Interview: CalPERS’ Anne Simpson on the climate change power of investment managers

ABSTRACT

In this interview, Anne Simpson, director of global governance at CalPERS, California’s public employees’ pension fund, explains her approach to encouraging fossil fuel companies to clean up their acts.

KEYWORDS:

• Renewables
• investor activism
• carbon emissions
• climate change
• green economy

How does one make the heads of the worst carbon-emitting companies listen?

Anne Simpson, director of global governance at CalPERS, California’s public employees’ pension fund, has learned a few things about encouraging fossil fuel companies to clean up their act. By combining forces with other like-minded investors to form Climate Action 100+ – which together oversee about $52 trillion in investments – she has found that major stockholders can help to influence the decisions made by companies, when it comes to dealing with climate change.

“Finance plus science is a pretty powerful combination,” she says in this interview with the Bulletin’s Dan Drollette Jr.

Some critics worry that oil companies have used CalPERS and Climate Action 100+ as a fig leaf, so they can project the appearance of taking climate change seriously, while giving the merest outlines of climate change ambitions 30 years in the future. Here, she responds to this critique and tells of a newly launched effort to combat such tactics.

(Editor’s note: This interview has been condensed and edited for brevity and clarity.)

Dan Drollette Jr (DD):

Would you bring our readers up to speed on who you are, and what you do at CalPERS? For that matter, what is CalPERS?

Anne Simpson (AS):

CalPERS is a shorthand way of saying California Public Employee’s Retirement System. The important thing about CalPERS is that we are both a health system and a pension system for 2 million public workers in California – emergency responders, firefighters, police, teachers, judges, but also janitors.

And I think the notable feature about CalPERS is just how very big CalPERS is.

At this point – early 2021 – our funds for the main trust as we call it, is over $400 billion, which makes CalPERS one of the top 10 largest pools of money in the world. And we say asset owner money here, not money which is handed over to investment managers. But money where we have a board with a duty, we call it a fiduciary duty. And they have to oversee the investments of that money, so that when we’re paying pensions now, we’re helping our members have retirement security.

DD:

Where does the investment part come in? And how does that relate to dealing with climate change?

AS:

Investment is key to delivering those retirement benefits to our members; for every dollar we pay out, about 55 cents of it comes from investment returns. So it’s the single largest source of money into the benefits that we pay. And that’s why CalPERS looks at its investments with this very long-term horizon, really thinking very hard about risk to our investments.

To give a sense of the scale of what CalPERS is dealing with, every year we pay out something like $25 billion in benefits.

DD:

What exactly is the role of CalPERS, when it comes to the Climate Action 100+, which I believe your organization is the primary driving force behind?

AS:

Yes, that’s right. Climate Action 100+ comes out of the work that we did at CalPERS a while ago. To give you some background, we have a $400 billion portfolio, and we wanted to find out where are the greenhouse gas emissions coming from? Because after all, we own those emissions.

So, what we did first was to look at all of the approximately 10,000 companies that are contained in our investment portfolio, and then calculate the emissions coming from each of those companies, all around the world.

And out of those 10,000 companies, about 100 were responsible for the fast bulk of greenhouse gases. Which was an incredible insight into where we needed to focus our attention (see Figure 1).

Figure 1. Anne Simpson. Image courtesy of CalPERS

Consequently, what we did next at CalPERS was reach out to other investors, including pension funds like ours but also investment managers – the folks who take the money from pension funds and invest it on their behalf – and find out if they saw the same picture. Which they did.

We then had an opportunity to come together to tackle the issue.

DD:

What happened next?

AS:

We had a series of meetings, hosted at the United Nations. And we decided that we should all become signatories to a new initiative, which would ask these companies to do three things, regardless of whether they were in Asia, Europe, or in North America:

One, that these companies make sure that their board of directors takes responsibility for climate change. In other words, this is not something for their public relations department to handle, or just for the engineers. It’s got to be at the board level.

And that matters, because we as investors in these companies have voting rights. We vote for the appointment of these directors – or against these directors coming back in, if we don’t think they’re doing the job for long-term investors like us. That’s number one.

