California awards pioneering CalSavers ESG mandate to Newton

California’s ambitious new CalSavers auto-enrolment workplace pension scheme – predicted to swell to $98bn in assets over the next 15 years – has named Newton Investment Management (North America) to run its pioneering ESG option. 
Recently elected California State Treasurer Fiona Ma made the announcement following a meeting of the scheme’s investment board.
CalSavers now becomes the first state-sponsored retirement scheme in the US to offer an ESG option to members.
Nineteen fund managers responded to the scheme’s request for proposals (RFP) in December, with Franklin Templeton, Northern Trust, Nuveen and Schroders making the shortlist alongside eventual winner Newton.
Newton’s successful bid will see it create a mutual fund comprised of an active ESG equity strategy and a passive ESG bond strategy, split 60/40, respectively, according to published board documents.
The equities segment will be run by Newton’s London based team and the passive fixed income strategy will be managed by Mellon Investment Corporation. Both Newton and Mellon are subsidiaries of US custody and investment management giant BNY Mellon. 
Calsavers dropped its ESG option when it appointed State Street Global Advisors to manage its main investments last August, citing cost as the reason.
But RI reported in November that the ESG option had been put back on the table following a review by consultants Meketa into the feasibility of an ESG option which was “balanced” across equity and fixed income investments.
To keep costs down Meketa also suggested CalSavers “consider blending a passive fund with low fees and an active fund with a more targeted approach to ESG”.
Newton’s winning bid will be run at cost of 15 basis points – the lowest among the finalists – with the costs covered by the scheme’s members.Franklin Templeton was the only other finalist to offer both active and passive components in its bid but at a cost of 40 basis points.
Northern Trust offered a passive equity strategy at a cost of 30 basis points; Nuveen offered an active fixed income strategy at 39 basis points; and Schroders offered a factor based equity approach, costing 18 basis points – the second lowest proposal behind Newton’s.  
Newton’s “concentrated” active ESG equities component – which excludes tobacco and companies which “negatively impact climate change” – will prioritise companies that are “improving their ESG performance” over current ESG leaders, according to the documents released by CalSavers.  
Its passive fixed income component, overseen by Mellon, will replicate MSCI’s US Aggregate ESG Index and will exclude firms which breach the United Nations Global Compact and businesses deemed “unviable in a ‘2 degree’ world”. This means investments in oil and gas companies, weapons (including civilian handguns), gambling, tobacco, alcohol, and the metals and mining sector.
The contract runs for three years with the option for three one year extensions only.
The fund’s performance will be monitored “against a benchmark to be selected once the ESG fund is in place”.
“California workers now have even more reason to open a CalSavers account and feel good about investing in their futures,” Treasurer Ma said. “They can now choose to put their retirement savings into investments that protect the environment and champion a more fair and just world.”
CalSavers’ pilot began in November 2018 and will be open to all Californians in July.