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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

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You are in Direct - Fixed Income » ESG incorporation in actively managed fixed income » (C) Implementation: Integration

(C) Implementation: Integration

FI 10. Integration overview

10.1. Describe your approach to integrating ESG into traditional financial analysis.

CalPERS' Fixed Income Corporate Investment Grade portfolio requires investment grade ratings by at least one of the nationally recognized statistical rating agencies (NRSRO). As such, companies in that portfolio are subject to ESG analysis of material risks by the rating agencies and internal CalPERS staff.  CalPERS fixed income credit staff have access to and utilize MSCI's ESG database to identify, assess and quantify whether an ESG related risk is material to an issuer in the portfolio. Our analysts communicate ESG related risks to the Portfolio Managers when they are deemed material. On a quarterly basis, the Portfolio Managers and Analysts have a meeting to specifically discuss the highest ESG risk issuers in the portfolio.

10.2. Describe how your ESG integration approach is adapted to each of the different types of fixed income you invest in.

SSA

The CalPERS Fixed Income Sovereign Team conducts credit analysis through a process that evaluates both quantitative and qualitative factors. Quantitative factors include economic indicators to assess the country's ability to pay back and service its debt. Qualitative analyses are used to assess the country's willingness to meet creditor obligations. Willingness to repay debt is measured by policy continuity, governance, voice and accountability, freedom of press, labor rights, rule of law, judicial system effectiveness and efficiency, women's rights, GINI indicator, corruption indicator, ease of doing business, freedom of association, human rights, human development index, freedom of religion, etc. Examples include

Ease of Doing Business: An index developed by the World Bank Group. A higher ranking (a low numerical value) indicates better, usually simpler, regulations for businesses and stronger protections of property rights, and the opposite is true with regards to lower rankings (a high numerical value). The index is based on the average of ten sub-indices—starting a business, construction permits, getting electricity, property registration, access to credit, investor protection, paying taxes, trading across borders, enforcing contracts, and resolving insolvency. World Bank empirical research shows a relationship between economic growth and improving ease of doing business.

Corruption Perception Index: An index composed by Transparency International starting in 1995 and released on an annual basis. It measures perceived levels of corruption that’s determined by expert assessment and opinion surveys. The scale ranges from 100 (very clean) to 0 (highly corrupt) based on the misuse of public power for private gain.

Corporate (financial)

We have a dedicated team of credit analysts with industry specializations, and we apply a consistent approach to evaluating ESG risks. We look at the potential for ESG risk at both the parent and subsidiary level, for senior and subordinate debt, for long and short duration, and across multiple securities. We use corporate management team actions, quarterly and annual SEC filed financial statements, offering documents related to new securities issued, and other investor materials, including those of third party data providers and research subscriptions including MSCI, Bloomberg, and Covenant Review. Risk factors, including ESG risks where material, are systematically integrated into our credit analysis processes. We only invest where ESG risks are addressed, known, and factored into the security's price and yield. Once we invest in a security, the analyst monitors the security and issuer credit quality on an ongoing basis, while collectively, the Portfolio Managers and Analyst review High ESG risk portfolio exposures quarterly.

Also, CalPERS' Credit Team advocates for ESG related matters by participating in the Credit Roundtable, an Investor led industry group that includes 30 of the largest pension plans, mutual funds and insurance companies. http://www.creditroundtable.org/.

This investor led organization advocates for Governance related issues for Corporate Bond investors. Past advocacy includes filing comments with the SEC, FDIC and Federal Reserve on proposed rules and regulations.

We consider investments in green bonds if the security provides relative value and meets our portfolio guidelines.  2017 and 2018 purchases include green bonds of Apple Inc, and MidAmerican Energy Co. and DTE Electric Co.

Corporate (non-financial)

We have a dedicated team of credit analysts with industry specializations, and we apply a consistent approach to evaluating ESG risks. We look at the potential for ESG risk at both the parent and subsidiary level, for senior and subordinate debt, for long and short duration, and across multiple securities. We use corporate management team actions, quarterly and annual SEC filed financial statements, offering documents related to new securities issued, and other investor materials, including those of third party data providers and research subscriptions including MSCI, Bloomberg, and Covenant Review. Integration of risk factors, including ESG risks where material, are systematically integrated into our credit analysis processes. We only invest where ESG risks are addressed, known, and factored into the security's price and yield. Once we invest in a security, we monitor the security and issuer credit quality at least quarterly.