Number two, we identified the companies that we called the “systemically important carbon emitters” – in other words, the ones that are going to cause a system-wide impact, if they don’t get their emissions down. And we requested that these companies set targets to reduce their emissions, consistent with holding global warming to 1.5 degrees Celsius. That’s very ambitious, but I’m glad to say that out of the list of companies, 50 of them have made that commitment to us all.

The third thing we’re asking for is disclosure of their carbon emissions. And there is a framework for disclosure that came out of the work of the Financial Stability Board’s working group on this issue, known as the Taskforce on Climate-related Financial Disclosure (CalPERS 2020). They have a nice framework to have companies report on what’s going on with their climate change ambitions.

So, we have those three requests: the board, the targets, and the carbon emissions’ disclosure.

We started with maybe only about two dozen fellow investors during the planning stages; we now have over 500 investors who’ve joined Climate Action 100+. And in total, the signatories to that initiative – in other words, those who support it – are responsible for about $52 trillion of investments in total.

So, that’s how we’re managing to drive change, because we’re working in partnership with others. And it shows the important role of financial markets in making sure that climate change is addressed. It’s not all doom and gloom.

And we’re not just talking to these companies about bringing emissions down; we are also looking at the opportunities that the transition to a low-carbon economy can bring. We’re finding that there are a lots of good investment opportunities for us as well.

DD:

That’s my next question. Beyond divesting from fossil fuels, are you encouraging people to invest in renewables? To invest in offshore wind farms? Or solar, or better battery storage?

AS:

Right. So, here’s the thing. CalPERS is not going to divest. We’re not going to sell our shares in companies that need to make the transition. And here’s why: Right now, the global economy is dependent on fossil fuel sources of energy for about 80 percent of global economic activity. So, what we’ve got to do between now and at the very latest 2050 is get an energy transition away from fossil fuels, and onto low-carbon sources.

And that will be a mix of renewables and new technologies – and also, natural and other forms of carbon sequestration. We’re going to need every arrow in the quiver for hitting that goal. But if we sell our shares in a company and walk away, then we lose the opportunity to drive change and get this company moving.

And you have to look at this in a holistic way. Because even if you’re investing in, say, wind power, those windmills are going to require steel. You’re also going to need cement, for when you’re installing those windmills. And of course, they’re going to have to go from the place of manufacture, to be installed where they’re needed – offshore, or onshore. So there’s going to be transport involved.

So, when we’re looking at the emissions, even if CalPERS was able to take, say, $400 billion and put it all into wind power, we’re still investing in cement – and in shipping and transport. We’re still investing in steel-making. So, our strategy on climate change is to make sure that we’re reducing emissions right across our whole portfolio, in cement, steel, transportation, you name it – right across the value chain for these companies, rather than pull out from one individual segment.

DD:

But I thought I read something in the Los Angeles Times that said that California state law requested that CalPERS entirely divest from coal (Rosen 2019). Is that right?

AS:

Yes that’s right. That was a few years ago, from the California Legislature.

However, the authority of CalPERS’ board comes from the California constitution. And that sets out what is called the board’s fiduciary duties – a long and fancy way of saying: “You have to only invest in the interests of your members. You have to keep costs down. You have to have a duty of care, so that you’re being prudent in making decisions. And you also have to have a duty of what’s called loyalty.”

In other words, our board has to act solely on behalf of our members. So, when something like that legislation comes forwards, you will see that when you read it, it says: “Subject to fiduciary duties.” In other words, when the legislature is crafting laws, it acknowledges the higher authority of the California Constitution.

But when the legislation comes forward, we review what’s being asked for and try to accommodate, within that fiduciary framework. In other words, we try to see if it makes financial sense, investment sense.

So, we at that point had a little over 20 holdings in companies that derived more than 30 percent of their revenues from coal, typically used for the generation of electricity. And in our portfolio there are a dwindling number of companies in that area of business.

