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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

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You are in Indirect – Manager Selection, Appointment and Monitoring » Appointment

Appointment

SAM 04. Appointment processes (listed equity/fixed income)

04.1. Indicate if in the majority of cases and where the structure of the product allows, your organisation does any of the following as part of the manager appointment and/or commitment process

04.2. Provide an example per asset class of your benchmarks, objectives, incentives/controls and reporting requirements that would typically be included in your managers’ appointment.

Asset class

Benchmark

ESG Objectives

          Global Equity identified and selected two external managers to manage assets with an ESG mandate. Both strategies apply rules-based filters founded on a combination of fundamental, quantitative, and ESG research; both strategies provides exposures to targeted risk factors, controls for extreme risk events and targets desirable ESG profile.
        
          Tobacco, Iran and Sudan, Weapon manufacturers, and Thermal coal
        
          CalPERS requires external investment managers to adhere to our Governance and Sustainability Principles, which incorporate responsible investing attributes. Many managers' processes incorporate systematic and explicit inclusion of environmental, social and governance factors into traditional financial analysis. The information is used to appropriately price ESG risks and opportunities in support of the investment decision.
        

Incentives and controls

Reporting requirements

Benchmark

          BBG Barc IFII GDP Weighted ex US: Developed Index; BBG Barc IFII GDP Weighted ex US: Emerging Index; BBG Barc IFII GD Weighted ex US Index; BBG Barc Long Liability HY Cash Pay issuer Capped at 1%; BBG Barc Long Liability Collateralized Index; BBG Barc Long Liability Corp XSOV issuer capped a 1%:  BB/B index
        

ESG Objectives

          No tobacco
        

Incentives and controls

Reporting requirements

Benchmark

          2/3 FTSE US + 1/3 FTSE All World + 300bps
        

ESG Objectives

          ILPA Fee Reporting Template
        

Incentives and controls

Reporting requirements

Benchmark

          Real Assets Program Policy Benchmark
https://www.calpers.ca.gov/page/investments/about-investment-office/policies
        
          GRESB Real Estate and Infrastructure
        

ESG Objectives

          Sustainable Investment Practice Guidelines
        
          In 2018, CalPERS’ Real Estate Managers were asked to submit Energy Optimization project proposals for their real estate portfolios as part of their annual capital expenditure requests for their portfolios.   When submitting the proposals, Managers were asked about the expected results of the projects in terms of energy savings per year ($ and kwh), Internal Rate of Return (%) and payback period (number of years).
        

Incentives and controls

Reporting requirements

Benchmark

          Real Assets Program Policy Benchmark
https://www.calpers.ca.gov/page/investments/about-investment-office/policies
        
          GRESB Real Estate and Infrastructure
        

ESG Objectives

          Sustainable Investment Practice Guidelines
        
          Energy Optimization Initiative
        

Incentives and controls

Reporting requirements

04.3. Indicate which of these actions your organisation might take if any of the requirements are not met

          For PE: See SAM 4.5
        

04.4. Provide additional information relevant to your organisation's appointment processes of external managers. [OPTIONAL]

          CalPERS Listed Equity does not use “watch lists.” Repeated compliance failures may result in terminations.

Private Equity
For all new managers, Private Equity has reporting requirements that includes filling out the quarterly ILPA Fee Reporting Template (the “Template”) plus supplemental schedules. The Template is designed to get exposure to all the fees that are charged to the Partnership and to the portfolio companies. This reporting requirement is included in the Side Letter.
Additionally, a section on ESG is included in the majority of recent side letters as it relates to incorporating ESG factors into the investment process.
Moreover, a part of CalPERS PE Due Diligence Questionnaire (“DDQ”) is devoted to questions on ESG. CalPERS PE group requests:
- Reporting on agreed ESG implementation activities that are related to governance, for example, the disclosure of a key man trigger in a partnership
- Reporting on any material litigation related to ESG
- Adherence to outsourcing policy, consistent with fiduciary duty to manage the fund
As a part of due diligence process, Staff also conducts Operational Due Diligence (“ODD”) which is aimed at reviewing the system and processes at each Private Equity firm from the standpoint of transparency, governance, and compliance.

Real Estate Energy Optimization (EO) Initiative
In addition to ongoing ESG integration efforts, staff continues to make progress on the Energy Optimization (“EO”) Initiative. FY17-18 marked the second year where external managers submitted EO projects as a part of the Annual Investment Planning process with 17 proposed projects across 8 managers an at expected total cost of $6.2million with an expected annual savings of 9,222,409 M kWH/year or $1.0million with a combined NPV of $19.7million.  
 
The EO Initiative has also motivated managers to propose innovative pilot projects, including exploring onsite renewable energy opportunities, utility automation, installation of more efficient lighting, green building certifications, and others.  The next phase of the project will involve evaluating opportunities for systematic implementation across the portfolio.  
 


Though not the majority, Fixed Income does include incentives and controls in its process (which the current form is unable to capture) including: Fee based incentives, Terminations, and No fee/ breach of contract
        

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