CaLPERS doubling down on ESG engagement

The California Public Employees’ Retirement System, with over US$250 billion assets under management the largest state pension fund in the U.S., has started a program of generating more profit from public companies it engages on environmental, social and governance (ESG) issues.

In a recent article in Pensions & Investment, Anne Simpson, senior portfolio manager and director, corporate governance of CaLPERS was cited as explaining that under the new initiative, CaLPERS will buy additional shares of companies it owns already under its indexed equity portfolio. The additional investment will go into companies that CaLPERS views as underperforming but displaying growth potential with CaLPERS engagement. The names of companies it engages are not normally disclosed, but CaLPERS makes exceptions when it files shareholder resolutions to force governance changes. Last year’s examples of such companies included Chesapeake Energy Corp. and Nabors Industries Inc. . According to Ms. Simpson, CalPERS has about 10 other companies also under engagement.

Another CaLPERS official said the funds allocated to the concentrated portfolio would be US$50 million indefinitely for five to 10 companies each year with the potential to grow significantly if successful. According to Ms. Simpson the new initiative is “an important signal to the market that we believe in this, we have conviction.” She also called the strategy “monetizing our company focus list”.

Lev Janashvili, managing director of corporate governance research firm GMI Ratings, is quoted in the article as believing that CaLPERS is the first pension fund to build a separate portfolio of companies it has engaged in.

Since CaLPERS has been a pioneer in incorporating financial standards, corporate governance and broader ESG issues into its portfolio allocation decisions, it seems only fitting that the fund would be the first to build a separate portfolio of companies it is actively engaging on such issues. Depending on its success, one can expect more institutional investors with comparable clout to enter such strategies.