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How Disclosure Rules Protect Your Pension

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As the adage goes, you should never invest in something you don’t understand.

In that spirit, CalPERS is encouraging the state of California to fully fund the implementation of two laws that will provide institutional investors, consumers, and policy makers with a consistent source of emissions and climate-related financial risk reporting data — allowing investors to make more informed investment and purchasing decisions.

CalPERS Chief Executive Officer Marcie Frost in March sent a letter to state leaders expressing support for fully funding the implementation of SB 253 and SB 261, which passed in 2023. The landmark laws — known as the Climate Corporate Data Accountability Act (SB 253) and the Climate-Related Financial Risk Act (SB 261) — impose new reporting requirements on large U.S. public and private companies doing business in the state.

“CalPERS has advocated for increased transparency on climate risk and portfolio company emissions for more than a decade,” Frost stated in the letter. “We believe that companies should disclose consistent, comparable, and reliable information in regulatory reports to help shareowners more easily identify, assess, and manage climate risk and opportunity, and to better understand the full financial implications of climate-related data.” Frost said while she understands the state’s current budget challenges, she’s asking that officials consider a one-time implementation as a budget priority.

“Climate change is a global challenge and one we cannot afford to ignore as long-term investors, with inviolable fiduciary duty to our members,” Frost added. “The consequences of inaction will be measured not just in the impact on workers and communities, but also on the companies we rely upon to generate the investments that pay benefits.”

In addition, CalPERS applauded the Securities and Exchange Commission for its recent rule (PDF) requiring publicly traded companies to disclose how climate-related risk has impacted, or could impact, their business. Such disclosures will make it easier for CalPERS to assess risks to the businesses in which it invests.

CalPERS provided input and support for the rule in two letters filed with the SEC in 2021 (PDF) and 2022 (PDF).

The rule also requires firms to disclose the following:

  • Activities to mitigate or adapt to climate-related risks that can threaten operations.
  • Costs to their business stemming from climate-related natural disasters such as hurricanes, tornadoes, floods, droughts, wildfires, extreme temperatures, and sea-level rise.
  • Greenhouse gases generated from their operations or by energy they purchase, respectively known as Scope 1 and Scope 2 emissions.
  • Climate-related targets or goals.
  • The board of directors’ and management’s role in overseeing and dealing with climate risk.

The rule standardizes reporting so investors can make informed decisions. Climate-risk transparency in reporting had never been required of publicly traded firms up to now, which made it difficult for investors like CalPERS to assess threats to their portfolios.

For instance, increased data can help investors judge whether a publicly traded stock is well priced, given a firm’s exposure to climate change, and take action to seize opportunities or exit risky positions.

It couldn’t come at a better time with climate-related financial losses on the rise. Disrupted supply chains and damaged infrastructure impact returns, and thus the sustainability of the pension fund. So, it’s crucial for CalPERS to stay informed about potential climate threats to industries and firms.

“Climate risk is investment risk,” Frost said. “Transparency is vital to the success of CalPERS’ sustainable investment plan and the transition to a lower-carbon economy.”