Climate Change Risk and the Maryland State Retirement System

Climate change poses a real and meaningful threat to economies, industries, and companies at global, national, and local levels. The physical impacts of climate change create multiple, well-documented risks to people, governments, and business, but the risks are not limited to physical damages: other important risks include loss of competitiveness and value associated with the transition to a low carbon economy, and legal liability for the mismanagement of such risks. These risks are particularly relevant to public pension funds, which have long-running, predefined obligations to beneficiaries and need to sustain growth over longer time horizons.

In recent years, the financial community and many state governments have begun working to understand the nature and extent of the climaterelated risks to which their investments are exposed. Major efforts have been undertaken to promote climate risk assessments and to establish standards for related disclosures; many thought-leaders now argue that climate risk management is mandated by fiduciary duty. Stockholders, including major pension funds, are pushing companies to quantify their emissions and “stress test” their exposure to climate risks. Such risks accrue to all investors; fiduciaries need to understand the implications of these risks for their portfolios.

This is particularly true of state pension systems, and this report highlights the importance of incorporating such risks in the context of Maryland’s State Retirement and Pension System (SRPS). The Maryland SRPS currently manages over $47 billion in assets on behalf of over 380,000 members across numerous state and local government agencies. While some other state pension systems are beginning to systematically address their climate risk exposure, SRPS has implemented only some of the important policies and actions related to climate risk management.

Fortunately, industry leadership groups, working with diverse stakeholders, have begun developing best practices for managing climate risk. These include clearly articulating a fund’s investment philosophy and governance principles with respect to climate change, conducting a climate risk assessment, leveraging stockholder privileges to engage with corporate boards, and reallocating assets. Each of these practices requires, and is strengthened by, transparency of strategy and action. While SRPS has embraced some of these best practices, it has only partially implemented others. We highlight that the State of Maryland could benefit from (1) clarifying its investment principles, (2) undertaking a comprehensive climate risk assessment, and (3) increasing its corporate engagement and transparency.

The report offers several policies the Maryland State Retirement and Pension System could adopt in order to address its climate-related financial risks, and in doing so seeks to start a conversation and initiate a process of stakeholder engagement that can illuminate how the State might proceed in incorporating climate impacts into its investment strategy.