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Transcript: Protecting Our Planet: Role of Business & Investing with Mark Carney & Anne Simpson

MS. CASEY: Good morning, and welcome to Washington Post Live. I’m Libby Casey, politics and accountability anchor at The Washington Post. There are many issues topping the agenda at next month’s United Nations Climate Summit, but one of the most highly anticipated topics at COP26 is the role of business and finance. And joining me now to talk about this is Mark Carney, the UN special envoy for climate action and finance. Mr. Carney, welcome to Washington Post Live.

MR. CARNEY: It's a great pleasure. Thanks for having me, Libby.

MS. CASEY: So what opportunities does COP26 offer, and in your opinion needs to happen, at the summit in terms of businesses and the world of finance stepping up to help solve the climate crisis?

MR. CARNEY: Well, I would put it simply there's two objectives from a private finance perspective. The first is to have designed a system--your intro talked about regulations and standards and elements--but basically the plumbing of the financial system has to be put in place so that financial institutions, whether they're banks or pension funds or insurers or asset managers, have the information, the tools in the market so they can take climate change into account. So in other words, it's a fundamental driver of every investment decision or lending decision.

The second thing we need for COP26, to put it bluntly is money, a lot of it. This is going to be an enormous investment across the world that's required. Somewhere between $100-150 trillion of external finance over the next three decades. And we need commitments from financial institutions that are of that order of magnitude in order not just to finance the projects we need to get to where people want to go but also to encourage countries around the world to step up with more ambition of their own.

MS. CASEY: And let's talk about that intersection between what businesses need to step up and do and what's going to be expected of countries. You know, internationally the rich countries are falling behind in their commitments to step up and try to sort of spread the wealth internationally. So what do you expect to see there?

MR. CARNEY: Well, I think there's two things. First, so we're talking about the same types of commitments. In terms of the commitments of the G7 countries for reductions of emissions over the course of this decade, this decisive decade out to 2030, actually through the combination of President Biden's Climate Summit, the G7 meeting that was held in June in the UK, the G7 has stepped up, and the commitments, at least in terms of objectives, are consistent with the path that the world needs to go on.

Now of course those objectives need to be backed up with actual policies and investments of the public sector consistent with those objectives. But the first element, the recognition of the scale of the issue and taking responsibility is there. And we can come back to the policies as you wish.

But the second type of commitments that the advanced economies of the G7 have to meet is a financing commitment which was made 10 years ago in Copenhagen to support the poorest countries in the world and help them with their adjustment. This is a hundred billion dollar a year financing commitment. We haven't met it up until now. There are huge efforts underway. Again, two weeks ago President Biden committed to double the U.S. component of that commitment. Other countries are following with that. And it's a key objective for COP. But make no mistake. That is a hundred billion per annum, and we're of course talking orders of magnitude of 3, 4, or 5 trillion per year that's needed in order to make the transition globally--trillion--so that--those numbers--and this is our core point--aren't going to come from the public sector, aren't going to come from taxpayers. They're going to come from the private sector, which is why we have to get the financial system in the right place.

MS. CASEY: So let's talk about sort of how those financial institutions step up. Last week, dozens of environmental groups took out an ad saying that while your work on getting these institutions to do more on climate is laudable, it has also allowed some companies still investing in fossil fuels to greenwash their image, that is, to make their climate work appear better than it is. Can you respond to those criticisms?

MR. CARNEY: Sure. Well, look, the first thing is to say the world has been on track for north of three degrees warming. So there's a series--I mean, our economies are in that position, businesses are in that position, the money that has been financing businesses have been in that position. What we have been doing over the course of the last 18 months is to turn that around and orient it from 3 degrees to 1.5 degrees. And the core is to have financial institutions that recognize the scale of the issue and are committed to get on pathways to net zero. And so they don't start from a position of net zero. If they started from a position of net zero, we wouldn't have a problem. We have this big issue. The best in finance -- $90 trillion, nine-zero trillion dollars already and counting--that's a major addition to the last few days--have committed to get on those pathways to net zero. And that's not a pathway at some distant date. It's a five-year decarbonization plan. It's fair share, a 50 percent reduction by 2030. It's annual and transparent reporting. So those who took out the add but more broadly everybody will be able to see which institutions are part of the solution and which remain part of the problem. I would underscore that the financial institutions--our banks, insurers and others who have stepped up--are very much part of the solution. They're the ones who are going to bring capital, investment, lending to businesses that are going to decarbonize.

MS. CASEY: Do you believe that companies, whether banks or other financial institutions, can legitimately claim to support efforts to address climate change if they're still financing fossil fuel-related projects such as coal or gas plants?