Securitised

In assessing the governance risk of issuers of mortgage securities, the CalPERS Structured Product Portfolio Team monitors mortgage servicer behavior with regards to issuance and prepayment trends relative to the mortgage universe. Servicers that aggressively target borrowers for refinances or servicers that have streamlined procedures making refinances quicker result in more negatively convex loans and are avoided or valued less when bonds are trading at a premium. The structured products team researches trends and changes in servicer strategy and servicer technological advances via industry newsletters, Wall St. research, and periodic meetings with servicers. The structured products team also analyzes investments in high loan to value and/or low FICO score securities to assess including in the portfolio. The securities by their nature provide first time home access to mortgages.

10.3. Additional information [OPTIONAL]

ESG programs like the PACE (Property Assessed Clean Energy) program are reviewed for purchase as long as they comply with our lien prioritization beliefs as they relate to our current securities and/or portfolio.


FI 11. Integration - ESG information in investment processes

11.1. Indicate how ESG information is typically used as part of your investment process.

Select all that apply
SSA
Corporate (financial)
Corporate (non-financial)
Securitised
ESG analysis is integrated into fundamental analysis
ESG analysis is used to adjust the internal credit assessments of issuers.
ESG analysis is used to adjust forecasted financials and future cash flow estimates.
ESG analysis impacts the ranking of an issuer relative to a chosen peer group.
An issuer's ESG bond spreads and its relative value versus its sector peers are analysed to find out if all risks are priced in.
The impact of ESG analysis on bonds of an issuer with different durations/maturities are analysed.
Sensitivity analysis and scenario analysis are applied to valuation models to compare the difference between base-case and ESG-integrated security valuation.
ESG analysis is integrated into portfolio weighting decisions.
Companies, sectors, countries and currency and monitored for changes in ESG exposure and for breaches of risk limits.
The ESG profile of portfolios is examined for securities with high ESG risks and assessed relative to the ESG profile of a benchmark.
Other, specify

11.2. Additional information [OPTIONAL]

For Corporate (Financial) and Corporate (Non-Financial) ESG information is benchmarked against external managers.


FI 12. Integration - E,S and G issues reviewed

12.1. Indicate the extent to which ESG issues are reviewed in your integration process.

Environment
Social
Governance
SSA

Environmental

Social

Governance

Corporate (financial)

Environmental

Social

Governance

Corporate (non-financial)

Environmental

Social

Governance

Securitised

Environmental

Social

Governance

12.2. Please provide more detail on how you review E, S and/or G factors in your integration process.

SSA

The sovereign investment team regularly conducts surveillance and updates of quantitative and qualitative factors, using MSCI's database of ESG factor risks and factors outlined by the PRI, that affect risk and pricing of all its investments. Their surveillance process includes assessing changes in the ESG related quantitative factors highlighted in the investment selection process.

Corporate (financial)

As part of the ongoing surveillance of ESG risk factors, staff completes a quantitative and qualitative assessment of the Corporate Investment Grade portfolio vs the Barclays Long Liability Index on a quarterly basis using MSCI's database of ESG factor risks. This process seeks to identify those issuers in the portfolio displaying higher ESG factor risks than the industry group and which CalPERS portfolio is overweight vs the index. Once a high-risk issuer is identified, the assigned industry specialist credit analyst on the team will conduct research and diligence to understand/assess the risk, identify whether it's a known or unknown risk, determine whether it's a material financial risk, assess if management is seeking to reduce or mitigate the risk and whether the market is pricing in the risk. The credit analyst reports back his or her finding to the portfolio management team at the regularly scheduled quarterly industry review meeting.

Corporate (non-financial)

As part of the ongoing surveillance of ESG risk factors, staff completes a quantitative and qualitative assessment of the Corporate Investment Grade portfolio vs the Barclays Long Liability Index on a quarterly basis using MSCI's database of ESG factor risks. This process seeks to identify those issuers in the portfolio displaying higher ESG factor risks than the industry group and which CalPERS portfolio is overweight vs the index. Once a high-risk issuer is identified, the assigned industry specialist credit analyst on the team will conduct research and diligence to understand/assess the risk, identify whether it's a known or unknown risk, determine whether it's a material financial risk, assess if management is seeking to reduce or mitigate the risk and whether the market is pricing in the risk. The credit analyst reports back his or her finding to the portfolio management team at the regularly scheduled quarterly industry review meeting.

Securitised

Governance issues are reviewed periodically specific to the underwriting process.  We consider financing for green projects (PACE program for instance) as long as they do not violate any lien prioritization positions on our current securities and/or portfolio.

12.3. Additional information.[OPTIONAL]


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