Analysis: a closer look at CalPERS’ sustainable investment research project

CalPERS, the largest US pension fund, is really trying to put some intellectual heft behind its sustainable investment programme.

The $260bn (€198.5bn) fund has begun hosting a massive database of academic research on the topic that’s claimed to be the largest collection of such research in the world. At a stroke CalPERS has done the responsible investment sector a service by making the research accessible to everybody, searchable by keywords, author, year, sample size and scope, or journal publication.

The fund’s academic partners at the University of California, Davis conducted an “exhaustive search” for all the relevant studies they could find.

It’s part of CalPERS’ Sustainable Investment Research Initiative (SIRI) to attract academic research on sustainability. Seven studies (see below) were discussed at a symposium earlier this month.

It’s important to note that the exercise has a “real world” purpose, in that it will feed into an overall fund-wide sustainability plan for CalPERS and, not least, an expectations document for its asset managers, both internal and external. The “independent, credible, comprehensive” review aims to provide clarity on the definition of sustainability – and its potential impact on investment risk and return across CalPERS’ portfolio.

However, a review of the evidence, presented to CalPERS’ Board of Directors, by Professors Steven Currall and Brad Barber of UC Davis and Columbia Law School’s Robert Jackson, point out that academic research establishing a convincing causal relationship between sustainability factors and risk is “sparse”.

The academics argue that an institution could incorporate ethics into its investments if there’s a consensus among its beneficiaries on important ethical considerations – although this may “lead to tensions between ethical considerations and the institution’s fiduciary responsibility.”The impact of sustainability factors on risk and return was “ambiguous” – although there was clear empirical evidence of the implications of shareholder rights.

They conclude: “A large institution should tread carefully on adopting sweeping beliefs related to sustainability factors.”

One suggestion to emerge is that CalPERS should urge proxy firm Institutional Shareholder Services (ISS) and its other clients to focus on the pay-performance link when casting “say-on-pay” votes at US listed companies.

It should also consider supporting the development of new datasets on environmental and social factors, and share existing CalPERS data to encourage academic collaboration.

Details of the research papers presented at the June 7 symposium:
Corporate Governance and the Environment: Evidence from Green Innovations by Mario Daniele Amore (Bocconi University) and Morten Bennedsen (INSEAD). This presented “causal evidence” on the importance of corporate governance for the environmental performance of firms. It’s shown that worse governed firms patent fewer clean innovations.

Stakeholder Relations and Stock Returns: On Errors in Expectations and Learning by Tilburg University’s Arian Borgers, Jeroen Derwall and Kees Koedijk. The researchers built a “stakeholder-relations index” (SI) for US firms over the 1992-2009 period and provide evidence that SI explained errors in investors’ expectations about firms’ future earnings.

Do Managers Do Good with Other Peoples’ Money? By Ing-Haw Cheng (University of Michigan), Harrison Hong (Princeton University) and Kelly Shue (University of Chicago). They test the hypothesis that corporate social responsibility – “corporate goodness” is due to managerial agency problems.

Active Ownership by Elroy Dimson (London Business School/University of Cambridge), Oguzhan Karakas (Boston College) and Xi Li (Temple University). This analyzes the impact of environmental, social, and governance engagements between asset managers and companies. Successful CSR engagements give rise to a positive one-year abnormal return of 4.4%, whereas there is no market reaction to unsuccessful CSR engagements. “Positive abnormal returns are most pronounced for engagements on the themes of corporate governance and climate change.”

Signaling through Corporate Accountability Reporting by Thomas Lys, James Naughton and Clare Wang of Northwestern University find that firms undertake CSR expenditures when they anticipate stronger future financial performance.Corporate Social Responsibility and Asset Pricing in Industry Equilibrium by Rui Albuquerque and Yrjo Koskinen (Boston University School of Management) and Art Durnev (University of Iowa). They found evidence that CSR firms exhibit lower systematic risk and expected returns and that the ratio of CSR profits to non-CSR profits is countercyclical. One of the few studies to show how CSR correlates with lower market risk.

Do Private Equity Fund Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance. David Robinson and Berk Sensoy (National Bureau of Economic Research) find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in “stark contrast to other asset management settings”.