We then looked at the financial benefits of holding those companies – particularly as there is a declining market for coal. So for example, one of the companies in Climate Action 100+ is Duke Energy in North Carolina – the biggest utility, and a big user of coal. They’ve agreed, because of investors like CalPERS and Climate Action 100+, to move to low carbon, to get to net zero emissions.

And of course, that means a big customer for coal is now busy closing shop.

Anyway, it’s against that backdrop – looking at all the dynamics, and the holdings – we decided to sell a number of those holdings. And we held on to some others. Because the companies were in a discussion with us, about their own plans to make the transition. So, while the role of the legislature is extremely important to CalPERS, ultimately, we have to do what’s right for our members, in terms of the pension fund’s investments. So, we take that input, and we filter it through our investment processes, as described.

DD:

It’s interesting that you focused on 80 companies as being accountable for most of the emissions of greenhouse gasses, because that’s broadly in line with what I learned while interviewing a researcher who was studying this (Drollette 2016). It sounds like you came to the same conclusion – a relatively small group of companies could be targeted for getting emissions down. Is that right?

AS:

Yes, that’s exactly right. And that’s the logic behind Climate Action 100+. But those 100 companies – I can explain what the plus stands for in a minute – consist of the 100 companies that we selected to focus on, who are responsible for about 85 percent of the emissions in our portfolio.

I think that measure lines up very closely with the research you were just referencing. But the other measure for thinking about the scale of what we’re trying to tackle is to think of these 100 companies as a country. You’d find that those companies make up the third-largest source of emissions on the planet.

The biggest is China. The second is the United States. And that small group of 100 companies is the third source of emissions. So, when we talk about the power of financial markets to drive change, it can be done in a very focused way – it’s those 100 companies. Because if this group of companies can get their emissions down, that will have a measurable impact on global warming, in line with hitting that 1.5 degrees Celsius target.

DD:

That was one of the things I wanted to clarify: The “100+” part of the title “Climate Action 100+” refers to the companies being targeted? In other words, it does NOT refer to the number of pension plans that are on-board with this effort to fight climate change?

AS:

Right, that’s the target. These 100 companies produce, according to our estimates, 85 percent of the emissions in our investment portfolios. The plus part came about because there were investors joining the initiative who said, “Okay, we have bought a very big emitter, that doesn’t rise to that list on a global level, but is so important regionally to the transition to a green economy that we want to add them to the list.”

So we crowdsourced the plus list, particularly to capture more of what matters in emerging markets. And there are 60 companies on that list, which have been nominated by investors, because of their significance in other markets. So that’s why it’s called 100+. The 100 are, according to our best calculations, the 100 companies responsible for the vast bulk of emissions globally.

The plus part of that list have been brought forward through the different regions that we’re working in, like Asia, to make sure that we’re capturing what matters locally, as well as at a global level.

DD:

At the risk of plunging into the deep end of the pool here, how do the mechanics of all this work? Do you essentially go up to the company that used to call itself British Petroleum (now BP) and say: “Unless you start cleaning up your carbon emissions act, we’re going to pull all our money?” What do you do, as someone who holds a large chunk of stock at a fossil fuel company?

AS:

How do we get this done?

DD:

Yeah.

AS:

Well, the important things to remember are that we have over 500 investors that support Climate Action 100+, responsible for $52 trillion dollars. Which is a lot of money. And the key thing here is that we then nominate what we call a “lead team” of investors for each of the companies that we target. And we have certain criteria for who on the investors’ side gets teamed up with what company, to lead this dialogue about changing strategies, because of climate change.

They then set out those three requests I talked about earlier – making sure that the company’s board accepts responsibility, sets targets, and that the company discloses its carbon emissions. The lead team makes it clear that when the board takes responsibility, we’re in a position to use our votes to hold them accountable.

It also means that we’re looking for the company to make sure its board’s compensation is in line.

DD:

Can you give me a real-life example?

