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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

Export Public Responses

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Outputs and outcomes

FI 17. Financial/ESG performance (Private)

FI 18. Examples - ESG incorporation or engagement

18.1. Provide examples of how your incorporation of ESG analysis and/or your engagement of issuers has affected your fixed income investment outcomes during the reporting year.

ESG issue and explanation

Constellation Brands increased its ownership interest in Canopy Growth Corporation to 38%, and received warrants that if exercised would increase its ownership interest to >50% in the subsequent 3 years.  Canopy Growth is the largest Canadian company in the production, processing, and distribution of cannabis and hemp products, with approximately 36% share of the Canadian market.  Since cannabis products are still illegal in the US, questions arose as to the ESG and legal risks of our investment in Constellation Brands, and particularly in the Constellation Brands bonds that were issued to fund its investment in Canopy Growth.  Constellation Brands management assured investors there were no legal restrictions on its investment in Canopy Growth, and that Constellation Brands and Canopy Growth are following all federal and provincial laws.  Additionally, CalPERS’s internal compliance group confirmed that marijuana was not part of the tobacco divestment program, and there was no standalone marijuana divestment requirement, there was no restriction for investing in the Constellation Brands issued to fund the Canopy Growth investment. 


Impact on investment decision or performance

Our Food & Beverage analyst recommended investment in the Constellation Brands bonds that were used to fund the Canopy Growth investment

ESG issue and explanation

Social Risk. Johnson & Johnson was widely known to have issues with product recalls, however a larger, unknown concern stemmed from the company’s potential litigation risk surrounding asbestos-related concerns in JNJ’s talc and baby products. As litigation claims gained momentum in a similar product safety issue surrounding Monsanto’s glyphosate product, whereby a jury awarded $289mn to a single claimant, the odds that a jury would award 22 claimants suing JNJ for $4.69bn ($213mn per claimant) seemed probable. However, the greatest concern was not that lawsuit but rather the nearly 11,700 additional lawsuits relating to talc claims.

Impact on investment decision or performance

CalPERS felt that these risks were not priced into the company’s bonds and recommended that the portfolio position be adjusted.

ESG issue and explanation

Carbon transition risk for utilities:  Customers are seeking more options to buy renewable energy, often from third-parties.   This shift towards greener, decentralized generation makes electricity consumers more self-sufficient, reducing demand for utility power. While not a key near term risk given a low base, this is a potential negative long-term trend.  The cost to transition to a low carbon electric grid may also weigh on credit metrics or introduce execution risk.  We have integrated a screen to rank companies across various factors that are connected to long-term carbon transition risks.

Impact on investment decision or performance

Framework has led to a positioning tilt towards utility credits that are better positioned along the carbon transition risk spectrum. 

18.2. Additional information.