MR. CARNEY: Yeah, well, look, coal is going to--is going to move out very quickly. The advanced economies Powering Past Coal--something led by the UK and Canada--part of the COP process--I mean, and one of the core objectives of this COP is to have a pathway to end coal by 2030 in advanced economies and by 2040 in emerging economies. And so, it's--you know, there's that trajectory. There are countries where virtually all of the generation is from coal. Think South Africa, think substantial proportion in China, in Indonesia, other places. So we need to transition from that and have the finance that winds down those fossil fuels--which absolutely have to be wound down, there's no question--but we transition to wind those down as we ramp up renewable and other clean sources of power. So this is not a switch that gets flipped overnight. This is--but we need a system, which is what we have built--just have built a system that makes it transparent who's doing the right thing, who's managing, helping to manage down those bad emissions and get up net zero generation.

MS. CASEY: Let's talk more about how to sort of increase that transparency and accountability. You know, there are some skeptics who say that the ESG movement--you know, creating environmental, social and governance priorities--is sort of creating a mirage that's allowing financial leaders to charge more for investments that aren't actually making a difference in terms of climate change. So talk to us about how you're working to make companies' commitments and actions more transparent.

MR. CARNEY: Yeah, well, okay, so let's be absolutely clear what we're talking about. We're addressing, the work that I'm working on and addressing as part of COP26 is to get the global economy towards net zero or get--ultimately get us to net zero, and that is a subset of a broader set of issues around climate, nature, biodiversity, which itself is a very large subset of broader issues around environmental, social, and governance. So not pretending to solve all of those issues, but a relentless focus on transition to net zero because that's the only thing that's going to stabilize the climate. So the systems being built up around that, it requires, fundamentally, information at its core, which is why we have pushed for mandatory so-called TCFD disclosure everywhere, not just for some companies who volunteer to do it but in all economies, including the emerging and developing world. We think we've cracked it both with an agreement at the G7 in June, support from the G20 in July, and also development of an international standard through something called the IFRS which will come out at COP. So there's that basic.

But then what we need is net zero plans of our biggest companies--again, not just for longer-term targets but short-term milestones and metrics so we can see who's moving in the right direction and who's falling behind--and very importantly of our financial institutions, which is what we are doing with the Glasgow Financial Alliance for Net Zero apart from those commitments towards net zero, but annual reporting of these financial institutions across all of their financing activities, so their whole balance sheets, not just their operations of their bank or insurer, but their whole balance sheet of where that stands relative to this transition. So that's very clear--those will be very clear hard numbers against one metric.

Last point, just to reemphasize, that does not mean that we're addressing the full range of issues around nature, around biodiversity, and certainly around social factors and governance factors. And it requires additional information, scrutiny, strategies for that. But we are focusing on this core element because without stabilizing the climate, we can't begin to rebuild a nature-positive world.

MS. CASEY: As far as the work you're doing as chair of the Glasgow Finance Alliance for Net Zero, tell us more about sort of where the accountability will come in ensuring that companies follow through on the commitments. What's the system to check up and make sure those reports are indeed filed and that they are accurate?

MR. CARNEY: Yeah, well, I mean one of the things is that we don't have that system today, and that's part of the reason why we put it in place. So as you said a moment ago, Libby, you know, there's lots of ESG measures, there's lots of sort of gold stars or whatever. And it's very hard to tell who is succeeding, who is not, and how to compare apples with oranges and things in those regards. So that's why we set this up, having this annual accounting. There's something called PCAF standards, which is the gold standard for tracking emissions of companies that you invest in or lend to. So everyone will use PCAF standards. We will have, as I say, these annual reports. We have an external--we have external technical advisory panels which oversee this. It's rooted in the United Nations process, both in something called the Race to Zero, which sets the pathways for industries to move towards net zero, as well as something called UNEP FI, which is the core secretariat, if you will, for the financial sector. So it has all those elements and accountability.

In the end, though, what it is--you know, the main judges will be all the stakeholders of financial institutions. Is a bank moving in that direction? Is it financing the types of solutions that's needed? And also very importantly--and this is a tough one to get right but we've got to tackle this--are they--are those institutions responsibly and transparently supporting the wind down--the winding down of activities that are high emitting, that are hard to abate, that ultimately won't be part of the solution? Because for a transition to work, we also have to do that in a way that supports people in those industries and helps the economy move forward.

MS. CASEY: In order for investors to make smart decisions, consumers to make smart decisions, they have to be able to see what's actually happening, you know, behind that top sheet.

MR. CARNEY: That's right, without question. So--and one of the core things for investors is to make judgements about who's doing well, who isn't, relative to a pathway. So let me--let me be clear about that. If you look at the steel sector, it's one of the biggest contributors to climate change, about 8 percent of human-generated emissions. There is a path, a technical path to reduce those emissions with existing technologies, so called science-based pathways. There's a few of those. And we now have a system where one can look at a specific steel company, where is it relative to that pathway, and then ask the question, well, the investments that they're making, the strategy that that steel company is pursuing, whether it's in Canada, the U.S., Europe, China, is that going to get it on to the pathway? And of course, I mean, I'll be blunt about this. If you're an investor in that sector, it's one of the determinants you're going to use to figure out where is there value being created in that sector, because it's quite possible that a company has those strategies, is going to start to decarbonize aggressively. But the market hasn't fully priced that in. That happens all the time.

