RETIREMENT BOARD CALENDAR SHEET Investment Committee Meeting of - - PDF document

City and County of San Francisco Employees’ Retirement System

1145 Market Street, 5th Floor  San Francisco, CA 94103  www.sfers.org

RETIREMENT BOARD CALENDAR SHEET

Investment Committee Meeting of November 16, 2017

To: Retirement Board Through: Jay Huish Executive Director From: William J. Coaker, Jr. – CFA, MBA Chief Investment Officer Date: November 16, 2017 Agenda Item: Presentation regarding climate change by Principles for Responsible Investment (PRI). Background: PRI will present their views concerning climate change and the development of asset owner climate change strategies. Recommendation: This item is for discussion only. Attachment: PRI: San Francisco Employees’ Retirement System

San Francisco Employees’ Retirement System

Ophir Bruck, US Network Manager, PRI November 16th, 2017

• Why should investors care about climate change?
• Developing an asset owner climate change strategy
• Active ownership: why engage and how
• PRI is championing climate action
• Engagement opportunities

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Contents

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Climate-related risks and opportunities can impact organizations’ financial performance

Climate Change – Why Should Investors Care?

Source: Mirova “Estimating portfolio coherence with climate scenarios”

Climate Change – Why Should Investors Care?

Two degrees of separation - report

Analysis on whether the largest oil and gas companies are aligned with a two degrees carbon budget § TUS$2.3trn – around one third – of potential capex to 2025 should not be deployed in a 2D scenario compared to business as usual expectations. § Company level exposure varies from under 10% to over 60% when considering the largest 69 publicly traded companies. § Around two thirds of the potential oil and gas production which is surplus to requirements in a 2D scenario is controlled by the private sector.

“The more we invest with foresight, the less we will regret in hindsight”

Mark Carney, Governor of the Bank of England and Chair of the FSB

The Task Force on Climate-related Financial Disclosures (TCFD)

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The Task Force on Climate-related Financial Disclosures (TCFD)

The Task Force’s 32 international members, led by Michael Bloomberg, include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies.

Industry Led and Geographically Diverse Task Force The Financial Stability Board (FSB) established the Task Force on Climate- related Financial Disclosures (TCFD) on December 4, 2015 to develop recommendations for more efficient and effective climate-related disclosures that: ‒ could “promote more informed investment, credit, and insurance underwriting decisions” and, ‒ in turn, “would enable stakeholders to understand better the concentrations of carbon-related assets in the financial sector and the financial system’s exposures to climate-related risks.”

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Evaluating Financial Impact

Climate-related risks and opportunities can impact organizations’ financial performance

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Disclosure Recommendations

The Task Force developed four widely-adoptable recommendations on climate-related financial disclosures that are applicable to organizations across sectors and jurisdictions. The recommendations are structured around four thematic areas that represent core elements of how organizations operate:

Strategy The actual and potential impacts of climate-related risks and

• pportunities on the organization’s businesses, strategy, and

financial planning Risk Management The processes used by the organization to identify, assess, and manage climate-related risks Metrics and Targets The metrics and targets used to assess and manage relevant climate-related risks and opportunities Governance The organization’s governance around climate-related risks and

• pportunities

• Why should investors care about climate change?
• Developing an asset owner climate change strategy
• Active ownership: why engage and how
• PRI is championing climate action
• Engagement opportunities

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Contents

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Three Steps to developing a climate change strategy: § Measure § Act § Engage § Invest § Avoid § Review

Developing an asset owner climate strategy

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Developing an asset owner climate strategy

Step 1: Measure

Understand your portfolio exposure:

• Evaluating portfolio exposure to climate change risks and opportunities

Approaches: § Sector analysis § Stranded asset analysis § Portfolio emissions and carbon footprinting § Thematic exposure

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Developing an asset owner climate strategy

Step 2: Act Gather commitment throughout the investment chain

The following groups need to be engaged to decide on appropriate strategies: § Senior executives and non-executive decision makers § Staff § Investment managers § Beneficiaries and stakeholders

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Developing an asset owner climate strategy

Step 2: Act

Choose appropriate strategies and execute them § Strategy 1: Engage § Strategy 2: Invest § Strategy 3: Avoid

The summary table highlights that most opportunities to contribute towards emissions reduction are applicable to every asset class. Asset class specific considerations are covered in more detail in the appendix.

