The California Public Employees Retirement System (CalPERS), at $307bn (€272.4bn) the largest US pension fund, this week announced a sweeping review of how it approaches sustainability. Not least among the changes was Anne Simpson changing roles from Investment Director, Global Governance to the new role of Investment Director, Sustainability.
“Developing a strategic plan of this magnitude was no easy task,” Henry Jones, CalPERS Investment Committee chair said when announcing the plan. “It will guide our ESG efforts in a comprehensive and integrated way across all asset classes.”
Simpson, in an in-depth interview with RI about the changes, agrees: “Yes, it is big stuff indeed – bold plans, more resources, setting up a hub on sustainable investment with new asset class responsibilities and a governance structure to link this into the investment strategy group. Integration is the goal.”
On Monday, the giant fund’s Investment Committee approved the five-year plan. “So it’s full steam ahead! Geothermal steam, of course,” quipped Simpson.
The plan includes major ESG strategic and core developments on data and reporting standards (one example: CalPERS sent a 40-page letter to the SEC about the Regulation S-K disclosure developments), investment manager expectations, research (including CalPERS’ own Sustainable Investment Research Initiative, SIRI), engagement, voting on and running shareholder campaigns, advocacy, carbon footprinting its total fund, working with partners — it’s an impressive list.
It’s a major initiative and planning began in April 2015; the plan itself actually stretches out 30 years to 2046 with full implementation of the Paris Accord’s goals.
But the thrusts of the investment decisions, campaigns, advocacy and engagement will not be adopted, and those in the future will not be adopted, without rigorous research into whether they actually grow the value of the companies in which CalPERS is invested.
Some campaigns, such as redirecting energy companies away from fossil fuels to renewables, would seem so self-evident that proof is hardly necessary. After seeing what has happened to the coal industry in the US, it is probably safe to say that the next one in line, unless it changes its course, is the oil and gas industry.
Nevertheless, proof that this is going to happen and that engagement rather than divestment is the way forward was necessary before CalPERS joined partners to begin even this campaign.“The energy transition may seem obvious,” cautioned Simpson, “but note that in the US a majority of investors voted against the proposals on climate risk reporting. This is a sign of the work to be done engaging investment managers and company management, which in every single case advised their owners to vote against reporting.
“Out of the 10,000 companies in our portfolio, just 80 companies are responsible for 50% of the emissions,” Simpson revealed.
“We developed a method of carbon footprinting our entire global equity portfolio that blends data from three different providers, and developed a proxy for the rest of the portfolio (necessary because of poor disclosure, less than half provide reasonable data). This is why we are so strongly behind corporate reporting of ESG data and risk. There needs to be mandatory reporting of accounting and audit ESG risk. We already have clear definitions of materiality, we know what ‘contingent liability’ is [a potential liability that may occur, depending on the outcome of an uncertain future event]. We need to establish the floor so we can find the ladder.”
“We are going to go to our fellow asset owners,” continued Simpson, “with this list of 80 companies and pool our resources to drive this 50% figure to zero. We have the ability to drive this down between us.”
Simpson referred to the 80 companies as “SICEs” or ‘Systemically Important Carbon Emitters’ akin to SIFIs (Systemically Important Financial Institution). “They need to be a special focus not just of owners but also regulators,” she said.
The strategy also includes a focus on water risk, which includes both rising oceans and water shortages, because board members were concerned that a sole focus on driving emissions down would ignore other climate change issues.
Also prominent is a focus on diversity. “Human capital is one of our Three Forms of Capital model,” said Simpson. “We were struck by research that was presented to us in April this year on the effects of diversity and inclusion on performance, but we are also aware that it is hard to get data on real diversity [see CalPERS’ definition below] because of poor disclosure.
“We can sometimes use a proxy, for example an indicator of inclusiveness of the LGBT [lesbian, gay, bisexual, and transgender] community might be the presence of an openly gay board director.”
CalPERS’ definition of diversity goes far beyond women on boards, though that is part of it. Taken from the Global Governance Principles: “Board diversity should be thought of in terms of skill sets, gender, age, nationality, race, sexual orientation, gender identity, and historically underrepresented groups. Consideration should go beyond the traditional notion of diversity to include a more broad range of experience, thoughts, perspectives, and competencies to help enable effective board leadership.”
“Board tenure is a problem for change, and tenure is increasing,” commented Simpson. “Experience is good but only if it also includes experience of new ideas. A male, pale and stale board is not always the best advisor for businesses that sell to women!”
CalPERS is trying to increase disclosure in this area and joined with the New York City and North Carolina public pension funds in sending a petition to the SEC calling for a matrix form of disclosure with the first level being skills and experience and the second level being ethnicity and gender.Income inequality is also a focus, but no decisions have been made on how to, or whether to, go ahead with engagement on the issue. “We need to be thoughtful and come back with a plan that is supported by a review of the research,” said Simpson. So for the meantime, the fund is reviewing the literature to make sure that what seems obvious – a diverse and properly rewarded workforce will be a high performing one – is actually true. In another workforce initiative, the Sustainable Investment group will also report on CalPERS’ existing Responsible Contractor Policy. “If companies take our capital, they need to report on their compliance with this policy. So far we have around 99% compliance. We know this is good for returns; companies with high health and safety standards, a properly rewarded workforce and good training equals a high performing workforce,” said Simpson.
Part two of this interview will appear tomorrow.