For super funds and their advisers

Getting serious with company engagement on ESG

Chris Ailman

by Greg Bright

CalSTRS, the second-largest pension fund in the US and a bellwether for others, has instituted a new policy on its engagement with the thousands of companies in its global portfolios. The policy focuses on where the fund can have the most impact. The move is likely to be watched by other big funds around the world.

CalSTRS (the California State Teachers’ Retirement System) is a US$252.4 billion fund based in California’s small, by population, capital of Sacramento. What is generally regarded as its sister fund, CalPERS, (California Public Employees Retirement System) is also based there and is the US’s largest pension fund with about US$380 billion under management. Colloquially within the industry they are known as “PERS and STERS”. They have a tendency to move in lockstep. And California is probably the most sensitive American state to environmental concerns. Los Angeles has changed from one of the most polluted cities to one of the least in a matter of about 25 years.

Why the rest of the world should watch the development is because there has long been an issue around whether the big asset owners should engage with their investee companies if they want them to change their behaviour or whether they should just do the “Wall Street walk” and sell out, which is a lot easier.

In Australia, the increasing tendency for larger managers and their big client funds seems to be to try to engage with management, rather than sell out. This is, at least in part, driven by the size of the Australian sharemarket. If you don’t own BHP and/or Rio Tinto, it can hurt your relative performance against the ASX 300.

Australian professional investors also have an additional quandary as to what to do, for example, about AGL. The well-managed company, whose stock is usually among the top performers, is one of Australia’s largest users of dirty coal but also one of the largest investors in solar power.

CalSTRS approved its new engagement policy at its January 30 investment committee meeting. According to the ‘Chief Investment Officer’ investment newsletter: “The new plan requires staff to not only evaluate CalSTRS’ ability to influence change at companies in its portfolio that it is selecting for engagement, but also assess the pension plan’s ability to deliver measurable outcomes. The pension plan also approved a new investment principle aimed at expanding its ESG investment policy. The new principle requires CalSTRS investment staff to consider investment risks associated with climate change.”

The fund had already required investment staff to look beyond traditional financial metrics to assess material ESG factors in the investment process for every asset class. The ‘CIO’ newsletter points out though that the new policy does not mention ‘climate change’.

An interesting phenomenon for “PERS and STERS” is the political nature of anything they do. Unlike all-but a handful of Australian funds, they have annual meetings of members. They also have full transparency about all important investment committee and other meetings, many of which are provided in real-time online video.

Ahead of the January 30 meeting, for instance, protestors drenched themselves in fake oil and rode on an ‘oil tanker’ float. School children as well as retirees marched on the CalSTRS headquarters. This was because the fund had not divested itself of it remaining US$6 billion portfolio related to fossil fuel producers. Australian funds, such as UniSuper and Cbus, have also copped press criticism in the past week for being too slow in their divestment policies.

In an interesting parallel with Australia, ‘CIO’ reported: “CalSTRS investment committee members said at the meeting that they don’t think the environmental advocates are aware of all the efforts they are making as part of their engagement efforts with fossil fuel companies. Chris Ailman (the fund’s head of investments) has said that divestment from fossil fuel companies would deprive CalSTRS of a seat at the table to influence sustainability efforts.

“While energy stocks have been the worst-performing sector in the S&P 500 over the past decade, pension plan officials say the sector is important for the pension plan to maintain a diversified equity portfolio.”

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