Big news from California: The state legislature has just passed a bill, SB 964, that requires two massive pension funds run by the state, the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS), to factor in climate-related financial risk and report progress both on that, and towards meeting the goals of the Paris Agreement.

“This vote was about what we value,” Dan Jacobson, director of Environment California, said in a statement. “California is saying there's nothing we value more than our children and grandchildren — and their inheritance must include clean air and a healthy planet.”

Climate risk is, in simple terms, the risk to businesses, financial institutions, infrastructure and other physical and non-physical assets from climate change. It can range from the obvious — lost value of coastal property due to rising sea levels — to the more hard-to-determine impacts of complex systems, such as crop reductions due to drought.

Over the past few years, climate risk has gone mainstream, as more and more investors, asset managers and others in the financial industry are accepting the conclusion that climate change will impact business operations, and that smart businesses will not only plan for this but report on how they are addressing these potential impacts.

When companies refuse to act, investors and shareholders, increasingly, will. Last year, shareholders at ExxonMobil, the US’ largest oil company, went against the board’s recommendation and voted overwhelmingly to ask the company to disclose the impacts on its business under a 2-degree scenario — something that the oil giant had blocked the previous year; Harvard Business Review called it a “tipping point for climate issues.”

“Part of why the Exxon vote was so high was because Exxon has been in the news for covering up climate change, and that played a role in investor concern about [the company],” Danielle Fugere, president & chief counsel at the non-profit As You Sow, told Sustainable Brands.

Notably, the California bill takes a broad view of climate risk, including “risk that may include material financial risk posed to the fund by the effects of the changing climate, such as intense storms, rising sea levels, higher global temperature [and] economic damages from carbon emissions.” This, Cox believes, will give it real teeth and power.

“The fact that this bill requires them to look at fairly broad-definition climate-related financial risk means that businesses and companies that the funds invest in are going to be on notice,” she said.

California is the largest state in the country, and by some estimates, the sixth-largest economy in the world; thus CalPERS and CalSTRS are the two largest public pension funds in the United States, and among the top 15 globally. That means the impact will be felt widely, as both funds invest heavily outside of the Golden State.

“CalPERS and CalSTRS are seen as national leaders among pension funds, and the kinds of risk that SB 964 requires them to consider are the kinds of risks asset owners and investors are going to have to be dealing with nationally,” Cox said.

Moreover, there’s momentum at the national level. Shortly following the passage of SB 964, Senator Jeff Merkley (D-Oregon) introduced the Retirement Investments for a Sustainable Economy (RISE) Act in the US Congress. If passed, it would create a mechanism to factor climate risk into investments made on behalf of federal workers' pensions.

The ultimate lesson? Climate risk is a real concern, and building a business that factors it in is now a necessity. Investors, consumers and now governments, increasingly, are all demanding it.