And if I can generalize this now, this is one thing that's just beginning to happen in financial markets, which is looking at climate change and the climate competitiveness of a company as one of the determinants of its value. And those who are moving in the right direction are becoming rewarded and the laggards are being punished. That's part of what we've been trying to accomplish in getting the information out there so the market can make those determinations.

MS. CASEY: So where's the boundary between this sort of oversight and information sharing and self-regulation? Where do governments need to step in? Because, yes, investors can make smart decisions in terms of saving the climate, but they also may just make decisions based on the bottom line. And so where's the accountability there?

MR. CARNEY: Well, yeah. Well, there's a couple of things. Let's go to the basics of what governments need to do. One is climate policy. So it's great we talked at the outset, Libby, that G7 nations and others are beginning to step up with the types of commitment in order to be on a path to net zero. Let's take the United States--50 percent down by 2030 on emissions. But what are the underlying policies that are consisting with those reductions? What's happening in the auto sector? What support is there for emerging sectors such as hydrogen, carbon capture, et cetera, et cetera? Canada, where I'm talking to you from, there's a legislated price on carbon out till to 2030. So these are some of the things that governments need to do in order to help the adjustment.

The second thing more specifically to the financial sector is they need to get the plumbing right. We need to--the private sector can take it a certain way on the voluntary basis, but then it needs to be made consistent, and that's the classic example here right now is climate reporting. I think within a few years--I have mentioned a few times net zero plans of companies, of financial institutions. There's a bit of experimentation going on with that right now, but within a few years I think that will have to be formalized, and it's a role for authorities, whether it's financial regulators or securities regulators in order to do that.

The third thing that governments need to do is to help create new markets and make sure the infrastructure is there for markets, the most important of which--or one of the most important I should say--is for so-called nature-based solutions, the carbon offset market. You hear a lot about that market, but it's very small. It's only about a billion dollars a year. It's very fragmented. It's not professional in many respects, and there's a wholesale effort to rebuild or start again with that market. Governments will have to play a role, ultimately, in ensuring that that market is the--has the integrity that it needs in order to scale up properly.

MS. CASEY: We have an audience question for you, Mr. Carney. So we've been talking about so much of the big picture. This is a question coming from a personal investor who's just asking how can a potential investor tell whether a company is genuinely implementing sustainable practices and not just window dressing?

MR. CARNEY: Yeah, it's a great question. I mean, I think first is I would say to Mr. or Ms. Kimmelman who asked the question, that I would go to the annual report and see what they say in the annual report. And the reason I say that is, if they're genuinely implementing these practices, they're part of the company's core strategy, they'll appear in the annual report, not in a separate sustainability report which is off here.

The second thing is what are the metrics that that company uses to measure how sustainable they are? So again, with greenhouse gasses, they should know not just the greenhouse gases that they use in their day-to-day activities but that which they use for the power they use to build or to provide their services and also the emissions in their supply chain and by their customers. So the so-called scope one, scope two, scope three emissions. So first, is it in the annual? Secondly, how well do they account for it in terms of clear metrics? And then finally and crucially, what's their strategy to get them down? And of course, you need a few years eventually to have a track record to see whether they're successful in reducing emissions. Are they putting their money where their mouth is, and are those strategies effective? Those were the--those would be the three things that I would do.

You know, the shorthand for a financial institution is, are they part of the Glasgow Financial Alliance for Net Zero? That's shorthand because that--there's a lot of rigor in order to get into these alliances and then transparency which comes with that. But I think ultimately the spirit of the question is looking at specific companies and how can you tell.

MS. CASEY: Well, as you talked about, it will take trillions with a T--trillions of dollars in investments to achieve that zero emissions future. So talk to us about some of the latest data that indicates that the investments do yield returns. Why would companies invest so much to do this work?

MR. CARNEY: Well, I think there's--there are a couple of reasons. One is the shift in government policy is making it more expensive to emit and a higher return to reduce those emissions. Secondly, it's--there's an alignment with--I'll use the term stakeholders but let me make it tangible--there's alignment with employees, there's alignment with suppliers, and in many cases with customers who are looking for companies that are sustainable.

And I think the third thing--and this is--it slightly goes to the investor question--which is, you know, this is a big--there are a couple of big strategic issues over the course of this next decade. All aspects around digitization is one, and the shift towards a more sustainable economy is another. And so if a company is not focused on it, if it isn't integral to their strategy, it's not an issue for the CEO/CFO, then you've got to ask yourself, well, what else isn't being managed properly in that company? So it is an indicator, a proxy, if you will, for good and effective strategic management and value creation as a consequence.

