Calpers to direct $25bn to green private market investments

Calpers, the US’s biggest public pension plan, will pour more than $25bn into green-related private market investments, in one of the largest commitments by a major fund to unlisted climate assets.

The giant US pension group is examining the private equity, real estate and infrastructure markets, particularly in Asia and Europe, as it looks to deploy the capital over the next six years, a senior executive told the Financial Times.

“Those are the ones [private market assets] that have very evident climate investment opportunities,” said Peter Cashion, Calpers’ managing investment director, sustainable investments.

The comments are the first time Calpers has publicly revealed how it plans to spend an extra $53bn it committed last November to an expanded low carbon assets portfolio. The new goal would take the total portfolio to $100bn by 2030, or more than double the initial $47bn in funds.

“We’re expecting [private markets will] represent more than half of the $53bn,” he added. “It’s pretty significant.”

The allocation will propel the $483bn fund to become one of the world’s largest investors in so-called climate solutions, in spite of the political pushback against environmental, social and governance-based investing in the US.

“The reason we have conviction around it, we’re really doing this [is] to generate alpha and outperformance, because we see the investment opportunity set from this really fundamental change in the economy,” said Cashion. “At the same time, it’ll have a side benefit of having a portfolio that has a lower carbon intensity.”

California is distinct for having set out a framework aimed at using the state’s big public pension plans, including Calpers, to drive investments in sustainable technologies and other green assets.

Calpers’ green investment push comes as the issue of how to pay for a shift to a cleaner economy dominates global discussions about climate change.

Almost 200 countries agreed to transition away from fossil fuels at the UN COP28 climate summit in Dubai in December, leaving governments with already-stretched budgets scrambling to drive investments to green solutions. 

A report last year from the Climate Policy Initiative found that climate finance globally will need to increase to about $9tn a year by 2030, up from $1.3tn in 2021-2022, in order to meet the Paris accord, where countries agreed to limit the long-term global temperature rise. Investments from pension funds and the private sector are expected to play a crucial role. 

In real estate, Cashion said he saw opportunities in so-called green buildings. “The measurement for what qualifies in your real estate portfolio as green is becoming easier,” he said.

Calpers would build out its investments in renewable infrastructure, he said, as well as looking at private equity investments in companies that support the shift to clean energy, citing those servicing wind turbines or developing software to make solar panels more efficient as examples.

“[Renewables are] already an area where we’re very active and we’ll continue to do that and build out that portfolio,” he said.

In terms of where the climate money would be deployed, Cashion said his “expectation is that Asia and Europe will present significant opportunities”, with a particular focus on emerging markets.

Cashion, who was in Europe to meet other pension funds, said that with the rise in global greenhouse gas emissions now coming from non-western nations, “the opportunity set in emerging markets will be huge”. 

But he added that the emerging market countries where Calpers could operate at scale was a “pretty small number” and would be driven by where the asset managers it uses saw the best opportunities.

The Biden administration has tried to make the US more attractive for climate investors with tax incentives, through the Inflation Reduction Act. But Cashion said its investment criteria were global.

“The IRA has been has been excellent and has increased (investment) opportunities for us,” he said. “But we’ll be driven by where we see the opportunities.”

As well as working with its existing asset managers, Calpers would look to work with “specialised, smaller managers who may well have access to deals that the bigger players do not”.

Further details of the climate plan come two months after Calpers approved plans to increase its overall allocation to private markets from 33 per cent of plan assets to 40 per cent.

A spokesperson for Calpers said this increased allocation, approved by the Calpers Board of Administration in March, would not be measured on the same timeline as the $100bn climate plan, which is linked to 2030. No further details on investments from the wider private markets drive were disclosed.

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