California Senate Bill 964 Will Require Largest U.S. Pensions to Report on Climate Risk

U.S Government photo, via NASA

By Laura Sisk-Hackworth / SanDiego350

A landmark bill in the California legislature, SB 964, defines climate-related financial risk in law for the first time and requires the boards of the two largest public pension funds in the nation to report on this risk every three years. The importance of this bill is that it gives the public a way to respond to the boards’ consideration of climate risk and its investments in key industries. It also protects state employees and our economy from potentially devastating financial losses that could result from climate change.

Climate-Related Financial Risks

SB 964’s definition of climate-related financial risks is perhaps its most important aspect. It describes numerous risks: physical, litigation, regulatory, and transition.

Physical Risk

Physical risks are those arising from physical impacts of climate change, such as the risks to physical property assets and the economy due to severe weather and sea level rise. An increase in severity and frequency of extreme weather is sure to challenge our public health, economic and financial systems. Imagine how the inundation of coastal communities by sea level rise, property and resource loss from wildfires, and more frequent storms of greater severity will stress our economies.

Litigation Risk

Companies whose businesses have contributed to climate change may also be sued for damages and mitigation of future harm, causing the company to lose value; this is defined as litigation risk. This risk is more than mere speculation- many communities are already suing large companies for climate change-related damages. According to the Columbia Law School Climate Change Litigation Database, a total of 16 cases have been pursued in the U.S. with plaintiffs seeking damages from fossil fuel companies for climate-related losses. In addition, 22 climate-related public trust cases have been recorded in this database. As more and more cases go to court, the risks to companies and their shareholders grow.

Regulatory Risk

As governments change policy and legislation to transition to a greener economy, one tactic will be to prohibit carbon-based fuels from being extracted and burned, resulting in stranded assets for companies that have invested in fossil fuel reserves.

Transition Risk

Tied to regulatory risk is transition risk, which results from economic shifts favoring certain companies during the transition to a low-carbon economy. If carbon-reliant companies do not transition enough of their business to invest in renewable power sources, they will be left behind in the new economy, to the financial detriment of their shareholders. This is not a concern merely flitting on the fringe of society; oil companies like Shell are concerned enough about transition risk to issue a report on it, the first section of which is titled “Towards a low-carbon future.” The report acknowledges the reality of human-caused climate change and that a transition towards low-carbon energy sources is inevitable. It also recognizes regulatory risk as an area of company sensitivity. Despite this, Shell continues to invest heavily in oil exploration and production, and lists no renewable investments in its “key portfolio decisions.”

What will the Bill do?

CalPERS and CalSTRS, the first and second largest pension funds in the United States, serve California public employees and educators. The bill mandates that in 2020 and every three years thereafter until 2035, the boards of the funds will be required to report on the exposure of the fund to climate-related financial risks, including risk resulting from investments in publicly traded companies that are carbon-intense, such as utilities, coal, oil, and gas. In addition to reporting on risk, these reports must include discussions of the funds’ alignment with the Paris climate agreement and California policy goals. The boards do not have to take action, however, unless they determine that action to reduce risk is within their responsibilities to act in the funds’ best interests.

Importance of SB 964

It is imperative that state pension funds consider the very real risks to their clients’ financial assets resulting from climate change. If they do not plan for climate-related financial risk, the results could be disastrous – not only for pensioners but for our economy. A 2017 CalPERS report found that CalPERS benefit payments generated over 20 billion dollars of economic activity. A risk to these funds is a risk to the California economy.

California’s climate leadership will expand with this bill. According to Janet Cox of Fossil Free California, a sponsor of the bill, the pension funds throughout California and the U.S. “look to CalPERS and CalSTRS for leadership … when CalPERS and CalSTRS take climate-related financial risk into account, this will reverberate throughout the pension fund community.” With California paving the way, similar definitions of climate-related financial risk could spread to other states.

The bill is sponsored by Environment California and Fossil Free California and supported by numerous California 350 chapters, many other environmental groups, SEIU California, and the California Teachers Association. The CalSTRS bill analysis identifies no known opposition to the bill. William Wellhouse, a volunteer with San Diego 350 and California educator for 33 years, supports SB 964:

As a long time member of CalSTRS currently receiving benefits, I have a vested interest in the success of the pension fund. I believe the long term effects of climate change and the rapidly-changing energy transition market endanger the stability and reliability of any fossil fuel assets CalSTRS holds.

Take Action

The bill is currently in the Assembly, where it must pass before the end of August. Find your legislator here, and encourage them to co-sponsor the bill. The pensions of dedicated public servants must be protected from the threats of climate change. You can sign Fossil Free California’s petition in support of SB 964 here.

Laura Sisk-Hackworth is a SanDiego350 volunteer who has worked in environmental and research science fields. Originally from the Inland Empire, she became concerned about climate change in 6th grade and has since then worked to educate herself and others on the challenges a changing climate presents.