CalPERS and the material risks of ecosystem services degradation

How the influential fund is addressing a range of ESG risks

Friends of the Earth (FOE) put out a press release recently announcing the successful completion of a “years long campaign” to get CalPERS to recognise deforestation as a material risk in its investment portfolio.
This was closely followed by another release from Amazon Watch – which monitors the river not the online giant – announcing a win for indigenous peoples. Then came Climate Advisers Chain Reaction Research announcing a ‘Potential Multi-Billion Dollar Investment Impact’ of the change to the fund’s investment policies, with potentially $26bn of affected investment in the Consumer Staples and Materials sectors, where deforestation risks generally reside.
But, as the FOE release also recognised, CalPERS’ rewrite of its Environmental Management Practices, largely undertaken by Beth Richtman, the fund’s Managing Investment Director, Sustainable Investments, goes far beyond addressing deforestation as a risk.
While the changes to policy were presented to CalPERS’ board in March this year, and thus made public then, they were not voted on and approved by the board until June, with the publication of its Total Investment Fund Policy. As Richtman told me in an interview, the prior Environmental Management Practices were all about climate change. The new set covers not just deforestation, but everything from “degradation of ecosystem services (e.g. pollination)” to “traceability issues in its supply chain” to “material human capital issues (e.g. public health, land rights, and just transition in relation to workers)”.
I first spoke to Jeff Conant, FOE’s Senior International Forests Program Director, about the organisation’s engagement with the fund. “We’ve been in touch with CalPERS since 2014,” he said, “about the specific palm oil companies in their portfolio and our concerns about the ESG risks they represent. It was in 2016 that we really stepped up our engagement. In late 2017, we gave them a full analysis of the material risks related to deforestation, which was around the time when they were planning to revise their policy anyway. I also started attending their public investment board meetings through 2017, presenting short testimony.” When the Practices were first presented to the board this March, Conant also sent a letter of support encouraging the board to adopt them and attended the meeting, along with representatives from CERES, to speak about the risks surrounding the issues.

I asked Conant why he felt that it had taken CalPERS so long to adopt the new practices, and he said: “Like any other public fund, CalPERS is subject to a lot of advocacy from organisations like mine; they want to make sure that they don’t look like they’re playing politics with other people’s money. And there are competing forces within the agency as regards ESG.”

Was there any specific resistance, I asked? “In 2015, a CalPERS official was interviewed by The Guardian about our campaign to get the fund to address deforestation as a risk,” he replied, “and said that it wasn’t a priority for the fund.”That has clearly changed, as CalPERS appears to be first pension fund, public or private, specifically to address the issue along with a range of other E & S risks.

Richtman said: “As an issue, deforestation presents a complex array of environmental and social risks.” She detailed the range of complexities, noting the risk from the contribution of deforestation to climate change, from land-use changes effect on biodiversity and, in some cases, from forced labour issues in supply chains and neglect of indigenous peoples’ rights. “There’s also market access and reputational risk for companies related to those environmental and social issues,” she added. “It is a complicated and international issue, and involves a range of countries, commodities, suppliers and customers.”
Stressing that the engagement with FOE had been collaborative and positive, Richtman said: “Friends of the Earth has been helpful in supplying research materials on deforestation related to the palm oil industry and to referring CalPERS staff to useful additional sources of information. CalPERS appreciates when we can have collaborative and helpful dialogue with NGOs who are close to issues that present risks or opportunities for our portfolio.” She reiterated Conant’s earlier comment that engagement eventually coincided with an opportunity to rewrite the environmental management practices section of the fund’s Governance and Sustainability Principles and added that they had been working closely with CERES and the PRI on a range of material environmental topics.
The governance and sustainability principles are going to be annually reviewed each March. There were also some updates in the principles this year related to sexual harassment, an issue raised by the CalPERS Board. In addition, there was language added related to free prior and informed consent, which came from CalPERS’ work on the Dakota access pipeline.
Richtman also drew attention to the Principles’ inclusion of risks associated with pollination, adding that she doubted any other funds had such a reference in their voting practices. “But if you are a food company that depends on bees for the production of fruit or vegetables and that catastrophically fails, I can’t think of a more direct material risk.”
She summed up the changes: “In framing our revised environmental management principles we did take inspiration from the TCFD’s [Taskforce on Climate-related Financial Disclosures] work around climate change, though we expanded our focus behind climate change to other environmental topics that may be material for companies within our portfolio. We want the companies in our portfolio to identify and manage the material environmental risks and opportunities that are relevant to their short and long-term success.”
As much of the other coverage notes, while CalPERS is the first to incorporate such a specific range of material ESG risks in its voting principles, its size makes it unlikely that it will be the last.