CalPERS to set KPI for sustainable investments to outperform across every asset class

Fund to triple sustainable investments team size as it looks to put additional $53bn into climate solutions, evolve divestment approach.

Californian pension giant CalPERS will set a KPI for its sustainable investments to outperform in every asset class when it presents its 2030 sustainable investments strategy at a board meeting later this month.

The $465 billion fund for public employees in the state is set to triple the size of its sustainable investments team to 15 to help implement the strategy, and also announced plans to double allocations to climate solutions to $100 billion.

Peter Cashion, managing investment director for sustainable investments, told reporters he was looking to hire 10 people for his team, with job advertisements set to be posted this week.

Of the new hires, three will focus on ESG integration, working with investment teams on due diligence and reporting. A further five will be “sustainable investors with significant experience in sustainability”, while junior support staff will round out the team.

Cashion said the expansion would “give us firepower” to hit the $100 billion target.

CalPERS already has $47 billion invested in climate solutions, and Cashion said the fund would work across its asset classes to come up with a specialised investment strategy to increase deployment in the area.

Investments can be made across mitigation, adaptation and transition, according to the strategy, with drought-resistant crops and retrofitting fossil fuel plants with CCS given as examples of possible solutions across adaptation and transition.

Alongside a series of 10 other KPIs, CalPERS will also track the performance of its sustainable investments relative to asset class benchmarks, with a goal for outperformance in each asset class.

Other targets include engaging half of its global equity portfolio by AUM every year and ensuring 100 percent of new investments have ESG analysis integrated in the diligence process.

Looking at renewables, for instance, Cashion said that, while there has been a downturn in listed renewable energy companies in recent months, there had been “significant outperformance” in private markets.

He also reported that CalPERS had brought in Mercer to assess the fund’s net-zero plan against 12 peers.

The consultant found that its strategy was “broadly aligned” with industry best practices, but that some peers prioritised emissions reduction targets for their portfolio against CalPERS’ approach of increasing allocations to climate solutions.

It also noted that publicly disclosed taxonomies for climate solutions tend to be less rigorous and comprehensive than CalPERS’ proposed framework.

Divestment debate

The 2030 strategy also includes an acknowledgment that the fund needs to begin moving beyond engagement. It says CalPERS will “develop a process, subject to fiduciary duty and investment analysis” to exit companies without credible net-zero plans. The process will include assessing firms’ net-zero plans and conducting analysis to assess their financial risk in the transition.

Where there is “not a financial rationale to have continued exposure”, CalPERS may exit certain securities across both listed equities and fixed income.

Cashion said the new process was a “natural evolution” of CalPERS’ existing approach to engagement. The core focus will be on the financial risk posed by a company if it continues to avoid adopting a decarbonisation plan, looking at factors such as future consumer demand and the potential impacts of carbon pricing.

However, Cashion did not raise the prospect of imminent or major divestments. “Over time, if companies have that approach of not focusing on transition and just business as usual, we believe that an underweight or some tactical change would be appropriate.”