MS. CASEY: Let's talk about another place where both businesses and consumers are thinking about their money, and that's this emerging energy crisis we're seeing. You know, advocates for renewable energy are saying that this current crisis that we're moving into right now shows the need to shift away from coal and oil as we see those commodities spike. There are also a lot of concerns, of course, Mr. Carney, that energy shortages and high prices will hurt this economic recovery that many countries are trying to do in this sort of post-pandemic moment. So given the position you're in at the intersection of business and climate change, what do you see should be done at this moment to get through to a stronger economy?

MR. CARNEY: Well, I think the first thing to recognize is we have a series of supply chain problems with the restart of the global economy. As you know, semiconductors affecting the value of a variety of things. We've seen it in commodities for the building sector as well. We're seeing it in energy markets, and so there's a common cause for much of this.

Second point, though, is it underscores the need for an integrated energy transition strategy. And so part of that integrated strategy is a transition which has lower and lower carbon fossil fuels at their heart--but still some fossil fuels at their heart. And it is a reality of where we're starting from and where we need to get to.

So it does need to be integrated--but only to a point. In other words, only to an objective, the objective being to decarbonize. And so it has to be transparent, if there are lending or investment in fossil fuels, that when's the end state, when's the terminal point, in other words, as it goes down? You know, big picture there's two things we know. One is we have far too many fossil fuels than we can possibly burn and meet our climate objectives, more than twice as much that we already know about in the ground than we can possibly burn and meet our climate objectives. That's on a global basis. And the second thing we know is that renewable energy on the margin is in most economies the most efficient form of energy, and that lead is widening--and that lead of course continues to widen with the current crisis of energy. So it's about transition, it's about an integrated strategy, and it underscores that we're going to need for a period of time all forms of energy but certainly the fossil fuel component has to decline.

MS. CASEY: And finally, what does success look like in terms of finance at the UN summit? And what does failure look like?

MR. CARNEY: Yeah, well, let me talk about success. We'll leave it on the high level. We need that hundred billion from governments. Secondly, we need commitments from the private financial sector towards net zero that equal the scale of the financing need of the world for the next three decades, so something on the order of a hundred trillion dollars. And thirdly, we very importantly--we need to have in place an approach to get that money, which might end up being the right amount of money, the order of magnitude, but also in a way that's going to flow to where it's needed the most, which is the emerging and developing world, in a way that's commercial and effective. And we need all three of those elements for Glasgow. I could bore you and I won't. I'll stop here--and maybe I already have--but I could bore you about 24 other things we need in the plumbing of the financial sector. But just--maybe just rest assured that those are going to be delivered.

MS. CASEY: We'll be watching. Thank you so much, Mr. Carney. Really appreciate you joining us today.

MR. CARNEY: Thank you very much, Libby, a pleasure.

MS. CASEY: I'll be back in just a few moments with our next guest. Please stay with us.

[Brief recess]

MS. MESERVE: Businesses can facilitate and accelerate change when it comes to meeting environmental, social, and governance goals to the benefit of their communities but also to their employees, their investors and even their customers. How do they move forward to create positive change for groups beyond their shareholders?

I'm Jeanne Meserve. Here with me to discuss is Paul Knopp. Paul is U.S. chair and chief executive officer of KPMG U.S. Great to have you with us.

So let me ask you first, the ESG landscape has changed significantly over the last few years. How are CEOs viewing that?

MR. KNOPP: Jeanne, it's a pleasure to be with you. And there's a lot of momentum in the direction of ESG. That is a certainty, you know, whether it's thinking about the climate or the social element of ESG. And we see more than 60 percent of CEOs in our most recent KPMG CEO Outlook survey saying they're trying to lead with purpose to deliver long-term sustainable value for all stakeholders. We also see that 2:1 CEOs are saying that ESG improves financial performance, which is critically important, and we're seeing that CEOs want to lock in the gains they've had on sustainability during the pandemic as part of their mission on ESG.

But really interesting to say too that CEOs are thinking about the how and trying to envision the how with respect to ESG. How do you operationalize, how do you transform those business models? And I think it's the reason we're seeing a lot of interest in our own KPMG ESG solution KPMG impact today.

MS. MESERVE: Stakeholder capitalism is the in-vogue phrase, and I'm wondering which stakeholders are standing out, and how are corporations meeting their demands?

MR. KNOPP: Well, Jeanne, certainly all stakeholders are relevant. We see institutional investors in our CEO surveys really standing out, the tip of the spear. But also, the regulatory environment is very focused on climate. It's very focused on the human capital element of ESG. And we expect more requirements potentially coming out of the SEC when it comes to climate and human capital, more disclosure requirements, more transparency. And we certainly are seeing that in the EU.

