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California Public Employees' Retirement System CalPERS

PRI reporting framework 2019

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Asset class implementation gateway indicators

OO 10. Active ownership practices for listed assets

10.1. Select the active ownership activities your organisation implemented in the reporting year.

Listed equity – engagement

Listed equity – voting

Fixed income SSA – engagement

Please explain why you do not engage directly and do not require external managers to engage with companies on ESG factors.

          Fixed Income does not engage in SSA due to the following reasons: 
A)	We have not determined a clear, scalable and objective criteria for measuring ESG for governments or methods for tracking.
B)	We have not found an appropriate measurement or scaling that would allow us to measure impacts
        

Fixed income Corporate (financial) – engagement

Fixed income Corporate (non-financial) – engagement

Fixed income Corporate (securitised) – engagement


OO 11. ESG incorporation practices for all assets

11.1. Select the internally managed asset classes in which you addressed ESG incorporation into your investment decisions and/or your active ownership practices (during the reporting year).

Listed equity

Fixed income - SSA

Fixed income - corporate (financial)

Fixed income - corporate (non-financial)

Fixed income - securitised

Commodities

Cash

Money market instruments

Other (1)

'Other (1)' [as defined in OO 05]

          Derivatives
        
Select the externally managed assets classes in which you and/or your investment consultants address ESG incorporation in your external manager selection, appointment and/or monitoring processes.
Asset class
ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes
Listed equity

Listed equity - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Fixed income - SSA

Fixed income - SSA - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Fixed income - corporate (financial)

Fixed income - corporate (financial) - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Fixed income - corporate (non-financial)

Fixed income - corporate (non-financial) - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Fixed income - securitised

Fixed income - securitised - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Private equity

Private equity - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Property

Property - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Infrastructure

Infrastructure - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Fund of hedge funds

Fund of hedge funds - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Forestry

Forestry - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Cash

Cash - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Money market instruments

Money market instruments - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

Other (1)

Other (1) - ESG incorporation addressed in your external manager selection, appointment and/or monitoring processes

11.3b. If your organisation does not integrate ESG factors into investment decisions on your externally managed assets, explain why not.

Cash and derivatives are short-term and do not provide for ESG incorporation

11.4. Provide a brief description of how your organisation includes responsible investment considerations in your investment manager selection, appointment and monitoring processes.

Manager Expectations  

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 

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.

Listed Equity 

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”.


OO 12. Modules and sections required to complete

12.1. Below are all applicable modules or sections you may report on. Those which are mandatory to report (asset classes representing 10% or more of your AUM) are already ticked and read-only. Those which are voluntary to report on can be opted into by ticking the box.

Core modules

RI implementation directly or via service providers

Direct - Listed Equity incorporation

Direct - Listed Equity active ownership

Direct - Fixed Income

RI implementation via external managers

Indirect - Selection, Appointment and Monitoring of External Managers

Closing module

12.2. Additional information. [Optional]


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