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Step 1: Act

Strategy 1: Engage

§ Engage with policy makers § Pros and cons § Possible actions § Engage with companies § Individual/Collaborative Engagements § Pros and cons § Possible actions

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Step 1: Act

Strategy 2: Invest

§ Invest with climate change integrated into decision making § Pros and cons § Possible actions § Invest in solutions § Pros and cons § Possible actions

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Step 1: Act

Strategy 3: Avoid

§ Avoid as a risk management strategy vs. divest as a political strategy/moral statement § Possible actions

§ Exclusion based on scenario analysis § Exclusion based on carbon intensity § Exclusion based on percentage threshold for fossil fuel extraction § Divestment from Carbon Underground 200

§ Pros and cons

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Developing an asset owner climate change strategy

Step 3: Review Monitor and Report on Effectiveness

• Putting processes in place to assess effectiveness of chosen strategies
• Further work is needed on how an individual asset owner can assess their

contribution towards emissions reductions in the real economy

Broader tools for monitoring and reporting:

§ The PRI Reporting Framework

§ TCFD alignment

§ The Asset Owner Disclosure Project § Balanced score cards

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Divestment vs. Engagement is a False Dichotomy

• Why should investors care about climate change?
• Developing an asset owner climate change strategy
• Active ownership: why engage and how
• PRI is championing climate action
• Engagement opportunities

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Contents

Principle 2 and Active Ownership

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One mission – Six principles "We believe that an economically efficient, sustainable global financial system is a necessity for long-term value creation. Such a system will reward long-term, responsible investment and benefit the environment and society as a whole. The PRI will work to achieve this sustainable global financial system by encouraging adoption of the Principles and collaboration on their implementation; by fostering good governance, integrity and accountability; and by addressing obstacles to a sustainable financial system that lie within market practices, structures and regulation."

ESG issues can be material

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“VW slumps to first net loss in 15 years and warns of scandal toll”

2010 2014

Bond price as a % of par

“BP set to pay largest environmental fine in US history for Gulf oil spill”

2011 1997

“Nike's Labor Woes Leave Soiled Footprint on Image” “Apple faces record-breaking €13bn penalty over Irish taxes”

2015

“Tokyo Electric executives to be charged over Fukushima nuclear disaster”

Investors are increasingly focused on the impact of ESG factors

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Why engage with companies?

The financial impact of active ownership – Academic evidence

Meta-study (December 2015) Friede, Lewis, Bassen & Busch University of Hamburg/ Deutsche Asset Mgmt.

“After engagements have concluded successfully, we find target companies experience improved profitability, as measured by return on assets, and increased ownership by the lead investor who conducted the dialogue on behalf of the coalition”.

• Dimson, Karakaş & Li (2017): Local leads, backed by global

scale: the drivers of successful engagement

• IE2 initiative study (2014) - Shareholder engagement a key

way for investors to leverage their public equity holdings for ESG impact

• Companies targeted by CalPERS for engagement delivered

an excess cumulative return of 13.72% above the Russell 1000 Index, and 12.11% above their respective Russell 1000 sector indices (2012). This incudes the proxy process, direct dialogue with portfolio companies, public policy work and assertive action. This includes both those on the public ‘Focus List’ and those identified for confidential engagements.

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Why engage with companies?

Why?