AS:

Sure. For example, you mentioned BP. In response to the engagement that we’ve had with them, BP has not only agreed to that net zero target, but they’ve also put their top 14,000 executives into a new compensation plan, so that these executives are now being rewarded for hitting these climate change targets. They’re not just being rewarded on the basis of traditional measures, such as expanding the company’s reserves of fossil fuels, or purely for the financial performance of the company. Instead, the level of carbon emissions are now embedded into the targets.

And also, we look to see that the investors in that board have the capacity and commitment to stay the course. Because these sorts of changes are not going to happen overnight, so we’re looking for investors who are committed to the long term. Who have got big investments at stake, and also have got a history of dialogue with that company. For example at CalPERS, we typically will have direct discussions with about 2,000 companies a year, where we work out how to cast our votes in the annual meeting in the spring.

And what we do is use the dialogue, and then back it up by votes. And that is our theory of change.

It’s effectively taking Teddy Roosevelt’s advice: “You speak softly, but you carry a big stick.”

DD:

Money talks?

AS:

Well, you’ll see that where companies are making change, it’s because they acknowledge that you’ve got this huge community of investors calling for that change. And these are the investors who hire and fire the board. Approve compensation. And have these voting rights, because they hold shares in the company.

DD:

What if those things still don’t work?

AS:

For those companies which aren’t willing to make the commitment to make the change, then we have to start not just to request, but to require that companies make the change.

An example of that is Exxon. A couple of years ago shareholders put something on the ballot at the annual meeting, for all the investors to vote on, that said: “We want Exxon to produce a climate change report, setting out all the emissions that Exxon is responsible for.”

It passed with a majority of the votes, which was a major accomplishment. But Exxon then decided just to count only some of the emissions, related to just what Exxon emits when it’s actually doing the drilling, mining, and refining of its oil and gas, and no more – what are known as Scope One and Scope Two emissions. But we wanted them to take responsibility for emission right through the entire lifecycle of the use of that energy, all the way through to the consumer end, which is about 80 percent of all the emissions in total.

And Exxon replied: “No, we can’t do that. It’s too difficult. It’s not our responsibility.”

So, we came back again this year, and we – CalPERS and some of our fellow investors, at Climate Action 100+ – filed another proposal. This time we were really specific, and said: “Hey, we actually need you to report on Scope Three emissions – so that it includes what happens when your customers, be they in business, or the wider public, are using Exxon products. Because that’s where most of the emissions are generated.”

That was filed, and, in the last couple of weeks Exxon said it will produce those numbers. This is very significant, because it means that Exxon is taking the responsibility for the full cycle of emissions that it generates in its business.

And we will also be looking at the board of Exxon, to see whether that board is actually exercising the proper level of oversight on climate change. And last year, not only CalPERS, but some other big fund managers, like BlackRock, voted against board members being reappointed at Exxon, because they’ve lost confidence in those directors’ ability to drive change at Exxon.

If you look at all the programs we’re making with companies in Europe, with Shell, BP, Total, ENI, Repsol and others, those companies have agreed to what we’re asking for. They’re putting the plans in place.

Exxon sort of barely got off the starting blocks, so that’s where the votes had to come in. That’s where our votes, the votes on shareholder proposals that come onto the ballots, through the investor community, come into play. And also the voting on the reappointment of board members becomes so very important. It concentrates minds wonderfully.

Directors serve at the pleasure of shareholders, and if shareholders are starting to demand that board directors deliver strategies and meet carbon emissions targets, and we can track their progress with all the disclosures, then that’s good. We’ll support them in the transition to clean energy, and all is well.

But we know there’s a lot still to do at many of these companies.

And at the end of the day, whether it’s a capital market in the United States, Asia, or Europe, these directors owe their position to their shareholders, so they need to be held accountable. That’s the theory of change at work here.

DD:

It’s fascinating to hear how “speak softly and carry a big stick” is employed – the big stick being the large sums of money that are involved in the form of shares.

But there is one thing I do have to ask you, which came from an article in the Financial Times in August about Climate Action 100+ (Mooney 2020). The article was generally fairly positive, but they did point out that there are some accusations that some companies use their interactions with the group to give just the mere appearance of taking climate change seriously. That maybe they don’t have any real plans for doing anything in the next decade or two, but at least they can look good on paper, for 30 years down the line.

