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Op-Ed: CalPERS election earthquake should shake up responsible investment narrative

Op-Ed: CalPERS election earthquake should shake up responsible investment narrative

A philosophical overhaul is needed, argues Jay Youngdahl

New CalPERS board member Jason Perez

Editor’s Note: Last week’s election at CalPERS saw a senior figure at the Principles for Responsible Investment lose her board seat at the influential pension fund. What incoming board member Jason Perez is saying should resonate with the entire responsible investment community — so we would like to take this opportunity to invite him to speak at RI Americas 2018, taking place in New York on December 5-6. He can contact us here.


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Shockingly, on October 4, Priya Mathur, the head of the Board of the US largest public pension fund, the California Public Employees Retirement System (CalPERS), was defeated in her bid for a fifth term on its Board of Administration.

In an election for a seat for active public employees, southern California police officer Jason Perez defeated Mathur, 9208 votes to 7008. Recent CalPERS elections have been hard fought, but this was a large margin of victory for Perez, who was supported by a number of police and fire employee organizations. Mathur’s bid for reelection was supported with the time and resources of the two largest California public employees unions, AFSCME and SEIU, among others.

Mathur is a well-respected advocate for defined pension plans, and has been part of the golden age of ESG at CalPERS, helping to guide Board work in moving away from hedge funds, drilling down on investment fees, and developing strong investment beliefs. But on her watch CalPERS has suffered governance lapses, such as the recent exposures of misleading resumés from their CIO and CEO, and she had overseen a less than adequate response to the transgressions.

Importantly for non-US responsible investors, Mathur has also served three terms on the Board of the Principles for Responsible Investment and is the highest profile PRI official in the U.S. Her defeat is a clear repudiation of the PRI strategy in the US.

After the election, two competing narratives have emerged as to the results. The first, pushed by conservative California newspapers, is that the election was a direct repudiation of ESG itself. Perez himself argued that “environmental, social, and governance investing priorities, regardless of the investment risk,” have put “retirement security at risk,” for California governmental retirees. This narrative has been embraced by the portion of California politicians who disdain defined benefit plans and some local governmental leaders who are straining to make payments to CalPERS for benefits for their employees.

The second narrative is that CalPERS has serious governance issues, requiring new Board leadership. The CIO and CEO resumé problems give this argument weight. This narrative has been most strongly pushed by the Naked Capitalism website.

This argument is that the CalPERS Board is a captive of the staff, which itself is in turn a captive of favored investment consultants and asset managers. Given large union support for Mathur, the Naked Capitalism headline partially read, “Repudiation of Captured Board and Labor Leaders.”

Divining the narrative tea leaves in election post-mortems is always tricky. Governance problems exists in all organizations and frankly, this CalPERS electorate is not sitting at home fretting over the effects of ESG investing.

But for Responsible Investor readers, the most important conclusion is that the Mathur defeat is a direct challenge to the current strategy and structure of responsible investment in the U.S., and probably globally, as well. This problem can be addressed, but not without a philosophical overhaul.

Two crucial errors have been made in the U.S. The first is that the ESG community has made a conscious decision to ally, not with beneficiaries or those seeking to change greedy Wall Street practices, but with mainstream financial entities who are reviled by the American electorate at large – including the electorate at CalPERS.

Recently, for example, PRI staff have appeared arm in arm and coast to coast, avoiding the “fly-over” states in between of course, with the portion of Goldman Sachs that is a PRI signatory.

Goldman Sachs is reviled by the American electorate as an example of those responsible for the 2008 financial crisis, and a major part of the D.C. “swamp.” Those who follow pensions even a bit, know that the US government bailed out financial institutions in that crisis but gave no help to pension funds. The resulting pension underfunding is being used as a tool to increase precarity among workers in the US.

ESG is increasingly seen as the “nice” arm of American financial capital, which is not an attractive look to the American population. ESG conferences, signatories and organizations laud practices such as “activist investing” which leads to major job losses, “alternative investments” with ridiculous fees which diminish returns, and “impact investing” which ignores the “S” and whose only impact is often upon service providers’ bottom line. Workers are not stupid and they can instinctively feel a disdain for this stance.

Unlike the American and British elite who were shocked by Trump and Brexit, the ESG community must take the Mathur defeat very seriously.

In his campaign, Perez said, “I’m selfish; I want to retire,” implying that ESG as practiced today ignores the needs of beneficiaries. The current unwillingness of the ESG community to place beneficiaries front and center and challenge the practices of many in the finance community looks like elite paternalism and leads to misunderstanding about ESG.

Perez’s campaign tapped into the anti-elite mood. “Mathur is out of touch,” he said, “believing her role is to fly around the world, ringing the bell of the London Stock Exchange and hobnobbing with United Nations officials.”

The second lesson must be, as I wrote in this publication in 2012, that when “values” are sacrificed for “value,” ESG is just an investing style like any other. Then, ESG becomes only a marketing moniker and the PRI membership becomes a “Good Housekeeping Seal of Approval.”

The “business case” argument, which dominates today, is a very slender reed on which to support ESG activity. Frankly, as much as we would like, the evidence is not that strong. The result is that ESG does not provide enough intellectual support on which to consider and analyze hard issues that exist in ethical investing today, for investors large and small. For example, given rising oil prices and the extraordinary prevalence of fracking, neither divestment nor engagement in the oil and gas sectors is helpful to fund returns today.

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