Rising to the challenge: 2023 TIAA Climate Report
A message from TIAA
TIAA has looked after the financial futures of millions of savers and investors for over a century. We've managed through numerous challenges over those decades—including economic booms and busts—with a steady hand, always with clients at the forefront of our decision-making.
We believe that one of the major challenges of our time is the changing climate. While many have already felt the physical changes in temperatures and weather patterns, flooding, heatwaves, droughts and fires, we also know that the changing climate is transforming industries, complicating supply chains, and driving macroeconomic trends that affect profitability and business models. We recognize that climate change affects our investment portfolios and the methodologies we use to achieve our clients’ investment objectives.
Executing our fiduciary duty to manage our clients’ investments requires a holistic understanding of the implications of a changing climate and how they may impact the growth prospects and values of issuers and assets in which we invest. As stewards of our clients’ financial futures, we must face the challenge and guide our clients’ investments through the transition to a net zero greenhouse gas (GHG) emission economy.
TIAA’s focus during the low-carbon transition is our own operations and the portfolios that we manage, and we believe that reaching a net zero carbon world is essential to our long-term success. We support the Task Force on Climate-Related Financial Disclosure (TCFD) and support its focus on transition plans. We continually review our disclosures for areas where we can provide more information and transparency and will evolve this report over time based on data availability and industry standards.
We are proud of our progress so far, and we hope that global businesses and governments will continue to join us in facing this generational challenge head on. Together, we believe we can achieve better outcomes for our clients and the future of our climate.
Climate beliefs of the TIAA General Account
Our obligation to TIAA retirement plan participants is long term, which means it is our responsibility to consider investment risks, including climate risks, over a similarly long horizon. The scientific findings from the Intergovernmental Panel on Climate Change (IPCC) suggest that physical impact of unmitigated climate change will result in global economic damage over time, with damage increasing as warming increases. Therefore, we believe the transition to a low-carbon economy is an economic imperative. Furthermore, an orderly transition within the 2050 timeframe set out in the Paris Agreement is likely to deliver better economic and investment outcomes than a disorderly or delayed transition.
The following TIAA belief statements have been developed and subsequently updated with this scientific and economic context in mind.
- Belief statement no. 1: The world is transitioning to a low-carbon economy, although the pace is uncertain.
- Transitioning to a low-carbon economy is seen as necessary by many governments and the private sector, and may bring a wide variety of policy, legal, regulatory, technological, and market changes that influence investment fundamentals.
- The pace of the transition will vary significantly by region and sector.
- Transitioning to a low-carbon economy reduces long-term physical risks for investors, and an orderly transition creates less volatility than a disorderly transition.
- Proactively planning for climate risk in business strategy may enable issuers and other operating companies to adapt, while avoiding stakeholder scrutiny or reputational or brand impairment.
- Businesses, real assets and projects across many sectors that actively accelerate the transition may experience increased demand.
- Strategic actions
- TIAA seeks to develop low-carbon transition “signposts” that monitor the pace and magnitude of the low-carbon transition over time. These signposts will be inputs that help determine our interim net zero targets.
- Nuveen offers its clients a variety of low-carbon and climate-focused products in public and private markets.
- Belief statement no. 2: How markets react to this transition will bring risks and opportunities that influence how the GA invests.
- The low-carbon transition is expected to create transition risk for public and private investments with exposure concentrated in fossil fuel and energy-intensive sectors.
- Government-related issuers with significant reliance on the fossil fuel industry are also relatively more exposed, which may manifest in impacts to tax revenues, gross domestic product, and access to capital.
- “Green” sectors may benefit significantly from a low-carbon transition, including renewable energy, green buildings, electric vehicles, sustainable forestry and agriculture, water management, battery storage, carbon capture and storage, energy efficiency, and electricity transmission and distribution.
- Sectors and regions with direct physical risk exposure would also benefit from a low-carbon transition scenario in the long term due to reduced physical impacts of climate change.
- Strategic actions
- TIAA continues to expand the implementation of net zero across additional asset classes in the GA to heighten our focus on investment risks and opportunities stemming from the low-carbon transition.
- TIAA also continues to deepen the measurement and monitoring of physical climate risks, with a particular focus on “place-based” asset classes like farmland, timberland, real estate, infrastructure, and municipal bonds.
- Belief statement no. 3: Decarbonizing the GA portfolio will allow us to properly manage transition risks and embrace investment opportunities.
- Specific investment characteristics that influence transition risk include carbon intensity, expected holding period, liquidity, and the strength of the climate policy regime in the places where we are investing.
- As climate data continue to evolve and mature, carbon emissions data is an imperfect but useful proxy for transition risks.
- Disclosure of carbon emissions data is nonetheless still voluntary in many jurisdictions, leading to lack of data coverage and lack of independent verification of accuracy.
- Adopting a decarbonization objective helps the GA uncover and pursue new investment opportunities, such as renewable energy infrastructure and the U.S. Commercial Property Assessed Clean Energy (C-PACE) program, among others.