Hinders country and company economic growth (i.e. siphoned off funds) Increases cost of business (factor in cost of bribes) Legal and reputational risk (e.g. cost of litigation and damage to future business) Distorts competition (e.g. contracts awarded based on bribes and relationships not ‘real’ price) From ‘norm’ means of getting business done > illegality Limit expansion into some markets

“Engagement can move the market in terms of standards of disclosure and transparency expected by investors across the world”

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Four stage integration model

Engagement should not take place in a vacuum

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Engagement process

Successful engagement relies on having a good process in place

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Impacts and Outcomes from Active Ownership

Engaging with oil and gas companies on fracking

From 2014-2016, a group of 41 PRI signatories, with USD$5.1 trillion AUM, engaged with 37 companies

• n their fracking-related policies, practices and management systems.

“87% of the engagement companies improved their disclosure of fracking-related policies, practices and management systems during the period of engagement”.

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Impacts and Outcomes from Active Ownership

241 shareholder resolutions filed on PRI Collaboration Platform, 63 related to climate change

38 of the 63 climate-related resolutions uploaded to the Collaboration Platform were voted on at company AGMs and received an average vote outcome of 33%.

• “2-degree scenario” resolution at

Exxon-Mobil received 62% of votes –

• ver 90 investors with more than

US$10tr combined AUM declared support.

• Same resolution at Occidental

received 67% of votes in favour, with Blackrock voting in favour as there was a “lack of observed change in reporting practices”.

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Impacts and Outcomes from Active Ownership

Governance engagement example – Boardroom Accountability Project

In November 2014, the New York City Comptroller and the New York City pension funds launched their “Boardroom Accountability Project.” - aimed to give shareholders the right to nominate directors for the board using the corporate ballot, known as “proxy access”.

• 2016: 72 companies targeted, through

collaboration with other institutional investors such as CalPERS

• Average votes in favour was 57.6%, and some

companies had upwards of 70% votes in favour including Netflix Inc. and Old Republic.

• According to the New York City Comptroller, 115

companies have adopted meaningful proxy access bylaws as of 8 January 2016, up from just six as of November 2014 when the campaign was launched. Find out more

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Impacts and Outcomes from Active Ownership

PRI-coordinated engagement on anti-bribery and corruption

Collaborative engagement on anti-corruption (phase 2, 2013-2015)

• 34 signatories
• $2.7 tr. AUM
• 32 companies

https://www.unpri.org/download_report/18553

• Why should investors care about climate change?
• Developing an asset owner climate change strategy
• Active ownership: why engage and how
• PRI is championing climate action
• Engagement opportunities

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Contents

Champion Climate Action

In PRI signatory satisfaction surveys, signatories have repeatedly identified climate change as their highest priority ESG issue. The Case for Action:

• Portfolio risks and opportunities
• Fiduciary Duty
• 11% of asset owners and 10% of investment managers have integrated climate change into their

asset allocation strategy

We Will: § Work with our UN partners to meet the Paris Agreement § Empower investors to assess how well-positioned companies, issuers and their portfolios are for the transition to a low-carbon economy § Align the PRI Reporting Framework with the Financial Stability Board’s Task Force on Climate-related Financial Disclosures § Convene investor engagement with companies on climate risks and opportunities § Encourage investors to make substantial allocations to clean assets and technologies § Demonstrate the investment implications of national governments’ climate change goals § Collaborate with policy makers to address the barriers investors face in scaling up clean investments

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Climate change is the highest priority ESG issue facing investors

Championing Climate Action

Investor action and practical tools § 2 degrees of separation report and regional workshops § Climate Action 100+ coalition § PRI collaboration platform alerts for climate resolutions e.g. ExxonMobil Climate disclosure and FSB Task Force (TCFD) § PRI Chair served on Task Force, with strong signatory input § Final recommendations were published June 2017 § PRI-Baker McKenzie country climate disclosure reviews § PRI will drive TCFD implementation Forward looking priorities –supporting signatories through the transition § Paris Agreement implementation § FSB Task Force implementation § Green finance

Highlights from PRI’s Climate Work

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• Why should investors care about climate change?
• Developing an asset owner climate change strategy
• Active ownership: why engage and how
• PRI is championing climate action
• Engagement opportunities

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Contents

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PRI Collaborative Engagements

