CalPERS bets on outperformance from growing climate allocation – Top1000funds.com

CalPERS’ Climate Investment Strategy and Alignment with Sustainable Development Goals

Strategic Overview and Financial Commitment

The California Public Employees’ Retirement System (CalPERS) is actively pursuing financial outperformance through a dedicated climate investment strategy, positioning itself to capitalize on market opportunities created by a challenging US policy environment. The fund’s Climate Action Plan outlines a commitment to allocate $100 billion to climate solutions by 2030, a strategy that directly supports global sustainability objectives.

• Current Allocation: $60 billion is currently invested across climate mitigation, adaptation, and transition strategies.
• Core Objective: To generate superior investment returns by investing in climate solutions and tapping into market segments that other investors have vacated.
• Team Expansion: CalPERS has expanded its responsible investment team to 18 specialists to execute this mandate.
• Portfolio Integration: The climate strategy is designed to be complementary to the fund’s new Total Portfolio Approach, with opportunities integrated across all asset classes.

Alignment with Key Sustainable Development Goals (SDGs)

CalPERS’ climate investment framework demonstrates a strong alignment with several United Nations Sustainable Development Goals (SDGs). The strategy moves beyond simple risk mitigation to actively fund solutions that advance global targets for a sustainable future.

• SDG 13 (Climate Action): The entire $100 billion Climate Action Plan is fundamentally aimed at financing climate mitigation, adaptation, and transition, forming the cornerstone of the fund’s contribution to this goal.
• SDG 7 (Affordable and Clean Energy): Investments are channeled into renewable energy, green bonds, grid improvements, and innovative energy companies to accelerate the transition to clean energy systems.
• SDG 9 (Industry, Innovation, and Infrastructure): Capital is allocated to resilient infrastructure, battery storage, and advanced technologies like Artificial Intelligence (AI) that enhance industrial efficiency and drive sustainable innovation.
• SDG 2 (Zero Hunger): The portfolio includes investments in agricultural technology, such as drought-resistant crops, which contributes to building climate-resilient food systems.
• SDG 11 (Sustainable Cities and Communities): Commitments to technologies that prevent wildfires and improve grid stability enhance the resilience and sustainability of communities.
• SDG 12 (Responsible Consumption and Production): The investment screening process, which favors companies with verifiable green revenue streams and transition plans, promotes more sustainable production patterns.

Public Market Strategy and SDG Impact

In public markets, CalPERS utilizes targeted financial instruments to steer capital towards companies leading the climate transition, thereby supporting SDG 12 and SDG 13.

• Climate Transition Index (CTI): A $5 billion allocation to a customised public equity index that increases weightings for companies with credible transition plans and significant green revenue. This includes high emitters that are investing in renewable energy assets or carbon capture technology, rewarding transitional efforts.
• Green Bonds: A sizeable allocation to green bonds directly finances projects in renewable energy and sustainable infrastructure, contributing to SDG 7 and SDG 9.
• Performance Indicators: The S&P Climate Transition Index, which rose 50% over nine months compared to a 20% rise in the MSCI All World Index, is cited as evidence that sustainability-focused investments can generate significant outperformance.

Private Market Investments and Innovation for SDGs

CalPERS’ private market strategy focuses on high-conviction managers and innovative companies developing solutions for critical climate challenges. The fund has made commitments to 13 climate-focused funds, targeting technologies that advance multiple SDGs.

1. AI and Resource Efficiency: A key theme is the synergy between AI and climate solutions. Investments include companies using AI for wildfire prevention (SDG 11, SDG 13) and to improve mining efficiency, reducing emissions and resource use (SDG 9, SDG 12).
2. Energy Innovation: An investment in Octopus Energy highlights the focus on companies using AI-driven software (Kraken) to manage electricity grids and match demand with intermittent renewable supply, directly advancing SDG 7.
3. Climate Resilience Technologies: Direct investments are made in companies developing solutions such as:
   • Energy optimisation software (SDG 7)
   • Drought-resistant crops (SDG 2)
   • Battery storage (SDG 7, SDG 9)

Market Context and Performance Outlook

Despite a negative policy backdrop in the US that has caused many investors to retreat from climate-focused investments, CalPERS maintains that underlying corporate investment in sustainability remains strong. The fund perceives the current environment as an opportunity to invest in sectors with high growth potential driven by fundamental demand, such as electrification for AI, grid modernization, and carbon capture. This counter-cyclical approach is based on the conviction that companies integrating sustainability create long-term value, aligning the pursuit of financial outperformance with tangible progress on the Sustainable Development Goals.