I think it's really important, though, to point out that our employees are a huge stakeholder when it comes to ESG. Employees want to work for organizations that have a purpose, and that purpose needs to be tied to the culture and to sustainability in the future. And there's no doubt that our customers are critically important when we think about ESG. They're looking at their suppliers and they're looking for accountability, transparency, and they're looking for progress when it comes to all elements of ESG.

MS. MESERVE: You mentioned climate. The UN Climate Change Conference is coming up shortly. How are corporations going to respond to demands for decarbonization, and what is their role going to be vis-à-vis government?

MR. KNOPP: Well, Jeanne, I already mentioned that one finding from our survey that CEOs, more than 75 percent are looking to lock in the gains on sustainability, reduced emissions that we've had from the pandemic or during the pandemic. But they're also looking to mitigate financial risk. They're looking to improve their operating models. They're looking in some cases to really transform their own business models to lock in those gains and to improve operations. You know, we see them trying to operationalize sustainable behavior, sustainable action to ensure that they are more efficient, they do realize those better financial performance metrics.

And you know, stepping back too, we've talked to many CEOs--and I engaged with CEOs where we talk a lot about the same journey that we're on with respect to digital transformation we're going to be on with respect to ESG, and they are very linked. The digitization of business, digitalization of business, is leading to progress on several fronts with ESG. And we're seeing real strong progress in that area.

I would say too at KPMG we're on our own journey, and it's very important to note that as part of our journey we're committed to being a net zero organization by 2030 while also achieving a 50 percent reduction in direct and indirect greenhouse gas emissions and also looking at setting the internal price of carbon. We've done that recently, and it's really leading to solid business decisions and operationalizing some of those business decisions that I referred to earlier. So we're seeing real progress at our own organization when it comes to ESG.

MS. MESERVE: Is KPMG viewing ESG as a market opportunity?

MR. KNOPP: There is no doubt that ESG is a huge market opportunity. We believe ESG has the power to really transform business. Again, you know, companies are looking at ways to transform their business models to be more environmentally friendly, to connect more with their employees, to have better governance models moving forward into the future. And they're all--they're proactively addressing these ESG factors, you know, not just because of the long-term societal impacts of ESG, Jeanne, but also because they're really trying to realize the benefits real time, realize the benefits today through better engagement on climate, through better engagement with their own employees, and certainly through engagement with our customers and our clients as we try to ensure that ESG is the watermark for everything. We kind of look at it at KPMG as the watermark through which everything runs in our organization. You know, we tap into people to ensure that they are excited about the journey that we're on but they're also very engaged in wanting to work with our clients to help our clients improve on their own ESG journey.

And very importantly, Jeanne, too, last week we announced a $1.5 billion investment over the next three years for KPMG globally to harness the data around ESG, to transform technologies to fit to the ESG solutions that we need, and also to invest in our people, invest in training, and expand our workforce when it comes to ESG capabilities in the future. So we really think that ESG is accelerating a lot of change, and we're certainly on that journey at KPMG and we're certainly with KPMG IMPACT--the solution that we have that's diverse, it's multidisciplinary, it's global--we're seeing a lot of interest in what we can deliver to the market with KPMG IMPACT.

MS. MESERVE: Paul Knopp, U.S. chair and chief executive officer of KPMG US. Thanks so much for joining us.

MR. KNOPP: Thank you.

MS. MESERVE: And now back to The Washington Post.

[Video plays]

MS. CASEY: Welcome back. If you're just joining us, I'm Libby Casey, politics and accountability anchor at The Washington Post. My next guest joins us to talk about sustainable investing. I'm pleased to introduce Anne Simpson from the California Public Employees Retirement System, or CalPERS, one of the largest pension funds in the world. Welcome to Washington Post Live.

MS. SIMPSON: Yes, good morning. [Audio distortion] be with you.

MS. CASEY: Thank you so much for being here. So let's talk about what CalPERS has to do. You know, you have this fiduciary responsibility to pay pensions and to prepare long-term so you can continue to pay those pensions of people decades from now. So where does that mission overlap with encouraging companies to be environmentally responsible?

MS. SIMPSON: Well, thank you for that question. Corporate prosperity is what we rely upon so that we can harvest the returns and pay pensions. You know, for every dollar that we pay out in pensions, over 50 cents comes from investment returns. So we are inextricably locked in--not just with society but with business--in facing these sustainability challenges.

Now when you rightly ask where does the environment fit into this, just take the example of climate change, or think about other planetary boundaries around biodiversity or water management. These environmental issues matter to financial markets because they affect risk, but they also present huge opportunity, particularly as we're attempting to move towards net zero and the financial markets are full force driving companies in that direction.

MS. CASEY: How do you think about climate change posing that risk to your investments? You know, I'd like to share with you a new Washington Post headline. Let me read this here. "Already 18 weather disasters costing at least $1 billion each have hit the U.S. this year." And, Ms. Simpson, it goes on to say that these disasters are coming in quicker succession so the nation can't recover. It doesn't have time. How do you factor that into investing?

