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CalPERS develops sustainable value framework ahead of review of ESG evidence

Major sustainable investment review at leading institution

The California Public Employees Retirement System (CalPERS), the largest US pension fund, has formulated a ‘sustainable long-term value creation’ framework to shape its interests in environmental, social and governance issues ahead of a planned review of the evidence for sustainable investments.

The three-pronged structure was outlined in a document presented to the $262.8bn (€202.3bn) fund’s Investment Committee earlier this month.

“Long-term value creation requires effective management of three forms of capital – financial capital, physical capital, human capital,” according to the paper.

Physical capital refers to the environment: managing risk posed by climate change, and the use of natural resources and buildings. Financial Capital (governance) means the alignment of interest over equity, debt, public and private investments. Human capital (social), meanwhile, includes health, safety, and labor practices.

It comes ahead of an academic symposium next week (June 7) that will in turn feed into a full “review of evidence” for sustainable investment scheduled for an Investment Committee Board Workshop on June 17.

The symposium was commissioned by CalPERS under the Sustainable Investment Research Initiative (SIRI) banner to debate ESG issues and is billed as a “technical academic inquiry” into the definitions and relevance of sustainability factors and related policy issues for long-term capital providers.SIRI was launched earlier this year with a call for academic papers. Of the 94 submitted, seven will be presented at the event, which will be hosted by the UC Davis Graduate School of Management. A study that the fund commissioned called ‘Climate Change Scenarios – Implications for Strategic Asset Allocation’ will also feed into the review.

“Sustainable investment in its simplest form is the ability to continue, and for a long-term investor like CalPERS with long-term liabilities, it is critically important,” the paper presented to the committee argues.

The fund has also asked consultants Mercer to help it rationalize its more than 100 sustainability initiatives and policies.

The fund’s governance team under Anne Simpson will use Mercer’s recommendations to work with the fund’s Sustainable Investment Cross-Asset Class team and develop a fund-level principles document encompassing sustainability “across all asset classes”.

Simpson’s team, in partnership with the fund’s legal department, has begun drafting a corporate reporting white paper, setting out proposed best practices and “our long-term vision”.

CalPERS has also catalogued its staff’s participation in investor forums and networks – with a view to prioritizing its participation in them. The fund is aiming to release its second sustainable investment report in time for the PRI In Person Conference in Cape Town in October.