CalPERS Direct could point the way to more climate-wise investments

Last week, the California Public Employees' Retirement System (CalPERS) announced its plan to invest directly in private companies, which could enable its members to capitalize on the transition to a low-carbon economy and protect assets against climate risk.

Why it matters: Global investment in renewable energy, energy efficiency and low-carbon generation must average $2.3 trillion between now and 2040 in order to keep warming below 2 degrees Celsius — the target established in the Paris Agreement. Accordingly, investors need to find pathways to profitably scale-up spending to three times current levels.

Scaling up investment will require better alignment between climate-wise investment opportunities and pension funds, whose assets make up roughly a quarter of the $100-trillion spread among the world’s major institutional investors. As it stands, approximately 1% of total pension assets are invested in infrastructure of any kind, while clean energy represented about 0.01%.

Many of the barriers preventing greater flows of pension dollars into climate-wise investments can be overcome by the Canadian model that CalPERS is aiming to emulate. Namely, a direct private equity strategy allows the pension to

1. Trade fees for expertise: CalPERS can reduce the amount it pays in external management fees while building up human capital with the ability to appropriately price climate risk and opportunity across the entire portfolio.
2. Retain talent: Fewer limitations on investment staff compensation and the flexibility to employ investment professionals in other metros will help retain top talent.
3. Write smaller checks: The investment universe expands when your smallest check size isn’t $50 million.
4. Invest in first-time funds and projects: The resource revolution is by nature new; the best talent may not have a track record, or the record may be poor given that the economics of clean technologies weren’t nearly as favorable just a few years ago.
5. Buy and hold: The value of infrastructure assets can be greater when they don’t need to conform to the fixed duration of most private fund vehicles.

The bottom line: As the global economy transitions from high to low carbon and climate change proceeds, investors will weather significant gains and losses on their assets. Fiduciaries that wish to gain more and lose less must reconsider business as usual. The devil is in the details, but if CalPERS Direct can get the governance and human capital right, its members might have a better chance of a funded and fortified retirement.

Alicia Seiger is the Managing Director at the Stanford Precourt Institute for Energy.