On Climate Change

Methane Disclosure & Transition- Alignment Oil & Gas Assets PRI & Ceres Deforestation

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Climate change transition for oil and gas

Based ‘2 degrees of separation research’ (2degreeseparation.com)

Overview:

• This engagement will build on the research developed jointly by

Carbon Tracker, PRI, and five investors, understanding company level exposure to the energy transition

• This public reports ranked 69 oil and gas companies on the proportion
• f their potential future capital expenditure outside a 2 degree budget.
• The engagement will target oil and gas companies to comment on the

risks they face as a result of a constraint to oil and gas use as part of a transition to a low-carbon economy. Next steps:

• Engagement to be launched in early 2018, when it will be open for all

signatories to join

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TCFD engagement

Upcoming PRI-coordinated engagement

The Task Force’s 32 international members, led by Michael Bloomberg, include providers of capital, insurers, large non-financial companies, accounting and consulting firms, and credit rating agencies.

Industry Led and Geographically Diverse Task Force

The PRI has recruited an advisory committee to develop and guide a new collaborative engagement that asks companies to align their disclosure and transition strategies with the final recommendations of the FSB Taskforce on Climate-Related Financial Disclosures. It will focus on a range of sectors, except for

• il & gas (covered in a separate

engagement).

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Methane risk

With the oil and gas sector being the largest industrial source of methane emissions globally, methane risk across the natural gas value chain has been identified as an area where investors are exposed financially and through reputational and regulatory risks. The engagement will focus on:

• Understanding what is best practice in managing methane risks

and to transfer these learnings across companies;

• encouraging energy and utility companies to improve their

management and reduction of methane emissions and to strengthen disclosure of their progress.

• Piloting ‘An Investor’s Guide to Methane’ and using the

framework: measure, report and reduce. Status: The group is closed to new joiners. Dialogues have started. Group: 36 investors (US $4.1 trillion AUM) Companies: 31 oil and gas and utility companies

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Deforestation (cattle)

Upcoming engagement coordinated by PRI and Ceres

PRI and Ceres developed a new partnership aimed at addressing global deforestation driven by soft commodities – the first engagement will look at cattle-linked deforestation Overview:

• At least two-thirds of tropical deforestation is driven by commercial

agriculture, predominantly from four commodities: cattle, soy, palm

• il, and timber & pulp
• An advisory committee has already been formed drawing up an

initial list of 70 publicly listed target companies. The engagement will be opened up to new signatories in the coming months

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Climate Action 100+

www.climateaction100.org

The Climate Action 100+ is a new umbrella initiative, where investors agree to a common engagement agenda on climate change targeting more than 100 companies. Overview:

• Started by CalPERS
• Montreal Pledge
• The 100 companies
• Investor-led engagement for climate action
• Launched at PRI in Person Berlin 2017

PRI Collaboration Opportunities on Climate Action 100+: § Existing and New Working Groups

§ PRI’s methane and TCFD and oil and gas engagements

§ Join as a Full Participator or Supporter

YOUR DEDICATED PRI TEAM

SUPPORTED BY 80+ PROFESSIONALS

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Lorenzo Saa Director, Global Networks and Outreach Mandy Kirby Director, Reporting, Assessment and Accountability Fiona Reynolds Managing Director Nathan Fabian Director, Policy and Research Kris Douma Director, Investment Practices and Engagements

MEET THE EXECUTIVE TEAM

Graeme Griffiths Director, Global Networks and Outreach NAME: Chris Fowle TITLE: Associate Director, Americas, Global Networks & Outreach Email: Chris.Fowle@unpri.org NAME: Carol Jeppesen TITLE: Senior US Network Manager, Global Networks & Outreach Email: Carol.Jeppesen@unpri.org NAME: Ophir Bruck TITLE: US Network Manager, Global Networks & Outreach Email: Ophir.Bruck@unpri.org NAME: John Du TITLE: Project Manager, Global Networks & Outreach Email: John.Du@unpri.org