Acknowledging sustainability impacts all areas of the portfolio, CalPERS seeks to ensure sustainable investment considerations are appropriately included throughout the life cycle of investments by internal and external managers. CalPERS' Total Fund Governance and Sustainability Strategic Plan specifically seeks to integrate ESG factors into investment processes and decisions by internal and external managers. These processes include selection, contracting, monitoring and management. August 2016, IC approved ESG Strategic Plan Memo: https://www.calpers.ca.gov/docs/board-agendas/201608/invest/item05a-00.pdf
In 2016, each asset class developed and piloted a set of Sustainable Investment Practice Guidelines (SIPG) which reflect the particular requirements of each asset class. The SIPGs are intended to evolve and adapt as industry best practices emerge, and as such were updated in 2017. They are now available and posted to CalPERS’ website to ensure timely availability for interested parties.
CalPERS staff also integrated ESG factors into their Annual Program Review presented to the CalPERS' Board, with each asset class delivering such material throughout 2017-18. Highlights included:
- Global Fixed Income: Completed Carbon Footprint of Internal Corporate Fixed Income portfolios; including Governance factors across credit portfolio
- Global Equity: Completed a review of 20 ESG strategies
- Real Assets: Launched an Energy Optimization Initiative to research strategies to optimize energy consumption for the real estate portfolio
- Private Equity: Staff focused on broader adoption of the ILPA Fee and Profit Sharing template
In 2017-18, CalPERS' staff researched industry best practices, performed outreach to external managers to understand how the SIPGs are being utilized, refined internal processes, and developed a framework to measure and report on the percentage of external strategic managers with policies and procedures integrating ESG into investment processes and decisions. Staff determined 96% of managers incorporate ESG practices in their investment processes, representing approximately 81% of CalPERS externally managed portfolio NAV. Additionally, this measure has been approved as a Strategic Measure within the CalPERS 2017-2022 Strategic Plan specific to Fund Sustainability, and is reported on quarterly in the CalPERS' Strategic Plan update to the CalPERS' Board. https://www.calpers.ca.gov/docs/board-agendas/201809/full/item10a-0c_a.pdf
Private Equity Staff uses a customized screening process for all Private Equity fund investment proposals. This process includes a section pertaining to the General Partner's written ESG policy. The overall investment proposal score helps Private Equity determine whether to move forward to diligence the investment opportunity. ESG is considered with other investment factors necessary to reach an informed decision. The ESG item within the screening process consistently formalizes ESG in the assessment process. A manager's ESG policy, or lack thereof, will not exclude a proposal from moving forward to the formal diligence process, rather, it will be taken into account in the context of evaluating all relevant investment parameters.
As part of the due diligence process, Private Equity Staff: requests the firm's ESG policy, inquires about the way General Partners identify, monitor, mitigate and resolve ESG issues, consider the General Partner's approach to incorporating ESG factors into investment decision-making and ownership activities, and ask for examples on how they engage portfolio companies on ESG factors, inquire about General Partner's procedure for identifying ESG related issues to investors, and request disclosure on any ongoing ESG litigation related to ESG issues.
Final Diligence Reviews on new investments include an ESG section. Material ESG issues may be discussed at the Investment Review Committee (IRC) before voting and final investment approval occurs. The discussion around ESG issues will depend on their relevance to a particular investment opportunity.
Selection: Global Equity utilizes the Alternative Solicitation Process to source external investment opportunities. As part of the process, staff requests detailed and pertinent information on ESG integration. Scoring is performed by Global Equity staff and the ESG score contributes to the final strategy selection.
Appointment: Global Equity seeks to promote greater alignment with its external managers by establishing, where relevant, the following items in contracts:
- Manager have or will commit to have, an investment process which incorporates an assessment of relevant long-term Sustainable Investment or ESG factors;
- Managers will incorporate relevant ESG factors and Sustainable Investment activities into reporting; and
- Managers commit to working with staff to understand and incorporate appropriate CalPERS Global Governance Principles and, where appropriate, CalPERS Investment Beliefs.
Monitoring: Global Equity annually reviews ESG-related issues and reports as part of its monitoring protocol. Staff investigates:
- The Manager's process for identifying and acting on ESG-related opportunities and risks;
- New or ongoing litigation issues pertaining to ESG; and
- Material ESG issues that may impact the value of the portfolio
As per our Governance and Sustainability Principles, “CalPERS expects all internal and external managers of CalPERS capital to integrate the Principles into investment decision making, including proxy voting, consistent with CalPERS’ fiduciary duty to seek the highest possible returns at an acceptable level of risk to fulfill our pension obligations”.