CalPERS issues update on its ESG expectations guidance for external asset managers

The $300bn (€282.8bn) California Public Employees Retirement System (CalPERS) has issued an update on its plans to develop environmental, social and governance (ESG) expectations for its asset managers, both internal and external.

It comes as the influential fund could be about to return to investing in tobacco.

The ESG manager expectations pilot project dates back to May 2015 and was intended to ensure “clarity and consistency” in aligning asset class practices with CalPERS’ investment beliefs, global governance principles and the Principles for Responsible Investment (PRI).

The plan, according to a document to be presented to the Sacramento-based fund’s Investment Committee on December 19, included a review of definitions, data sources and “taking stock of current practices” of its managers. They were benchmarked against external sources such as the PRI, the International Corporate Governance Network (ICGN) guidelines and “global peers”.

This fed into a set of draft Sustainable Investment Practice guidelines for each asset class. The objective was to ensure that sustainable investment considerations were part of the “life cycle of investments” by managers, including: selection, contracting, monitoring and management.

CalPERS – which has an ESG “strategy timeline” stretching out to 2046 – then initiated a pilot programme to incorporate experience over time, to ensure that lessons were learned and the project could evolve over time. Lessons learned will be incorporated into the Manager Expectations as the project evolves. Next steps include transitioning the monitoring work to the newly formed Investment Manager Evaluation Program, under the COIO’s direction.

The goal of the project is to get away from “varied understanding, interpretation and integration” of sustainable investment with “little clarity” about how it should be factored in to manager selection, contracting or monitoring. The aim is for asset classes to have “clear and coherent” processes.

The next steps include transitioning Manager Expectations Oversight to Investment Manager Engagement Programme (IMEP) for “central monitoring and external communications”. And there is the possibility of including key excerpts of the guidelines into the investment portal for prospective managers.Coincidentally, consulting firm bfinance has just released a paper that finds ESG factors are increasingly important to manager selection across all asset classes. The 16-page ‘ESG Scrutiny: Lessons from Manager Selection’ looked at five recent customised manager searches in public and private markets, with detailed case studies on a private debt selection exercise for the UK Environment Agency Pension Fund and a public equity search for a European family office.

One of the risks to the programme that CalPERS identifies is the “premature development” of guidelines in the “absence of sufficient quantity and quality of data” around the materiality of various ESG factors. The aim is for all managers to have policies and procedures for including ESG information in five years.

The meeting documents also include the fund’s proxy voting and engagement update, with a special focus on Japan. CalPERS signed up to the Japan Stewardship Code in March 2016 and says it collaborated with an external manager to coordinate engagements and identify engagement opportunities at each company. It also collaborated with other influential organizations in Japan, including Government Pension Investment Fund (GPIF). For 2017 CalPERS will consider a minimum threshold of 1/3 board independence in proxy voting decisions in Japan.

Meanwhile, CalPERS’ investment staff have recommended that investment restrictions on tobacco-related securities be removed, according to a document that will be presented at the meeting later this month. It comes after consulting firm Wilshire Associates found not being invested in tobacco had cost CalPERS up to $3bn since an initial divestment back in 2000.

The note, by senior staff including CIO Ted Eliopoulos, mentions CalPERS’ current circumstances as a mature, cash-flow negative pension plan with increasing demands on investment returns to fund benefits.

They write: “Divestment, as an active investment decision, represents a form of active risk taking that must be considered, first and foremost, within the context of the CalPERS Board of Administration’s fiduciary duty.

“And while the broader social implications of the tobacco industry may not be directly relevant to an analysis of our duties as portfolio managers, they can and should be factored into the analysis in terms of the likely continued sustainability of this industry.”