RETIREMENT BOARD CALENDAR SHEET Investment Committee Meeting of - PDF document

City and County of San Francisco Employees’ Retirement System 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 1145 Market Street, 5 th Floor  San Francisco, CA 94103  www.sfers.org

San Francisco Employees’ Retirement System Ophir Bruck, US Network Manager, PRI November 16 th , 2017

Contents - 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 2

Climate Change – Why Should Investors Care? Climate-related risks and opportunities can impact organizations’ financial performance 3

Climate Change – Why Should Investors Care? Source: Mirova “Estimating portfolio coherence with climate scenarios”

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 Task Force on Climate-related Financial Disclosures (TCFD) “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) Industry Led and Geographically The Financial Stability Board (FSB) Diverse Task Force established the Task Force on Climate- related Financial Disclosures (TCFD) on The Task Force’s 32 international members, led by December 4, 2015 to develop Michael Bloomberg, include providers of capital, insurers, large non-financial companies, accounting recommendations for more efficient and and consulting firms, and credit rating agencies. 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 .” 7

Evaluating Financial Impact Climate-related risks and opportunities can impact organizations’ financial performance 8

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: Governance The organization’s governance around climate-related risks and opportunities Strategy The actual and potential impacts of climate-related risks and opportunities 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 9

Contents - 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 10

Developing an asset owner climate strategy Three Steps to developing a climate change strategy : § Measure § Act § Engage § Invest § Avoid § Review 11

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 12

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 13

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. 14

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 15

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 16

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 17

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 18

Divestment vs. Engagement is a False Dichotomy 19

Contents - 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 20

Principle 2 and Active Ownership 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." 21

ESG issues can be material Investors are increasingly focused on the impact of ESG factors “Nike's Labor Woes Leave Soiled Footprint on Image” 1997 “BP set to pay largest environmental fine in US history for Gulf oil spill ” 2010 “Tokyo Electric executives to be charged over Fukushima nuclear disaster” 2011 Bond price as a % of par “VW slumps to first net loss in 15 years and warns of scandal toll” 2014 “Apple faces record-breaking €13bn penalty over Irish taxes” 2015 22

Why engage with companies? The financial impact of active ownership – Academic evidence Meta-study (December 2015) • Dimson, Karakaş & Li (2017): Local leads, backed by global scale: the drivers of successful engagement “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”. • IE2 initiative study (2014) - Shareholder engagement a key way for investors to leverage their public equity holdings for ESG impact This incudes the proxy process, direct dialogue with portfolio companies, public policy work and assertive action. • 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). Friede, Lewis, Bassen & Busch This includes both those on the public ‘Focus List’ and those identified University of Hamburg/ Deutsche Asset Mgmt. for confidential engagements. 23