CalPERS says investors must put ‘F’ for financial reform into ESG

Fund lays out five principles for its own market health agenda.

CalPERS, the $235bn (€177bn) US pension fund giant, says institutional investors must extend their sustainability efforts towards improved financial regulation and derivatives reform if they are to avoid the danger of market meltdowns. Speaking at the Ceres conference in Boston, Anne Simpson, Senior Portfolio Manager and Director for Corporate Governance at CalPERS, said investors needed to be adding the ‘F’ for finance reform to their ESG efforts: “The financial crisis showed very clearly that badly configured financial markets make for a world of complete danger. Sustainability for CalPERS means being able to continue to invest within healthy markets, but we are not being heard within regulators such as the SEC on these issues at the moment.” Simpson said another area where both investors and corporates needed to step up was in recognising the mutually reinforcing interests of long-term ownership: “There are three types of ‘investor’ – a term that hides a multitude of sins – and where we need to be able to differentiate between owners, raiders and traders. Companies need to recognise the interest of their ‘owners’, and owners need to step up to re-assert their interests. Nano traders and hedge fund raiders don’t care about the sustainable health of the company; it’s an arbitrage.” The call came as CalPERS released its first sustainability report. Simpson said the CalPERS board had endorsed its plans for implementing ESG across the fund’s total assets as practically as possible. Importantly, she said ‘sustainability’ had become the guiding framework the fund was using for a return to what she called ‘old fashioned economics’.The CalPERS sustainability report lays out its position on proposed financial market reforms under five principles: transparency, independence, corporate governance, investment opportunities and systemic risk. It says the aim is to help restore trust and confidence in capital markets through new accounting standards to help reform the derivatives market and to improve auditor independence. The fund said it was also working closely with a number of groups to improve financial reporting and ensure investors receive transparent and relevant information about the economic performance and condition of businesses. It is also promoting the campaign for international integrated reporting to bring together financial, environmental, social and governance information in one report. The fund is also developing its ESG work under three tags: priorities, performance and procurement. The first step, it says, has been to identify ‘priorities’ after cataloguing more than 100 separate ESG initiatives across CalPERS. It said a peer exchange of information between 12 of the world’s biggest pension funds had shown that they are honing their focus on sustainability that is most relevant to investment objectives. Consequently, regarding ‘performance’, the fund said it will seek to identify how sustainability issues can affect risk and returns over time, noting that: “Despite a growing body of qualitative and quantitative evidence from the market and academia, there is still much discussion on metrics.” On ‘procurement’, CalPERS says it wants to ensure that all its managers and investment service providers understand its expectations on ESG.