Stewardship Central to CalSTRS’ Emissions Mission
US pension fund’s selection of ESG-tilted Nordea fund to manage US$450 million of equity investments highlights integration and engagement priorities.
The essential role of engagement in the California State Teachers’ Retirement System‘s (CalSTRS) approach to reducing greenhouse gas (GHG) emissions in its investment portfolio is increasingly reflected in its manager choices.
Earlier this month, CalSTRS, the world’s largest educator-only pension fund, selected Nordea Asset Management’s (NAM) Global STARS Equity strategy to manage US$450 million in global equity investments.
Launched in 2016, the Article 8 Sustainable Finance Disclosure Regulation fund’s AUM stood at US$3.1 billion as of August 2024. The solution has a strong ESG tilt, with the aim of investing in companies that nurture well-managed ESG profiles and/or contribute to solutions relating to global ESG challenges.
“The sustainability-focused approach of the Global STARS Equity Strategy aligns closely with the mandate of CalSTRS’ Sustainable Investment and Stewardship Strategies Portfolio (SISS),” Kirsty Jenkinson, investment director of CalSTRS, told ESG Investor.
“The public assets portion of the SISS portfolio focuses on improving the diversification of the total CalSTRS investment portfolio and enhancing its risk-adjusted total return, while also providing the ancillary benefit of improving the overall market through active engagement and integration of sustainability factors.
“The Global STARS Equity Strategy stood out for its explicit and transparent integration of sustainability considerations as a key component and value driver in the investment process.”
Emissions-led engagement
According to Jenkinson, NAM has been an important partner in CalSTRS efforts to address the climate risks in its portfolios, including engagement with firms in heavy-emitting sectors.
CalSTRS has called on companies to join the Oil and Gas Methane Partnership 2.0 (OGMP 2.0) – a UN-led framework committed to the measurement, reporting and mitigation of methane emissions. OGMP 2.0 member companies commit to set methane emissions targets in line with a 45% reduction by 2025 and 60-75% by 2030.
In July 2023, CalSTRS partnered with NAM on this ongoing engagement initiative, as well as 17 asset owners, representing more than €3.7 trillion (US$4.1 trillion) in AUM. Fourteen of 65 target companies including Chevron and ExxonMobil. have adopted the framework since the start of the engagement initiative.
“Nordea has been a valuable partner in our stewardship efforts, focused on meeting our pledge to achieve a net zero portfolio by 2050 or sooner,” said Jenkinson. “The transition toward net zero, and specifically methane mitigation, is a stewardship priority for CalSTRS [and] our partnership with NAM to encourage investee companies to join the OGMP 2.0 Partnership is just one example of why we look forward to expanding our relationship with their team.”
The pension fund, which has US$346.5 billion in AUM as of August 2024, focused on climate risk disclosure during the 2024 proxy season, voting against the boards of directors at a record 2,258 companies. This is up from a then-record 2,035 companies in 2023.
CalSTRS has set out a number of expectations for portfolio companies to effectively manage climate-related risks and opportunities, including: publishing a report on sustainability-related disclosures that align with the International Sustainability Standards Board; disclosing Scope 1 and Scope 2 GHG emissions; and for the highest global emitting companies – including those on the Climate Action 100+ focus list – to set appropriate targets to reduce GHG emissions and reach net zero by 2050.
These rising expectations of portfolio companies from CalSTRS and other major asset owners contrasts with the approach of some major asset management firms, increasing the importance of engagement criteria in the manager selection process.
A report released last week by Morningstar Sustainalytics found that during the 2024 proxy season, support for environmental and social shareholder resolutions had fallen while only backing for governance-focused proposals rose.
The number of environmental resolutions remained the same at 100, but the proportion filed by those deemed to be ‘anti-ESG’ tripled. The number of “well-backed” key resolutions suffered a five-year low, which the report attributed to a contraction in large asset manager votes.
BlackRock and State Street, who Sustainalytics’ report noted as cutting their support for environmental and social proposals, have announced stewardship programmes for clients demanding a more comprehensive approach to managing climate-related risks.
In a recent article for ESG Investor, Sierra Club Senior Campaign Strategist Jessye Waxman suggested decarbonisation or sustainability stewardship teams should lead on engagements with high-emitting and high-impact companies that are pivotal to the net zero transition. She also called on large asset managers to work toward more fully integrating climate risk mitigation measures into their standard investment management practices.
Bottom-up approach
A total 68.9% of the Global STARS Equity Strategy is in the US, followed by Switzerland (4.7%), Japan (4.2%), and the UK (3.8%).
The fund is managed by Johan Swahn, who leads NAM’s 30-strong fundamental equities team, which is primarily focused on sustainability-themed strategies. The Global Stars Equity Fund investment team works alongside Nordea’s responsible investment team, which provides company-specific and general research on ESG risks and opportunities.
The solution utilises a bottom-up approach, investing in 40 to 80 companies worldwide. ESG STARS equity funds commit to a minimum of 50% in sustainable investments, while ESG STARS bond funds commit to a minimum of 40%.
NAM also uses a proprietary data platform, which aggregates information from multiple sources, supporting analysts in carrying out in-depth research, includes the alignment of company revenues to the EU Taxonomy and to the UN’s Sustainable Development Goals. NAM was also an early signatory to the Net Zero Asset Managers Initiative.
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