Analysis of Sustainable Development Goals in the Article

1. Which SDGs are addressed or connected to the issues highlighted in the article?

• SDG 7: Affordable and Clean Energy – The article discusses investments in renewable energy, nuclear power, grid improvements, battery storage, and solar farms.
• SDG 9: Industry, Innovation, and Infrastructure – The focus on infrastructure investments, carbon capture technology, energy optimization software, and the use of AI to improve industrial efficiency (like in mining) connects directly to this goal.
• SDG 12: Responsible Consumption and Production – The article highlights strategies that promote resource efficiency, such as using AI in mining and generating “green revenue,” which aligns with sustainable production patterns.
• SDG 13: Climate Action – The entire article is centered on CalPERS’ “Climate Action Plan,” which involves investing in climate mitigation, adaptation, and transition strategies to combat climate change.
• SDG 15: Life on Land – The mention of investments in companies developing “drought resistant crops” and technology to “prevent wildfires” relates to protecting terrestrial ecosystems.
• SDG 17: Partnerships for the Goals – The article describes how CalPERS, a public pension fund, is partnering with private funds and other institutional investors (like Aware Super) to mobilize significant financial resources for climate solutions.

2. What specific targets under those SDGs can be identified based on the article’s content?

1. SDG 7: Affordable and Clean Energy
   • Target 7.2: “By 2030, increase substantially the share of renewable energy in the global energy mix.” The article details CalPERS’ investments in companies with “renewable energy assets,” “offshore wind,” and “solar farms.”
   • Target 7.a: “By 2030, enhance international cooperation to facilitate access to clean energy research and technology… and promote investment in energy infrastructure and clean energy technology.” CalPERS’ pledge to allocate $100 billion to climate solutions, including investments in “grid improvements” and “battery storage,” directly supports this target.
2. SDG 9: Industry, Innovation, and Infrastructure
   • Target 9.4: “By 2030, upgrade infrastructure and retrofit industries to make them sustainable, with increased resource-use efficiency and greater adoption of clean and environmentally sound technologies…” This is supported by the article’s mention of investments in “carbon capture technology,” “energy optimisation software,” and using “AI to find deposits in a way that also saves on emissions” in the mining sector.
3. SDG 12: Responsible Consumption and Production
   • Target 12.2: “By 2030, achieve the sustainable management and efficient use of natural resources.” The investment theme of “identifying companies using AI to increase energy or resource efficiency” is a direct application of this target.
4. SDG 13: Climate Action
   • Target 13.1: “Strengthen resilience and adaptive capacity to climate-related hazards and natural disasters in all countries.” CalPERS’ investment in “adaption” strategies, such as companies developing “drought resistant crops” and technology to “prevent wildfires,” addresses this target.
   • Target 13.a: “Implement the commitment undertaken by developed-country parties… to a goal of mobilizing jointly $100 billion annually… to address the needs of developing countries…” While the article focuses on the US market, CalPERS’ commitment to allocate “$100 billion to climate solutions by 2030” reflects the scale of financial mobilization required by this target.
5. SDG 15: Life on Land
   • Target 15.3: “By 2030, combat desertification, restore degraded land and soil, including land affected by desertification, drought and floods…” The investment in “drought resistant crops” is a strategy that helps combat the effects of drought and land degradation.
6. SDG 17: Partnerships for the Goals
   • Target 17.17: “Encourage and promote effective public, public-private and civil society partnerships…” The article exemplifies this through CalPERS (a public fund) making “investment commitments in 13 climate-focused funds” (private entities) and co-investing with another pension fund, “Aware Super,” in Octopus Energy.

3. Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

• Financial Commitment to Climate Solutions: The article explicitly states CalPERS’ pledge to “allocate $100 billion to climate solutions by 2030” and notes that it “currently has $60 billion invested.” This serves as a direct quantitative indicator for financial flows towards climate action (relevant to SDG 13 and SDG 7).
• Green Revenue Generation: The customized “Climate Transition Index” weights companies based on “the amount of green revenue they generate.” This is a specific metric used to measure a company’s contribution to the green economy and its alignment with sustainable practices (relevant to SDG 7, 9, and 12).
• Number of Partnerships/Fund Commitments: The article mentions that “CalPERS has made investment commitments in 13 climate-focused funds.” This number can be used as an indicator to track the formation of public-private partnerships for sustainable development (relevant to SDG 17).
• Portfolio Allocation to Green/Transition Assets: The article details a “$5 billion allocation to a customised public equity Climate Transition Index” and investments in green bonds. The size and performance of these allocations are indicators of shifting capital towards sustainable investments.

4. Summary Table of SDGs, Targets, and Indicators

Source: top1000funds.com