MS. SIMPSON: With great care, and here's why. You know, there are two dimensions really on climate risk. One is thought of, as you mentioned, physical risk--you know, where staff is, ZIP code risk, vulnerability to extreme weather events, be that, you know, wildfires here in California where we've had horrific wildfires--the great irony being, of course, our members are the firefighters who are there on the frontline tackling the blaze. But the big question they're asking us is, well, if the emissions are causing the temperature rise which is leading to this vulnerability to wildfire, which is then posing risk to life, limb and of course to investments, then we need to do something about bringing the emissions down. So that's the physical risk.

But there's another risk that we have to pay attention to in the portfolio, and that's transition risk. This is when a company has got to make huge changes to it capex--that's, you know, its own internal investment of shareholder funds--its strategy in getting from where we are now, which is on track for over 3 degrees warming world, to the net zero goal of 2050, which is what we need. So--and we're not talking about easy industries for this transition. You know, we're looking at oil, gas, utilities, transport, cement, steelmaking, getting these industries onto that low-carbon track is incredibly demanding. So the transition risk we face is that companies fail, either because they don't have the imagination, they don't have the right people on the board, they don't have the incentives, or the information in the market to, you know, make good decisions. And right now, we're in a sort of--something somewhat better than snake oil but not much in terms of corporate reporting and data gathering on this. So there's a lot to do at COP26 to actually give the market the information and also to get the incentives aligned to help with this transition.

MS. CASEY: And tell us more about what you'd like to see come out of COP26 in terms of that element of risk reporting and making it more standardized, making it mandatory.

MS. SIMPSON: Yeah. No, you're absolutely right. This is an essential issue for investors who, you know, we went to Paris in 2015 to say, hey, first of all, the markets are being distorted in two ways. Markets can be forceful and powerful, but not if they are ill-informed. At the moment, we simply don't have the data in a standardized, consistent, verified format integrated into the financials, which is what we need to make good investment decisions. We're sort of rather groping in the dark. You know, and you think about you go shopping to buy a can of beans, you expect to be able to see what's in the tin. That's the purpose of the label. Well, when we're buying investments, we simply don't have that kind of information that's going to help us understand risks that are ahead of us. So that's number one for COP26. We've got to have global standards of climate risk reporting so that the financial markets can play their part--and also so that regulators can do what they need to do.

The second thing is this question of the market being distorted by misaligned incentives. Think about hundreds of billions of dollars in subsidies to the fossil fuel industry. Now there was a time in life when that probably seemed like a good idea about fostering energy independence and so forth for particular markets and countries within those markets. Now we're at a point where this is actually a drag. It's holding us up on the transition to net zero. So they have to go.

Secondly, we must have a price on carbon. Right now, carbon is the--and its friends--carbon and friends--and the emissions are one of the culprits in global warming. We need to bring it down, and therefore we need to put a price on it, because markets work best when the incentives are aligned. And without carbon pricing, we simply don't have that. So that's our biggest to-do list coming out of COP26. And with those in place, the financial markets will really be able to scale up finance far more effectively, both to finance the opportunity for the new--for the new businesses but also in bringing down emissions, which is vitally important.

MS. CASEY: So CalPERS is part of a group of pension funds and private equity firms that recently announced agreement on a standard reporting, a standardized way of reporting on these ESG performance metrics. We're talking about environmental, social and governance records. How significant is that development? Where's sort of the incentive versus enforcement on that one?

MS. SIMPSON. Well, we've got a couple of very big things going on. In public markets, we have Climate Action 100+, and this is an alliance of now an eye-poppingly large number of assets under management. We have a $55 trillion alliance in the financial markets focusing on the companies that are the largest sources of emissions now--globally.

We now have a 111 of these largest greenhouse gas emitters committing to net zero. And you might think, okay, pretty good. What does that mean? Well, Bloomberg New Energy Finance calculated that's equivalent to 25 percent of global greenhouse emissions, or about the annual emissions of China. So this shows that the financial markets--with data, with engagement, with their voting and ability to hold boards accountable--can get these net zero commitments. And yesterday Chevron joined the club. So we're making fantastic progress in public markets.

Now the problem then is how are we going to track these issues and make sure we are managing these risks in private markets. And this is a tricky one for regulators because, for example, in the United States the regulations don't easily extend into private markets. That's something Gary Gensler and friends are thinking about and trying to work out at the moment. You've got a systemic risk. And we're not just thinking about climate change. We're thinking about human capital management issues as well--you know, diversity, job creation, a whole range of important matters that we need to start collecting data on.

