CalPERS looks to bolster ESG integration

CalPERS has instigated an extensive review of its environmental, social and governance policies and practices and its move towards fuller integration of ESG factors into its investment decision-making which will include an overhaul of its procurement policies for external managers.

The $226 billion fund’s ESG efforts over the last 12 months culminated in a high-level workshop held last week that will look to set the direction of ESG integration over the next two to five years.

High-level staff including chief investment officer Joe Dear and George Diehr, chair of the investment committee, attended the workshop.

The workshop examined a range of topics, including the findings of an extensive review of the responsible investing landscape and CalPERS’ current ESG practices conducted by consultants Mercer LLC in 2010.

Senior investment officers from each of the asset classes also contributed to roundtable discussions at the workshop about strategies for comprehensively building ESG best-practices into their investment processes.

Mercer partner Jane Ambachtsheer led a workshop focused on developing total fund processes for integrating ESG factors.

The results of the workshop will be crystallised into a range of recommendations and a timetable including a one-, three- and five-year plan will be formulated.

By autumn this year the investment committee will also propose a implementation plan.

Anne Simpson (pictured), CalPERS’ senior investment officer and chief of the fund’s corporate governance program, said the workshop would help provide a unified approach across the fund to handle ESG issues, which would ultimately lead to improved investment decisions.

“After today, we’ll develop a framework, a unified approach. We see this as a way of building for higher quality,” Simpson said.

“Our goal is to have a more effective strategy… to use ESG to improve the quality of our decision-making.”

The Mercer report looked in detail at both the current research into ESG and its effect on returns as well as CalPERS’ performance in ESG relative to a selection of its peers.

It then looked at potential areas of improvements for the fund and examined how ESG practices could be better implemented across each of the asset classes in the portfolio.

The Mercer research contained in a report, published to coincide with the workshop, looked at 36 studies through 2009 that examined ESG and its effect on returns.

Rather than being a drag on returns, 86 per cent of the studies found that ESG implementation had a neutral to positive effect on returns.

It also benchmarked CalPERS’ performance against a group of 11 major pension funds with more than $1.5 trillion in combined assets under management.

These included BT Pension Fund in the UK, PGGM in the Netherlands, Previ in Brazil and US funds TIAA-Cref and the Florida State Board of Administration.

The Mercer analysis found that CalPERS was a strong performer relative to its peers in broad asset class activity and innovation in terms of ESG, in targeting ESG-related investments, and in governance issues around engagement and market reform.

It also found CalPERS had demonstrated strong leadership in collaborating with other funds in ESG concerns and in setting ESG standards.

However, the research highlighted areas where there were opportunities for improvement and these included a development of a total fund ESG policy, the integration of ESG factors into investment strategies, and an establishment of a framework for monitoring investments.

The report also recommended CalPERS publish a sustainable investment report and improve staff education about ESG issues.

As part of its long-term planning around asset allocation, the workshop set itself the goal of assessing the potential impact of the fund’s exposure to a range of ESG risks.

The fund has set itself a priority of identifying quality data and key performance indicators to measure its sustainable investment practices against long-term investment objectives on both risk and return.

It will also step up requirements of its external managers and service providers around integrating ESG factors into their investment decisions and disclosure of ESG-related performance.

The workshop set a priority to develop a framework to monitor external managers across its different asset classes for ESG compliance and practices.

This will involve the development of uniform disclosure processes for external managers for each of the asset classes.

The workshop also looked at methods to more directly input ESG considerations in each of the respective asset classes.

This included further development of both quantitative and qualitative ESG analysis. The report cites a lack of quantitative research in the ESG space.

For its equity holdings CalPERS is set to engage researchers to look at weighting techniques to provide capital “tilt” to capture risk and return opportunities related to ESG.

Similarly, in its fixed-income investments CalPERS will also commission research to quantify ESG factors and their contribution to risk and adjusted return.

The fund will also look at bolstering its due diligence procedures to more robustly account for ESG considerations when evaluating a range of real asset and alternative investment opportunities.

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