This week the $192.9bn (€175bn) California State Teachers Retirement System (CalSTRS) launched a search for up to 10 investment managers to provide ESG-focused and corporate governance services for public equities. Having broken the story, Responsible Investor spoke to portfolio manager Brian Rice about the move.
What has prompted CalSTRS to put out this ASP (‘Alternative Solicitation Process’)?
We’ve had the ESG-focused portfolio for nearly ten years and we felt it was time to refresh it. For a number of years I’ve met with public equity managers who had ESG or a corporate governance focus and they seemed to be good candidates for consideration. We thought it was time to take a look and see what managers may be out there to fit into this portfolio.
Who currently manages the portfolio?
It’s two managers – Generation Investment Management and AGF – who manage to a global sustainability strategy. They manage $850m between them. They are benchmarked against a broad market index.
Will this be the size of the portfolio going forward?
It has not been determined how much in total will be allocated per manager. They will have the existing benchmarks such as MSCI World or MSCI EAFE (Europe, Australasia and Far East) or Russell 3000 depending on geographical focus.
This week, CalSTRS CEO Jack Ehnes said the fund will pull $20bn from external fund managers saying it “costs pennies” to hire investment staff compared with outsourcing. Why have you not decided to manage this ESG-focused portfolio in-house?
We don’t presently have the internal capacity to do analysis associated with ESG portfolio construction and management. To bring in an active strategy like this requires a level of expertise that we don’t have now.What will you look for in managers for this portfolio?
We are willing to look at active strategies, passive strategies, there may be one or two quant ESG strategies. We tried to leave it as open as possible as we understand that ESG integration is relatively new and managers who are very robust in the process are very difficult to find. We have tried not to limit ourselves saying you have to be active or passive. It’s basically long only, public equity.
The requirements we set are a minimum amount of assets in the firm. They must also be a certain size and complexity to manage a relationship with CalSTRS. You need a track record of at least two years, as managers may not have been running these products long. We have tried to be as broad as possible with minimum qualifications.
As well as awarding ESG and corporate governance-focused mandates, CalSTRS intends to establish a “pool” of qualified investment management firms. Could you explain how this will work in practice?
How we envisage this coming together is finding up to ten managers who are ready to make commitments right now – they have asset under management, history and a team.
For fund managers who may not have enough history, we may want to track their performance a bit longer. They may not have enough assets under management and we don’t want to be half of a portfolio and we’ll wait for them to grow their asset base. So we like what they are doing but think we need to track and monitor them. This is what the pool will do. If the fund manager grows their asset base or shows performance history then we may be in a position to make a commitment to them.
Is this search for new ESG managers in reaction to member campaigns, such as on fossil divestment?
The history of this portfolio is that it was created ten years ago with the belief that sustainability issues will grow in accordance. The ASP for this portfolio is not in reaction to outside forces. We felt it was time to look for new managers. I think that the membership is supportive of this.