For Betty Yee, California State Controller, the potential material impact of climate change on both the state’s giant pension funds is reason enough to take such risks very seriously.
Such was the thinking behind recent changes to CalSTRS’ guidelines under which the teachers’ pension fund will start to target the appointment of board members with specific expertise in managing climate risk at investee companies.
A Democrat who ran for office on a platform including environmental stewardship, tax reform and retirement security, Yee took office in November 2014.
Not only does she sit on the boards of both CalPERS and its peer CalSTRS, she is also chief fiscal officer of the Golden State, the sixth largest economy in the world. In July, she and state Treasurer John Chiang wrote to the investment committees of both funds to ask them to target board members with the skills needed to mitigate the impact of climate change on their companies, and highlighted the importance and impact of climate-related legislation, such as emissions reporting or carbon pricing.
Engagement is the most powerful tool available to CalPERS and CalSTRS, says Yee, particularly when it comes to bringing about change in the boardroom.
Proxy access (where investors get to nominate director candidates) is, as a result, often a point of discussion at portfolio companies. “Proxy access would enable the funds to nominate directors if necessary to corporate boards when there are concerns with governance or expertise, in accordance with each funds’ corporate governance principles and policy”, she explains.
Yee says that with a combined investment portfolio of around $482bn, the two finds have a unique opportunity to lead on climate change and other issues by “engaging from the inside” and that there has already been tangible evidence of change.
“Both CalSTRS and CalPERS are very active in research, advocacy, exercise of the proxy, and other actions – from supporting the development of climate risk reporting standards to directly calling on companies to disclose their climate risk,” she notes.
Recent highlights have included CalPERS developing a five-year strategy to integrate ESG issues into investment decisions and CalSTRS’ redirection of $2.5bn into low-carbon investments, the culmination of the efforts of the fund’s Ad Hoc Global Governance Subcommittee. Partnerships with other bodies are important too: Yee names advocacy group Ceres, the International Corporate Governance Network (ICGN) and other institutions as crucial to expanding corporate advocacy.CalPERS this week said its Board of Administration adopted the Environmental, Social, and Governance (ESG) 5-Year Strategic Plan, a six -point plan that it calls the “next evolution” of CalPERS’ work on sustainable investing and the Global Governance program.
The plan identifies six strategic initiatives that will direct its work. The initiatives are: data and corporate reporting standards; UN PRI Montreal Pledge company engagement; diversity and inclusion; manager expectations; sustainable investment research; and private equity fee and profit sharing transparency.
As a symptom of these efforts, both California funds have seemed to prefer engagement over divestment as a tool for good stewardship. There have been times recently where a duty to maximize returns for the funds’ beneficiaries has prompted a divestment action but such actions are only taken after a consideration of current and potential regulatory and litigation risks of investing in a particular asset and available investment alternatives.
Despite this, Yee is not convinced that divestment is a good approach for fossil fuels that are not coal. “The sheer volume of energy and magnitude of pension assets that need to be replaced is simply too big,” she continues. “Divesting does not solve the issue, since another investor will buy the divested shares and they may not share the same interest in creating change. Staying invested means maintaining our voice and gives us the opportunity to push for positive change from within.”
Beyond fossil fuel and climate change, there are more issues on Yee’s radar that CalPERS and CalSTRS will soon be examining. The corporate world has been one of the slowest sectors to evolve in terms of board gender diversity, Yee says, which she sees as a problem not for social reasons but in terms of mitigating risk, improving corporate accountability, and improving value for shareholders.
Both funds have aimed for this through policy advocacy, engagement, dialogue with corporates and direct investment into diverse companies. Recently CalSTRS made a $250m commitment to State Street’s Gender Diversity index, tilted toward companies with more women in leadership positions.
“CalPERS and CalSTRS also partnered to encourage California companies to increase women on corporate boards,” she adds. “That resulted in 32 more women appointed to 29 company boards.”