CalPERS explores environmental exposure

CalPERS’ investment office is working on a variety of environmental programs and initiatives. Amanda White looks at the environmental goals and achievements of the fund across real estate, global equities and alternative investments and examines the plans to develop total fund strategies to improve environmental impact and enhance risk adjusted returns.

CalPERS investment staff are actively reviewing environmental opportunities and aim to establish a process for assessing environmental investment opportunities that takes into account risk and return, as well as creating a reporting methodology that is consistent across asset classes.

The fund has factored in environmental considerations within real estate, global equities, the inflation-linked asset class and its alternative investments program since 2004, with mixed results and aims, across the sectors.

For the past two years the investment office has reported across the entire portfolio rather than individual reports from each asset class, and now a cross-asset class working group has been formed to lead the investment office towards its 2010 goals.

They are: to establish processes that systematically assess environmental investment opportunities taking into account risk and return across the portfolio; to identify lessons learned from current activities to improve impact and expand on the current opportunity set; and to create a reporting methodology that is consistent across asset classes.

Specifically, within the global equities portfolio staff are reviewing a new strategy that “positively” captures environmental opportunities rather than merely avoiding polluters.

Within that asset class, between 0 to 0.5 per cent of global equity can be allocated to environmental managers and as at November 30, 2009, it had $407.1 million committed.

It has three US mandates with Axa Rosenberg, New Amsterdam Partners, and State Street Global Advisors, and two international managers, Global Currents and State Street Global Advisors.

From inception until the end of November the program has underperformed the benchmark by 112 basis points, and now global equity staff are looking to “discuss lessons learned from current activities and use those lessons to expand upon the current opportunity set”.

According to a report to the investment committee global equity staff will continue to monitor the evolution of environmental investing, including the global rise of environmental action in both the public and private sectors.

It says a major opportunity has been created by the American Recover and Reinvestment Act, which addresses renewable energy and environmental efficiencies, with more than $90 billion committed.

Within real estate CalPERS has established a voluntary energy efficiency goal that proposed a 20 per cent energy reduction in the core real estate portfolio over a five-year period subject to an appropriate cost benefit analysis

Since 2004 the weighted total reduction in energy consumption is 15.1 per cent.

In a recent report to the investment committee, the feasibility to achieve the additional energy reduction necessary to meet the 20 per cent energy efficiency plan goal is uncertain

The fund hired JDM Associates to measure energy consumption, determine best units of measure and reporting standards, establish baseline years of energy consumption and review prior years’ reporting based on their recommended calculation measurements and methodology.

It also incorporates green building standards (such as LEED and Energy Star) as a factor in making investment decisions.

CalPERS also has a $1.5 billion exposure to clean energy and technology as part of its alternative investment management program. It made two environmentally-related investments in 2009, including a renewable energy solar and wind project in North America. And has a long-term concession to construct, own and operate a US wastewater recycling facility through a public/private partnership.

The infrastructure team has identified opportunities in renewable energy including wind, solar, geothermal and hydrological, water treatment and waste-water management, social infrastructure and waste management and recycling projects.

CalPERS has also contracted Mercer to identify climate change asset allocation risks, to assist in benchmarking its RI and ESG activities to a global set of peers and identify specific areas for future action.