California teachers’ pension giant CalSTRS understands the fossil fuel stranded assets issue but says the problem is all about timing and the lack of a carbon price, according to its investment chief Chris Ailman.
“Divesting the entire oil and gas industry, now?” he asked rhetorically. “We get the issue about stranded assets. Maybe I buy into that and say yes – but when? Is it 20 years from now or is it 10 years from now? First give me a price on carbon, then I’ll start worrying about stranded assets.”
Ailman, Chief Investment Officer of the California State Teachers’ Retirement System, was speaking on a livestreamed event organised by the CFA Institute, the global association of investment professionals. The topic of the event was ‘ESG – Does it Add Value?’
“I describe ESG risk as long term operational business risk, material operational business risk,” Ailman told the audience.
He also remarked on the challenges that the Principles for Responsible Investment (PRI), where he was a board member for a year, faces in the US. “Every money manager in the USA has signed up and then hasn’t done a darned thing about it,” he said. “There’s maybe five to 10 that have done something but that’s been the PRI’s challenge.
“OK, you’ve signed up, paid your dues, what are you going to do?”
In a wide-ranging lecture, he pinpointed materiality as a key issue, saying: “We have struggled with that in the last year trying to define that with our board, it’s just been crazy because it really does get back to the eye of the beholder.”
The CFA Institute has been getting more involved in ESG recently, and former CEO John Rogers was a keynote speaker at RI Europe last month.In his lecture, Ailman advocated using the Sustainability Accounting Standards Boards disclosure framework: “We are trying to get companies in the USA to start disclosing along the lines of the SASB data. We’re not going to wait on the SEC, that’s a lost cause.”
He also spoke about how companies tackle the long-term, saying: “When we talk to management, offline, out of the room, quietly, they’re thinking about these five and six and 10- year risks to the company.
“But they can’t do much about it because they care about the next 90 days of corporate earnings. They know the things they probably should do over the next five to 10 years – but they’re not going to take the time to do it now because it’s going to hurt earnings.
“And they’re not going to disclose that because they don’t want the competition to know, but they also don’t want shareholders to get upset with them.”
He has trouble convincing companies that CalSTRS is in it for the long term. He said: “Because we’re passive and we own the whole bloody market, we’re going to own these companies for so long that we have a longer time frame than their CEOs.” He said CalSTRS’ average holding period is 10-30 years – and that he is looking at the problem that private equity is “too short a duration” for the fund’s portfolio.
He said that at PRI events he meets people involved with issues such as supply chain problems or factory farming. He asked: “Is that something that should be front and centre of my portfolio? I don’t know. My definition of ESG doesn’t meet with their definition. That where the confusion comes in: ESG becomes so extreme, it becomes every issue.
“You can’t cope with every single issue, you can’t expect to solve every single issue.” That was why you had to have a clear view about materiality, he said.