How many policies and statements does CalPERS have aimed at guiding its massive investments, valued at $229 billion last week, in ways that look at the environment, social conditions and corporate governance?
A new study found 111 of them.
The impressive list, growing over decades, was compiled by a consultant as CalPERS prepares to integrate what has become known as ESG (environment, social and governance) issues into its investment process to reduce risk and increase profit.
A report prepared by Mercer consulting for a workshop last month said CalPERS has been “a respected leader in the world of ESG,” even before the “ESG moniker” was applied to the issues.
The Mercer report listed “111 policies, commitments, memberships and letters of support and endorsement that CalPERS has developed or publicly supported, which in some way relate to ESG.”
Investment officers for stocks, bonds, private equity and real estate gave the workshop their views about creating an ESG framework for decisions. A board member asked the senior officer for the biggest portfolio, stocks, about handling a 112th policy.
“We desperately, the investment office, need a real prioritization of the issues you want us to engage on,” replied Eric Baggesen. “We cannot engage on 111 discrete statements.
“So we need to find a way to focus that body of work down into something we can actually manage, and deal with, in conjunction with everything else we need to do in our daily activity.”
The potential clout that comes with investing billions has led to a global movement among public pension funds and other big investors to seek ways, broadly speaking, to improve the world without sacrificing investment returns.
Among the groups pushing ESG issues are the United Nations-connected Principles for Responsible Investing and the International Corporate Governance Network.
Academic studies say ESG may boost investment returns. Studies for CalPERS found similar results from adding women to boards of directors to improve diversity and from putting underperforming companies on a “focus list” to improve corporate governance.
ESG also may help investors reduce risk. A consultant told the workshop that a hard look at environmental and safety policies might have avoided investments in BP, hit by the gulf oil spill, and Massey Energy, hit by a mine explosion that killed 29 persons.
CalPERS has been sharply criticized by some for being a leader in the movement away from focusing solely on investment returns, calling it a costly mistake.
“The Next Catastrophe” by Jon Entine in Reason magazine, February 2009, takes particular aim at activist investing led by former state Treasurer Phil Angelides and the failures of “socially responsible investing.”
Board member Priya Mathur said at the workshop that she wanted to “draw a strong distinction” between ESG and socially responsible investing.
“I think socially responsible investing is really triggered by social objectives as opposed to investment and performance objectives and risk-management objectives, which I think is what we are really talking about today,” said Mathur.
Board member George Diehr, the investment committee chairman, said he had asked a consultant for his evaluation of ESG about a week before the workshop.
“He said if all things are equal between a couple of investments, if you consider ESG factors you are probably not likely to do worse by taking them into account,” he said.
Diehr said there is a need to ensure that staff is not spread too thin, that time and energy spent on ESG get returns, that more research is done on ESG results in some asset classes, and that whether ESG skews passive index investing gets a look.
“Let’s be careful about getting on some green bandwagon that isn’t real,” he added.
In one well-publicized ESG issue, CalPERS and others successfully pushed for a provision in the Dodd-Frank financial reform bill last year that supports allowing shareholders to put their candidates for the board of directors on company ballots.
The two pension funds announced the creation of a Diverse Director DataSource of potential candidates in April. But a new Securities and Exchange Commission rule allowing “proxy access” was overturned by the U.S. Court of Appeals in July.
Peter Mixon, the CalPERS general counsel, told the board last month there are two ways the court decision might be reversed: an “en banc” hearing by the full appeals court or an appeal to the U.S. Supreme Court.
“So again, disappointing,” Mixon summed up. “Not entirely over. But it would be a long shot, I think, to get either en banc or Supreme Court review.”
In what may be more like socially responsible investing than ESG, depending on how they are defined, CalPERS is under fire from legislators for not complying with legislation in 2007 calling for the sale of stock in companies doing business with Iran.
Consultants estimated that boycotts of corporate stocks to end racial apartheid in South Africa and reform the tobacco industry cost CalPERS and CalSTRS billions of dollars, with no hard evidence of any results.
CalPERS adopted a policy in 2009 of “constructive engagement” with targeted companies, if selling their stock is not in the best interest of retirees. In May CalPERS said it was divesting its remaining Iran-related stock because holding it was more costly.
The Senate approved a bill on a 38-to-0 vote last week, AB 1151, that the author of the Iran divestment bill said would require future pension fund decisions about Iran divestment to be made in public.
“The foot-dragging and stalling by CalPERS and CalSTRS has got to stop,” state Sen. Joel Anderson, R-Alpine, said in a news release. “Sometimes the Legislature just needs to give a gentle push to bureaucrats to get them to do their job.”
At the workshop last month, the CalPERS corporate governance manager, Anne Simpson, proposed that ESG be replaced by “sustainable investing,” a term broad enough to include “diversity” and “emerging managers” that also states the purpose and goal.
“It seems to me we need a conceptual framework which ties this down to the fund’s production objectives,” she said.
Board member Steve Coony, representing state Treasurer Bill Lockyer, said sustainable is a “buzz word that is about to be used up.” He challenged staff, consultants and board members to come up with a synonym that CalPERS could claim as its own.
Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at https://calpensions.com/ Posted 6 Sep 11