to ESG Investor, Jenkinson covered the most recent updates at CalSTRS regarding sustainability and stewardship, as well as main objectives for the coming period.
Low-carbon solutions
Last month, CalSTRS released its sustainability report for the year 2022-23, prepared with reference to the Global Reporting Initiative standards.
“The report takes a holistic view over how we think about sustainability across both the pensions and benefit side of the organisation, as well as the investment side,” Jenkinson explained. “This is the overall framework for how we think about sustainability at large. There’s also been additional releases from our investment team around semi-annual performance, and my team provides regular updates on our net zero strategy alignment.”
CalSTRS has made a pledge to move its entire portfolio to net zero by 2050 or sooner, in line with climate science and the Paris Agreement. Every May, the firm updates the board on progress made in that respect across three pillars: emissions measurement, management and reduction; investment in climate solutions; and using influence to accelerate the net zero transition.
“We’ve been really trying to increase our investments in climate solutions in several ways, one of which is to think about the best ways in which each asset class can invest in climate solutions that meet their risk and return goals across the private markets,” said Jenkinson. “In addition, we have a large number of green buildings in our real estate portfolio, and own the fourth largest solar developer and operator in the US in our infrastructure portfolio.”
Though CalSTRS already invests in various low-carbon solutions across its portfolio, the fund felt the need to create a dedicated platform to be able to ramp up sustainable investment across asset classes – largely as many of the most interesting climate-related opportunities didn’t fit neatly into traditional asset class buckets, Jenkinson explained.
“Two years ago, our board approved the creation of a portfolio that sits within my team, allowing us to invest from infrastructure-style assets all the way up to venture capital, with a particular focus on climate solutions,” she added. “We’re also deploying into what we call the ‘missing middle’ – which isn’t quite infrastructure, growth equity or private equity, and where we see a lot of businesses needing flexible capital – sometimes it’s company, sometimes it’s a platform investment.”
Through that private portfolio, CalSTRS has already committed US$2 billion over the past couple of years, and is now aiming to grow those investments to 1% of the CalSTRS total fund.
“That’s quite a significant allocation, which we’re likely to increase as well, so we have a pretty aggressive funding schedule,” Jenkinson explained. “We have to beat all of our underlying benchmarks – this isn’t concessionary in any form. It’s just very highly opportunistic, and a really exciting sort of timeline.”
Referring to the landmark climate disclosure laws passed in California last year – a first in the US at the time – the investment director noted that although they contributed to creating an overall positive environment for sustainable investing, CalSTRS’ actions in the field weren’t directly determined by them.
“It is of course helpful to be in a state where many of our board members and leadership recognise the importance of sustainability to investment decision-making, but we never want to take binary policy risk on any investments that we make – so none of our private investments are driven by a policy requirement,” she said. “There are obviously huge tailwinds that we’re now all benefiting from, including the likes of the Inflation Reduction Act, but our investments aren’t purely policy-dependent.
“Clearly having that environment in California allows you to be at the front end of where some of the most exciting opportunities are, but it doesn’t mean that others don’t exist elsewhere.”
Ramping up expectations
CalSTRS recently updated its corporate governance principles and revised its stewardship priorities, ahead of this year’s proxy season.
“We vote our proxies ourselves in line with our corporate governance guidelines, which we update on a regular basis,” she said. “Our dedicated team tells me today there’s already 500 proxies in the queue that they’re voting – so it’s a very significant effort for us.”
Over the past two years, the pension fund has focused on escalating votes around disclosure from companies on Scope 1 and 2 – and would now like to include Scope 3 emissions too.
“We took a pretty hard line last year and have been increasingly voting against directors at companies where we felt there wasn’t sufficient information on climate-related risks,” said Jenkinson. “We’ll continue to do that this year, because we feel directors are our representatives on the board. They’re the ones overseeing the strategy, so we expect them to be able to provide real clarity to us as investors.”
Further outlining its stewardship priorities for this year back in February, CalSTRS said it intended to use its influence as a global investor to promote long-term sustainable business practices and public policies, and engage publicly traded companies to support long-term value creation and mitigate risk.
It set three main criteria to achieve measurable outcomes: corporate and market accountability; net zero transition; and workforce and communities. A key aspect under the net zero transition category for CalSTRS, is methane mitigation.
“Methane emissions are another big focus area for us, because we think there’s a win there for everybody: it’s a cost-effective way to rapidly reduce emissions, but we need companies to take more action,” Jenkinson explained. “We think this is critical to getting emissions down, and it’s one critical area of proxy voting alignment with our net zero pledge.”
In line with this, CalSTRS will escalate some of its votes to encourage companies to support the Oil and Gas Methane Protocol 2.0 and other initiatives around methane flaring.
“For a long time now, we’ve also been focused on board diversity, and will continue to vote pretty aggressively on companies that we don’t believe meet the appropriate thresholds,” Jenkinson continued. “That’s a global standard we have, and we’re pretty firm in our expectations.”
CalSTRS will also look to get more details on workforce composition. At present, companies are not required to provide any information on this to investors, which makes it difficult for them to get a full picture, the investment director explained.
“It’s very hard for us to understand more about workers if we don’t have some basic disclosure on them,” she said. “This is another area we’ll be drilling into through our proxy votes this year, supported by broader engagement activities that goes on both during proxy season and all-year-round.”
Aggressive deployment
Next month, CalSTRS will present an update on annual net zero strategy progress to its board. This will largely include information around goals set to reduce emissions in public market portfolios through allocations to low-carbon indices made by the fund’s public equity and fixed income teams.
Jenkinson said there would also be follow-ups on how CalSTRS is engaging external asset managers in the private markets, particularly around inflation-sensitive real estate – i.e. infrastructure – and private equity, to understand how they’re helping the fund get a better understanding of carbon exposure and emissions in its portfolio, as well as how they’re seeking investment opportunities.
“On the portfolio that I look after, there will be aggressive deployment into an interesting mix of climate-related solutions,” she added. “We want to demonstrate that we can invest capital that is both innovative and can be scaled into these solutions to make good returns for our beneficiaries. Once we come out of proxy season, we will also know more about the focus of our future engagement activities into the rest of the year and beyond.”
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