CalPERS develops consolidated governance policy, will feed into new ESG manager expectations

Leading fund to simplify its governance policy framework

The California Public Employees Retirement System (CalPERS), at $299.5bn (€264.6bn) the largest US pension fund, is consolidating its three separate governance policies into a single unified, global policy – which will feed in to its forthcoming ESG Manager Expectations document due later this year.

The plan is that the giant fund will consolidate its policies on proxy voting, corporate governance director nominations and emerging markets equity principles into one simplified policy. It means its existing statements of policy will be repealed.

The idea is that its proposed revisions will “establish one simplified policy” which frames an updated set of global principles to reflect its own investment beliefs and include corporate engagement and public policy advocacy. Emerging markets are being integrated so that there is consistency across “all investment strategies, geographies, and engagements”.

The action is being taken, according to fund documents, to “provide a policy framework for the forthcoming development of procedures, including ESG Manager Expectations”.

This document, currently being developed by CalPERS’ ‘Cross- Asset Team on Sustainable Investment’, is due to be presented to the Investment Committee by June this year. It has been in the works for more than year: Responsible Investor reported in November 2013 that CalPERS was planning to work with fellow leading investors on their expectations about how asset managers should handle environmental, social and governance (ESG) integration, via its ‘Global Peer Exchange’. Meanwhile, other asset owners, such as a group comprising the BT Pension Scheme, the Environment Agency Pension Fund, West Midlands Pension Scheme and others in the UK are also involved in similar projects.One of the aims of the governance consolidation is ‘total fund policy alignment’, and to help align the fund’s interests with those of the “managers of its capital, including investee companies and external [asset] managers”. External consultant Wilshire Associates is backing the consolidation to achieve “simplicity, consistency and clarity”. The next step is for the policy to be adopted in March 2015, pending feedback.

According to a document presented at CalPERS’ Investment Committee last week, the fund has also begun to explore the issue of income inequality, a strategic priority along with ‘proxy access’ and climate risk. It plans to identify an academic partner through the University of California, who can provide specialist assistance with a literature review, and host a seminar on the issue.

In addition, on April 21-23, the fund will host a “high-level international consultation” for the UN Environment Programme’s Inquiry into the Design of a Sustainable Financial System. It has also emerged that CalPERS has taken on MSCI to help it with ESG data.

Meanwhile, John Chiang, who as Treasurer of California is an ex officio board member of CalPERS and fellow fund CalSTRS, has advocated that both schemes re-evaluate their proxy voting guidelines to promote term limits for corporate directors and even greater board diversity. Explaining his support of term limits for directors, Chiang wrote
in a letter to the funds: “Long tenure (for directors) not only impedes progress toward diversity, it may impair independence” of the board. Chiang also called on CalPERS and CalSTRS’ definition of board diversity to be broadened to include “sexual orientation and gender identity.” Currently, the criteria for diversity as defined by the schemes are: skills, gender, age and ethnic background.