In the second part of Responsible Investor’s interview with Jack Ehnes, the CalSTRS CEO discusses how the pension plan is addressing climate risk, investment beliefs, the Cerberus divestment … and why its members are its key stakeholders.
Last the week the fund released the results of a research study by consulting firm Mercer examining ways to mitigate investment risk and maximize value in the face of climate change.
Speaking to Responsible Investor at the Economist’s Sustainability Conference, Ehnes highlights that his panel at the event focused on the importance of scenario testing and analyzing risk. Indeed, one of the first audience questions was whether the investors speaking were doing it themselves.
“I’m not sure that everyone’s been doing as much as they should in terms of that self-reflection and analysis,” says Ehnes. “So some have done carbon foot-printing and at times there are some questions about the precision and methodology of those carbon footprints. So we thought the Mercer approach was more robust at really attacking the basic issue.”
He says the recommendations from Mercer fit very well with what the board has been thinking. The recommendations include finalizing its investment beliefs and initiating a review of 21 ESG risk factors.
“We have not done a thorough investment beliefs exercise and that’s starting literally in two weeks,” he says. “The board will be doing the first installment of that and we will be working through the board on that investment beliefs development and that’s important for us. CalPERS has done a similar exercise in a meaningful manner and now we think that’s important too.”
Ehnes continues that another thing on CalSTRS’ to-do list is refreshing its 21 risk factors that it demands all its managers use when making investments. “They’ve been with us now for almost 10 years and some things have become more important in terms of others and it deserves to be refreshed. That’s one piece of work that’s taking place.”
Ehnes also says CalSTRS will begin a conversation on engaging with its holdings to ensure board members are climate competent. CalPERS has just announced that it has amended its corporate governance policies to engage with companies on climate competent boards.
It follows a letter from Betty Yee, California’s State Comptroller and board member at both CalSTRS and CalPERS, and California’s Treasurer John Chiang, who requested the change. Ehnes says its time to now have the same conversation at CalSTRS.
“I have seen a lot of good convergence with directions that the Mercer report points to. It’s an exercise all pension funds should be thinking about.”
It ties in with CalSTRS’ proxy access campaign, seeking greater shareholder influence in appointing board members, in part, to get climate competent figures on boards. CalSTRS supported 83 of 87 proxy access proposals it voted on at annual meetings last year. This year, it has written to around 30 large US companies asking them to adopt it.Its other engagements this year include majority voting and climate-related issues such as energy efficiency and methane risk.
During his panel session at the conference, Ehnes was asked about divestment. He answers that one can’t “divest away from risk”, as it pervades all industries.
But he does say that coal may be an example where divestment makes sense. In February, CalSTRS divested from US thermal coal companies and announced plans to engage with non-US thermal companies.
It was moved in part by a new law, initiated by California Senate President Kevin de Leon, requiring the California funds to exit thermal coal if consistent with fiduciary duty.
Like many other pension plans, CalSTRS is subject to campaigns calling on it to divest fossil fuels from Californian climate protest groups and some of its members – which, uniquely, is 72% female. This diversity helps to drive CalSTRS’ culture, Ehnes explains.
This can reflect in its investment approach. CalSTRS recently put $250m behind the new State Street Global Advisors’ SHE Index that invests in companies with more women in senior management. SSGA is drawing on research from the McKinsey Global Institute and MSCI that shows companies with strong female leadership outperform peers.
“We are putting some money on the table to really prove that these governance issues are not just theoretical,” says Ehnes. “This is intriguing to have an index based on the level of diversity. We will see. There is increasing literature around their being a link to performance and diversity.”
Ehnes describes CalSTRS’ predominantly female members as vociferous participants, amplified by California’s campaigning roots. “You will find an advocacy organisation for every idea you could come up with right now in California. You would be surprised how much good thought there is around different issues, around sustainability, that is constantly being put forward. There is a very vibrant and intellectual community around these issues and our members expect to be heard.”
Ehnes said CalSTRS would not go as far as having a vote on divestment with its members, but he says there has to be an alignment between what they think is important and where CalSTRS thinks success in the market is.
“It’s that value alignment that works for us as an organisation,” he says. “On the private sector side the smart corporations today recognize that if you are only listening to people which like you, you’re probably not doing a very good job of navigating those troubled waters.”
Candidly, Ehnes admits that one area in which CalSTRS struggled with its membership was last year’s protests against its holding in private equity fund Cerberus Capital Management which owns the maker of the guns used in the tragic Sandy Hook shootings. CalSTRS eventually divested the stock. Ehnes says it “wasn’t one of his happiest moments”.
“It took a long time to disgorge the investment and it was a period of time when we heard extraordinary pleas from our membership to move forward, and move faster and rid ourselves of those investments.
“We had to hear things we didn’t want to hear. That we weren’t really satisfying the concerns on the membership.”
He describes a teach-in at CalSTRS where members brought in educators to talk about the impact of school, finance and guns. His employees had to walk past protests for a time.“I think it weighed on all of us, the responsibility we have to these members. We don’t want people to sit back with their Bloomberg terminals analyzing all the data. There is a real connection with the membership and us. That’s why I’m so proud of my staff. Inevitably they will tell you, even if they are working on a very technical investment issue, they will link it back to the mission of CalSTRS. That’s why the sustainability issues are so important to us as they make it real.”
“It’s a good place to work,” Ehnes concludes. “I love having teachers, although they are very challenging, it’s a wonderful set of customers.”