- New global sustainability disclosure standards are emerging, such as those put forth by the International Sustainability Standards Board (ISSB).
- Strategic actions
- TIAA is actively expanding measurement of its financed carbon footprint, alongside further build-out of transition risk assessments.
- We work with assets, portfolio companies and other stakeholders in carbon-intensive industries to encourage greater strategic focus on their low-carbon transition.
- Belief statement no. 4: The rate of decarbonization the GA can achieve will depend on government policy and regulatory actions across various geographies and sectors.
- Despite the increasing urgency surrounding climate change, current policies are not sufficient to meet the goals of the Paris Agreement.
- The real economy may therefore decarbonize more slowly than required by a science-based pathway to achieve the Paris goals. Investment portfolios that significantly diverge from the composition of the real economy could underperform more diversified portfolios.
- Significant policy developments in the past year support the overall trend toward decarbonization. TIAA and its investment teams closely track these developments and the implications they may have on our investment portfolios.
- Investment portfolios that decarbonize proactively can get ahead of the expected market impact of government policies before climate risks and opportunities are fully priced in and investment values impaired.
- Strategic actions
- TIAA expects to review its net zero commitment periodically to ensure the commitment remains broadly aligned with the pace and nature of the low-carbon transition, as well as with our goal to achieve long-term positive financial outcomes for our participants.
TIAA’s climate risk management framework
Climate risks are multi-faceted and must be identified and monitored through different lenses across the organization. TIAA began a phased buildout of our enhanced climate risk management framework in 2022, a map of processes that will help us take a consistent approach to how we invest, adhere to existing and evolving regulations, operate our business efficiently and represent ourselves in the fast-changing world. Our Climate Risk Management Framework will help us take appropriate actions and develop strategies for mitigating and managing the effects of climate change on behalf of our clients.
Below are the four key pieces of the climate risk management framework:
- Oversight – The Board, and Boards of our affiliates, are responsible for understanding relevant climate risks and overseeing their management within the overall business strategy and risk appetite.
- Risk assessment – Development of processes to report material climate risks, their transmission channels and their potential impact on existing risk factors and overall risk appetite.
- Monitoring – Incorporation of assessments, including time horizons, that allow us to appropriately inform TIAA’s business activities and decision-making.
- Scenario analysis – Use of scenario analysis to understand how climate risks may materialize and measure potential impacts.
Metrics and targets
Operational emissions: Net zero by 2040
TIAA Global Corporate Services reports on Scope 1, 2 and a portion of Scope 3 emissions. The Scope 3 categories include business travel, employee commuting, waste and water-related emissions.1 While our overall operational emissions increased in 2022 from the previous two years, they show a 27% reduction when compared to the 2019 baseline. We see the increase in our 2022 GHG emissions compared with 2020 and 2021 as anomalous due to the temporary reduction of emissions from the global pandemic resulting in reduced business, travel and related activities during those previous two years.
The General Account: Net zero by 2050
TIAA announced its net zero by 2050 commitment for the GA in 2021, driven by the belief that climate risk is investment risk.
The initial phase of our journey to net zero by 2050 will prioritize assets where data is readily available and reasonably accurate, therefore our interim targets are set for the public corporate bond portfolio and directly owned commercial real estate — these together account for roughly 30% of the GA’s assets.3 Inconsistent emissions disclosure and carbon accounting standards prevent the full and accurate measurement of the carbon footprint associated with the remaining 70% of diversified assets and securities held by the GA. As disclosure improves and carbon accounting best practices expand across asset classes, we will expand our interim targets accordingly. More asset classes are being targeted for 2024 and 2025 as the path toward gathering the data needed for measurement and interim target setting becomes clearer.
TIAA’s fossil fuel exposure
Fossil fuels currently make up over 80% of the world’s primary energy supply and are likely to meet a significant portion of global energy needs for decades to come. TIAA and Nuveen’s exposure to fossil fuel-related investments reflects their widespread past and current role in the real economy. Increasingly, the low-carbon transition is likely to bring major shifts in the energy system. We will continue to monitor these shifts, seeking to balance investment risk and return within our clients’ investment objectives as they unfold.
As a matter of policy, we do not completely divest from major sectors of the economy, including the energy sector. Divestment is a blunt tool that does little to reduce real world GHG emissions and removes our ability to engage with companies and assets over time. We have a long history of stewardship and engagement, with particular focus on the theme of climate change. Our engagement approach is informed by the growing recognition that portfolio-level climate targets are most impactful when they are achieved via real world emissions reductions, not simply by reweighting our portfolio holdings.1
However, this does not mean we will blindly hold an investment without regard for changing market conditions. Our investment process is both dynamic and climate-aware, reflecting our investment teams’ careful balance of risk and return as well as climate-related data and training curated by the Responsible Investing and Risk teams.
Transparency is a key part of our commitment to responsible investing. To that end, we are disclosing our fossil fuel exposure in this report for the first time. The below figures contain TIAA, Nuveen, and all affiliates’ exposure to fossil fuels (in millions) as of year-end 2022.