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Climate change will be an alpha generator for the next four decades, says CalSTRS CIO


ESG investing, or when a company’s environmental, social and governance factors are evaluated, is booming, and a panel of sustainability-focused investors said the trend is only going to accelerate from here.

Christopher Ailman, CalSTRS’ Chief Investment Officer, said Wednesday that climate change is a “mega-trend” and that it can be a “alpha generator for 30 to 40 years if we take advantage of it.” It’s a negative alpha that you will have to pay more attention to and you’ll be stuck with low beta returns if you ignore it.

Vice chair of Wellington, Wendy Cromwell said the same thing, adding that investors need to “study it” and that companies must be ready for climate change.

ESG investing has been booming. According to Morningstar, global assets in sustainable fund managed funds stood at $2.24 trillion as of June. In the first quarter 2020, assets surpassed $1 trillion.

However, the ESG boom is not without its critics. ESG by its very nature is subjective. Without standardization among companies and industries, it is difficult to determine if an ESG-branded product actually delivers on its goals.

Ailman said that while there is no doubt ESG may be used by some asset managers as a marketing tool, he does not believe it has achieved bubble status.

Washington’s regulators are considering ESG investments. There are a variety of options. Cromwell stated that it is all about data. She stated that disclosures about the scope 1 to 3 emissions of all U.S. listed companies should be mandatory. Scientists and investors need to be able to collaborate to determine the potential long-term health risks of climate change for businesses.

Chief governance and compliance officer of Norges Bank Investment Management Carine Ihenacho said that it is important to get past the hype surrounding company promises and ESG investing.

Find out the issues that are important to the companies, how do they manage them and what is the progress of the company. Norges, the largest sovereign wealth fund in the world with over $1.4 trillion under management, is the most successful.

The plan to eliminate fossil fuel exposure was previously stated by the fund, particularly for companies involved in exploration or production. More funds are following suit — often succumbing to pressure — including Harvard University, which earlier this month said it will stop investing in the fossil fuel industry.

Ailman said that divestment should not be considered the only strategy. He considers divestment to be ESG 1.0, while engagement — a far more useful and important strategy — to be ESG 2.0.

“Divesting does not reduce carbon dioxide in the atmosphere. Engagement does. It’s something I cannot stress enough.” he stated. Engagement and turning people’s attitudes around and companies around is crucial now that climate change has an impact on more than just the energy industry.

CalSTRS joined Engine No., an activist fund. CalSTRS joined upstart activist fund Engine No. 1 to fight for Exxon board representation.

CalSTRS and other prominent investors supported the fund, which was eventually elected three out of four candidates to Exxon’s Board of Directors. This came after a close vote at Exxon’s Annual Meeting.

“We elected to join that board. “We changed that board, and we’re really changing the company from the top,” he stated, noting Exxon has all the resources, scientists and capital necessary to tackle issues such as carbon capture.

His excitement at the prospect of changing up the board was immense. It was the climb of Mount Everest when you were just starting mountaineering.