By Marcie Frost, CalPERS Chief Executive Officer

We have long said that climate change presents a significant risk to the CalPERS investment portfolio, one we must carefully assess as part of our fiduciary duty.

But it also presents opportunity, an approach that’s at the heart of our $100 Billion Climate Action Plan. The plan was launched in the fall of 2023 to strengthen our returns by investing in the global energy transition over the next six years.

One thing we’ve learned is that there’s more art than science in defining an investment to count as a “climate solution” – the kind of variation that may seem reasonable in financial circles but perplexing to those seeking simple, common-sense ways to track our climate commitments.

We tackled this challenge head-on when assembling the 2023 estimate of our existing, or baseline, climate investments. We used a variety of established third-party data sets and methodologies to account for how companies invest in climate adaptation, mitigation, or transition strategies.

In some cases, only a portion of a company’s revenues could be considered “green.” In others, we sought ways to assess the value of a company’s science-backed plans to decarbonize “hard to abate” sectors of the economy.

We knew this wasn’t a one-time process. All along, we’ve been committed to improvements in climate accounting.

As an example, in 2023 we used a tool designed to use a company’s holding of a so-called “green patent” to estimate the dollar value of its future climate-related technologies. But we removed this data point during our most recent review of CalPERS’ baseline climate investments, concluding the benefits were unlikely to be realized in the near term.

Many of the “green patents” are held by oil and gas companies, and we will continue to use our engagement process to encourage those companies to develop those technologies. In the meantime, our climate accounting must be calibrated to real-world evidence.

This wasn’t a major setback. Green patents accounted for less than $3 billion of the $47 billion in baseline climate solutions that were on hand in 2023.

The lesson is simple: We need the right data and more corporate transparency to clearly reflect what’s happening.

Even as one data tracking tool was set aside, others were brought into the mix in the 2024 review. For example, we’ve embraced a new methodology that provides an estimated value of a company’s “green bonds,” borrowing earmarked to help fund climate change projects. Those kinds of innovations, along with overall growth in market value, led our baseline climate solution estimate to grow to $50 billion.

The process will continue to be complex and require frequent fine-tuning until global institutional investors agree on a common approach toward defining and tracking “climate solutions.”

We will work to raise awareness of this issue, and we are committed to sharing information about the methods used to calculate our portfolio investments. We are playing a leadership role in the market to establish climate investment standards, and we welcome other investors to join us in that effort.

Our members want to know that our climate investments are paying off. Earning and keeping their trust means having the right tools to do our job.