A publication of the fiduciary duty in the 21st century project.
The California Responsible Investment Roadmap is the result of a collaboration between the PRI and the Climate Risk Initiative at UC Berkeley School of Law’s Center for Law, Energy & the Environment (CLEE). It draws on interviews with stakeholders and experts in California, including state policymakers and financial regulators, fiduciaries, and asset owners (representing both the public and private sectors) who already integrate ESG factors into their decision-making. This Roadmap builds on the conclusion of the Fiduciary Duty in the 21st Century Report—that failure to integrate material ESG factors into investment decision-making is a failure of fiduciary duty—by showcasing responsible investment efforts and best practices at the state level and making a set of recommendations for public- and private-sector actions to advance ESG integration in California.
Currently, the PRI has 104 signatories that have their headquarters or are based in California, and several more have a presence in the state. California has the largest state economy in the US and the fifth largest economy in the world, and is a global center for “green” technology, climate science, and climate change mitigation and adaptation. The state has long been a leader in developing sustainability policies, and the large number of PRI signatories have begun to demonstrate growing momentum around ESG integration in investment practices. Given the size of the state’s market and the willingness of leaders in the legislature, executive branch, key regulatory agencies, state pension funds, and the private sector to undertake leading ESG-related commitments, California is an ideal jurisdiction in which to make further progress on responsible investment practices and policies. California has the opportunity to provide valuable leadership in advancing responsible investment policies and practices at the state and national levels in the US, especially so that the United States can keep pace with peer jurisdictions like the European Union in adopting responsible investment policies and practices.
The California roadmap makes 40 recommendations in seven categories:
- Metrics, data-sharing, and defining ESG;
- Institutional investors;
- Corporate governance and disclosure;
- State projects, procurement, and investment;
- State financing authorities;
- Insurers and insurance regulators; and
- California’s goal of carbon neutrality by 2045.
High-priority recommendations include:
- The State of California, led by the Governor or State Treasurer or State Controller, should convene a Task Force on Responsible Investment.
- All institutional investors should integrate material ESG factors into investment processes and decision-making to the fullest extent possible.
- Public pension funds should develop governance structures that encourage better long- term and data-driven ESG investment decision-making.
- Public pension funds should require that investment consultants and investment managers consider ESG factors in providing investment advice or investment management.
- The state legislature should enact legislation directing financial advisors (including investment advisors, broker-dealers, and others) that are licensed and regulated by the Department of Business Oversight to ask retail investors if they have a preference for investments that consider ESG factors and to offer them ESG-aligned investment opportunities.
- The state legislature should mandate climate risk disclosure or Task Force on Climate- Related Financial Disclosures reporting for all publicly traded companies incorporated or headquartered in California.
- The state legislature should direct mandatory climate risk stress testing for financial institutions (state-chartered banks, credit unions, mortgage lenders, and others) under the jurisdiction of the Department of Business Oversight.
- The State Treasurer, Controller, and Director of Finance should leverage their positions on the boards of state financing authorities to add ESG-related disclosure requirements for state financing.
- The Department of Insurance should undertake climate risk stress testing of insurer underwriting and investment portfolios, annually conduct climate risk scenario analysis of insurers’ investment portfolios, and require insurers to identify, analyze and address climate risks to their underwriting and investment portfolios.
- California insurers should integrate ESG considerations into their operations and investment decision-making.