A roadmap to a sustainable economy through responsible investment in California

The devastating wildfires raging across the western United States are a wake-up call for anyone who continues to doubt the financial and economic implications of climate change. 

Last month, the U.S. Commodity Futures Trading Commission published a comprehensive report on the risks climate change poses to U.S. financial markets, stating in clear terms that “a world wracked by frequent and devastating shocks from climate change cannot sustain the fundamental conditions supporting our financial system.” 

It’s time California policymakers, regulators, businesses and investors continue the state’s leadership in supporting a sustainable economy by embracing responsible investment principles and incorporating environmental, social and governance issues into investment decision-making.

The Principles for Responsible Investment, PRI, a UN‐supported international network of more than 3,000 institutional investors with more than $100 trillion in assets, has determined that the integration of financially material environmental, social and governance factors into investment analysis and decision-making is not only legally permissible, but that failing to do so is a failure of fiduciary duty.

This year, UC Berkeley Law School’s Center for Law, Energy & the Environment, CLEE, teamed up with the Principles for Responsible Investment to develop a roadmap for California leaders to advance environmental, social and governance integration in investment policy and practice throughout the state’s economy. 

California is an ideal place to spearhead this effort. The state is home to the world’s fifth largest economy, which includes the center of the global tech sector, the most productive agricultural industry in the country, international media and financial hubs, and regional economies that attract international visitors, businesses and investors. The state of California and its local governments invest tens of billions of dollars per year in infrastructure projects, and the state’s public pension funds manage hundreds of billions of dollars for millions of beneficiaries and are among the largest in the U.S. 

Climate change is one example of the many environmental, social and governance issues posing risks to California’s economy and the well-being of its people. The long‐term value of investments throughout the state – from public infrastructure to teachers’ retirement funds – will hinge on decision-makers’ consideration of climate impacts and key environmental, social and governance issues such as economic inequality, workers’ rights, and diversity and inclusion.

Fortunately, California has the power to move markets. From shareholder advocacy by public pension funds and landmark greenhouse gas emissions reduction policies, to enacting laws requiring greater corporate board diversity and climate risk assessment by public pension funds, California has long been a national leader on environmental, social and governance issues. 

This leadership is now more important than ever, with federal actors like the Securities and Exchange Commission and Department of Labor moving slowly, and in some cases backward, on policies related to environmental, social and governance integration and shareholder rights. 

Against this backdrop, and with input from experts across California’s state government and investment marketplace, PRI and CLEE crafted a set of recommendations that form a roadmap for action by state leaders.

The recommendations include developing public pension fund policies and practices that embed environmental, social and governance analysis in investment decision-making, as well as directing financial advisors to ask retail investors about their ESG investment preferences. The roadmap also recommends requiring publicly traded companies to make climate risk disclosures in accordance with the recommendations of the Task Force on Climate‐related Financial Disclosures. Additionally, Principles for Responsible Investment and Berkeley’s Center for Law, Energy & the Environment call on the state to conduct climate risk stress testing for financial institutions and insurers, and to add environmental, social and governance‐related disclosure requirements for projects funded by the state.

Recently, Gov. Gavin Newsom announced the California Climate Investment Framework, which seeks to unify and expand the climate risk strategies of the state’s three largest pension funds. We applaud these efforts and call on California leaders to go further by embedding climate risk management across the state’s economy, including county and municipal pension plans, state financing authorities and business oversight. The recommendations outlined in PRI’s California Roadmap present leaders with an opportunity to continue the state’s leadership as a trailblazer in forward‐looking policymaking and regulation designed to build a more sustainable economy.