So the initiative the CalPERS has developed is called the ESG Data Convergence Project, and we set this up with a number of our large private equity partners. And the idea is really to bring into the private markets the understanding of risk and return on sustainability, that we are managing to make progress on in public markets. Because there's no point in, you know, playing whack-a-mole with this. You know, you have companies decide to dispose of assets, they are the high-emitting assets and go into private markets, and then it really is a case of out of sight, it's easy to be out of mind. So the idea of this project that we have launched in private markets is really to give us a view of these risks and opportunities on sustainable investment right across the total portfolio.

MS. CASEY: Let's talk more about that question of sort of what happens when interested parties divest, right? So here's an example. You argued this fall after Harvard University cleansed its multibillion-dollar investment fund of holdings in fossil fuel companies, that when these big investors divest of their holdings, they lose the base of ownership. And I've heard you, Ms. Simpson, talk along those lines about a company actually celebrating when CalPERS divested because it meant they could bring in new shareholders who might just care less about the climate or social responsibility. So explain your philosophy of knowing when to hang onto an investment to try to make change as someone with a stake versus just getting out of it and selling the interest in a company that isn't making the transition fast enough as a statement of principle.

MS. SIMPSON: Well, it's a statement of financial fact, is this: When we sell our shares--if we divest, as it gets called--if we sell our shares, guess what? They don't vanish. What happens is we sell them for money to another investor who then owns the asset that we've disposed of. Now that's a normal part of the market. That's what markets are there to do, to help people buy and sell things. It's almost the definition of a market. But when we're looking at a systemic risk like climate change and we want to bring global emissions down, me selling CalPERS' assets to you who might have a different investment strategy and wants those assets, does absolutely nothing to the emissions. So for CalPERS, in managing a risk like climate change, we can't use divestment as a solution.

Now there are certain assets that we don't see capable of being part of the transition to low carbon, and an example there is thermal coal. Companies reliant on more than 50 percent of their revenues, CalPERS and CalSTRS, our sister fund in California, we disposed of coal some years ago following a California state mandate on the arena. However, it didn't discharge us of our fiduciary responsibility to work out whether this was the right investment decision.

So for oil and gas, we have to realize that 80 percent of the world's industrial activity is dependent on fossil fuels. So as selling our shares to another investor in a highly liquid market is--you know, might lay off a risk for us in terms of, say, stranded assets, but it doesn't protect our members' assets from the risks of climate change itself. The only way that we can tackle that is to get to the source of the problem, which is these emissions. If we've got just around a hundred-plus companies responsible for 85 percent of the emissions in our portfolio and public markets, then we need to get busy with other investors who've also got a long-term approach to actually bring those emissions down.

Now if we sell our shares, we lose our seat at the table. And I give you an example here with Exxon where we worked very hard with CalSTRS, with other big pension funds, New York City, New York state, to bring--to support Engine 1 in bringing new directors to the board. And candidate number three nearly missed by a whisker. And I was sort of looking back at the divestments that have taken place in recent years at Exxon and saying, well, if you hung on, you'd have been there to cast your vote and really secure new expertise, new energy industry expertise, new understanding of renewables onto the board of Exxon, which ultimately is what's going to make the change. We need Exxon to make the net zero commitment and to put the strategy and the capex behind that so that the company can prosper over the long term. It needs to change course. And for that, we need a new board. For that we need the votes to get climate-competent boards of directors at these big companies where the transition is a critical part of the financial future.

MS. CASEY: And can you talk about the push-pull that takes place before that transformation might come? Because essentially CalPERS is making money off of investments when companies may not yet be where you'd like them to be on climate solutions. So how do you have that conversation with people who have, you know, CalPERS as their pension plan who say, look, I have moral objections to this, I have real concerns about this? You know, you were talking earlier about some of those first responders who were fighting those very fires that climate change is fanning the flames of.

MS. SIMPSON: Yeah, those firefighters, those first responders, they're CalPERS members. So the issue--when I think about doing investment like a firefighter, the first advice you get from the fire service is protection. You need readiness, you need protection, you need to put resilience in place. And if you think about that from a portfolio, from an investment point of view, it means you look at the risks that your investments are exposed to and think about how can you either mitigate or manage those risks and make sure that you're being rewarded for taking them. That really is just the day job of an investor. It's finding rewards for risk taking. There are various ways of thinking about risk premium and what they bring. But if we're running risks that aren't being recognized, measured, understood and then mitigated, we're in serious trouble with our fiduciary duty.

You know, we have to be able to sustainably pay pensions for 2 million people over the very long term and generate cash in the short term. We have to pay out about $25 billion a year in cash to current pensions and grow the fund at 6.8 percent over the very long term. So this is not an easy job at all, not for the faint-hearted. But in the midst of that, our understanding of risk and the opportunity is going to be at the heart of it all.