How do you respond to that critique?

AS:

The Financial Times is absolutely right. Saying and doing are not the same thing.

And that’s why it’s called “Climate Action” and not “Climate Talking.” Or “Climate, Wouldn’t it be Nice 100+.” It’s Climate Action for a reason. How do we continue to judge their progress? Once the companies make their commitments, how do we then, year-on-year, monitor that they’re following up and doing what they committed to? And fulfilling that promise?

What we’ve done – and this just launched in January of this year, 2021 – is establish a benchmark for each company. And that benchmark has got 12 components, looking at everything from a company’s progress to where it is putting its own money to invest. Because we need to be able to see not just the warm words and the commitments; we ultimately need to be able to track what’s happening with the transition, the shutting-down of some aspects, and the new investments.

And that is all going to show up in the financial reporting. So, that’s the origin of that 12-part benchmark, which you can look at on the Climate Action 100+ website. Each company can look at the score that we’re giving them, under this benchmark – and that will then be the basis for us to monitor teir progress.

And if the progress is not on track … well, we do have a fiduciary duty, after all. This is our members’ money that we’re investing, and we have to hold these Board members accountable. So, if we don’t get progress in line with the benchmarks, then sad to say, we will have to turn our votes to holding those board members accountable. We’ll vote in support of proposals, but we’ll also vote against board members as needed.

So, the benchmark is the follow-through. We’re not looking for the promise of good things to happen 30 years down the road. That’s not good enough. We might be a long-term investor, but we need milestones. We need to see progress, year by year, along the way. And that’s what the benchmark is for.

It took a lot of work to build all those benchmarks, because the benchmark for a cement company is rather different to the benchmark for an oil company, or a steel manufacturer, or an agriculture company.

So, it’s not one-size-fits-all. But those 12 component parts are the way that we’re going to monitor progress.

DD:

What effect will the change in presidential administrations have on all this, if any?

AS:

It’s certainly been a very interesting period in the United States.

But you know, despite the Trump administration’s withdrawal from the Paris Agreement, there was an upsurge of support for the goals of the Paris Agreement from investors, states, cities, and counties, through an initiative called We’re Still In (Leahy 2017).

And that group was really a way to say: “Okay, withdrawing from Paris happens to be the view of the president, but we the people responsible for finance, for infrastructure, for budgets, for spending at local levels – we are going to carry on regardless.” Because climate change is not going to go away, just because somebody said so. We’ve got to base our actions in science, number one.

And the financial markets are noticeably driven by science.

Now, the other thing I would point to, is that despite this view from the White House, we and others continued to work with the regulatory bodies on the case for improving carbon emissions’ disclosure to shareholders. And if you look at a very important report that came out through a financial regulator known as the Commodities Futures Trading Commission, it simply said: “Climate change is a financial risk in the US system. Therefore, we call on the regulators to do things like introduce carbon pricing.”

So, I think what you see from that, is that at a local level, the financial markets were following the science. Finance plus science is a pretty powerful combination.

Disclosure statement

No potential conflict of interest was reported by the author.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Additional information

Funding

This research received no specific grant from any funding agency in the public, commercial, or not-for-profit sectors.

Notes on contributors

Dan Drollette

Dan Drollette Jr. is the deputy editor of the Bulletin of the Atomic Scientists. He is a science writer/editor and foreign correspondent who has filed stories from every continent except Antarctica. His stories have appeared in Scientific American, International Wildlife, MIT’s Technology Review, Natural History, Cosmos, Science, New Scientist, and the BBC Online, among others. He was a TEDx speaker to Frankfurt am Main, Germany, and held a Fulbright Postgraduate Traveling Fellowship to Australia – where he lived for a total of four years. For three years, he edited CERN’s on-line weekly magazine about high-energy subparticle physics, in Geneva, Switzerland, where his office was 100 yards from the injection point of the Large Hadron Collider.