So on climate change, this question of do you walk away from the problem or do you tackle it at source, that's the dilemma. That's the question. So if CalPERS, with our size and our scale, our view is that in partnership with other investors, in order to make our portfolio resilient, we need to be part of driving the transition in the real economy, not just, you know, greenwashing our own portfolio. You know, that has been a concern that's been out there in the market, is are investors just doing things to make themselves look marvelous or are they really getting down and dirty and rolling their sleeves up and working with companies to make sure that there's transition in place, which means the right board of directors, the right strategy, the right financial reporting, and the right plans to make sure that the impact on the workforce and the community has been taken into account as well--you know, the just transition as it's known.

MS. CASEY: As you've made decisions about investments, one of the questions about ESG investing is how the returns compare to more conventional investments, because we talked about you have to pay out those pensions and you have to keep generating growth for the future. So how did it compare?

MS. SIMPSON: Well, after the last financial crisis, CalPERS really went back to the drawing board thinking about this question of returns, because it was--it was just before I came to CalPERS. But the fund had been almost brought to its knees financially by the great financial crisis. You know, I--CalPERS went into that financial crisis 101 percent funded. That means we had a bit more by way of assets than we owed in liabilities, which is the place you want to be, because that's safety and soundness for the members. The financial crisis took that down to around 65 percent funded. So this question of the financial returns is absolutely fundamental to being a pension fund. It is why pension funds exist, is to allow people to save for the future for us as fiduciaries to invest that money and make sure it grows over time, and then, as I said, every dollar we pay out in pensions, over 50 cents comes from investment returns. So it's of critical of importance. So our members are looking for that safety and soundness in their pensions.

Now, our job on the investment front is to allocate capital, understanding the risks and the opportunities, and that's where we began to put together a new framework, which is to say, aha, we are coming to appreciate the financial capital on its own is not the only thing we need to track, understand, you know, think about. We need to understand that human capital is vital to value creation and to risk. And the pandemic has demonstrated that with brutal clarity for everyone. The social protests for racial justice in the United States and elsewhere also brought this home in an absolutely compelling way.

Then we have physical capital. Think about companies' access to water, impact on biodiversity, the impact of global warming. So essentially, we now at CalPERS don't put ESG over here in a little bucket. And it's a problem for an investor because there's no letter for F, for finance. It's just sort here's ESG, all marvelous, now how do we bring this over to our day job of finance? Well, the way we've approached this is to say, no, no, no, no. These things are interlinked. And in order to produce the financial returns, you have to take account of human capital and physical capital management. And that is really the basis for the strategy that we have which goes right across the portfolio.

So we look at--we've essentially got three things we can do. We can be advocates with policymakers and regulators. That's why we'll be at COP26 arguing the case for carbon pricing, mandatory risk reporting, things that are going to help the markets work better.

Secondly, we've got the [unclear], the owners, and the allocators of capital to engage. That's the second piece. That's Climate Action 100+. We've now got 55 trillion focusing on the world's systemically important carbon emitters and getting big results.

And then the third part is integration. That's where we take our understanding of these three forms of capital into our investment decision making. When we produced our first TCFD--you had Mark Carney on earlier, Mr. TCFD himself--our TCFD report assesses that about 20 percent of our portfolio globally in all asset classes is at risk from climate change. But the good news is, in our private assets we have around $15 billion--close to 20 percent of all private market assets are in what you might call climate solutions or renewables, water storage, energy efficient buildings where we also have a responsible contractor policy. So for example, then we see in that strategy for our real assets portfolio. This has been very good for returns, because we are finding that environmentally efficient buildings, both on energy and water and waste, attract tenants who are going to appreciate being in that kind of facility. And also our responsible contractor policies--so think, you've got people doing the maintenance, the service, the construction who are being paid a fair wage and have the right to union representation, if that's the way the workforce wants to go. And we have a reporting framework for all of this so that we can keep track of what's going on. So these aren't just, you know, warm words that we pull out of nowhere to sound good. It's tough work. And we know we've got so much more to do. But the progress that we can make is by understanding it's not a matter of it's ESG or it's finance. It's actually these forms of capital that we need to manage to create the returns. So it's a far more holistic--

MS. CASEY: Hence your ESGF.


MS. CASEY: Sorry, yeah, hence your ESGF.

MS. SIMPSON: Yeah, but you're right. How many more letters of the alphabet do we need? So it's really why we like and we use the term sustainable investment, because it's the day job of a pension fund. You know, your ability to continue for the future without undermining the assets that are going to make that possible is essentially a reasonable definition of sustainability. And I think somewhat in the spirit of the Brundtland Report where that idea was really first put into the public domain in a very clear way.

MS. CASEY: Well, we have to leave it there, but it's a perfect place to end. Anne Simpson with CalPERS, thank you so much for joining us today.

MS. SIMPSON: Well, thank you for having me. It's been a pleasure.

MS. CASEY: And thank you for joining us. I’m Libby Casey. To see what interviews we have coming up, please head to to register and find more information about all of our upcoming programs. As always, thanks for watching.

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