As ESG continues to grow in prominence in the alternatives assets industry, so too does the amount of conversation around it. Here, Preqin speaks to Beth Richtman from CalPERS for their take on the subject.
Q1 hedge fund letters, conference, scoops etc
There are many definitions of ESG in the industry– what does this term mean to CalPERS?
For us, ESG integration is about identifying, understanding and addressing short- and long-term risks and opportunities that can impact our returns to help us be a better investor and an effective and responsible asset owner. As a global institutional investor, CalPERS strongly believes long-term value creation requires effective management of three forms of capital: financial, physical, and human.
Good corporate governance is an important element of managing financial capital and is vital to ensuring an alignment of interests between a company’s management and its shareowners. In our experience, companies with good governance practices deliver better long-term value to investors. We focus on issues such as investor rights, board quality and diversity, reporting, compensation and effective regulation to protect our rights, ensure we have reliable information and give us rights of redress. Governance is important – not just in our public company holdings, but in our relationships with external managers and investment vehicles.
Physical capital refers to the environment. CalPERS believes companies’ long-term value creation requires effective management of environmental risks and opportunities. Companies should identify and manage material environmental risks and opportunities that are relevant to their short- and long-term success. Environmental issues may include the following: i
- Company impact on the environment: potential regulatory change, liability, license to operate, reputational or market access risks posed by the company’s environmental impacts, including:
- emissions, pollution, waste, loss of biodiversity, degradation of natural ecosystems, like deforestation
- Environmental effects on company: change, volatility or deterioration in the environment that may impact business operations, such as:
- climate change, extreme weather
- loss or degradation of ecosystem services, like pollination, decline in biodiversity
- change in access to clean, affordable and adequate sources of water and other critical natural resources, like food supplies
- Transition: transition of company’s industry and/or customers towards more sustainable products, services or practices, such as:
- low-carbon economy, technologies improving environmental outcomes
- sustainability certifications, restoration, adaptation and risk mitigation business models
Human capital refers to the workforce and communities where the companies operate. Corporations should adopt practices towards the elimination of human rights violations in all countries or environments in which they operate. Additionally, these practices should emphasize and focus on preventing discrimination; harassment of any kind including sexual harassment; and/or violence based on race, color, religion, national origin, age, disability, sexual orientation, gender identity, marital status or any other status protected by laws or regulations in areas of a company’s operation. Boards should be accountable for companies to develop and implement company policies, procedures, training and internal reporting structures to ensure good human capital management practices.
CalPERS has been a long-term supporter of ESG integration into investment decision-making for your entire fund – what are your reasons for this?
CalPERS’ fiduciary responsibility is to sustain its ability to pay benefits for generations of California state employees. This is reflected in our Core Values and Investment Beliefs. We view sustainable investments and ESG integration as necessary to helping us achieve the returns we need to be able to fulfill our commitment to our beneficiaries.
How has your wider Sustainable Investments Programme evolved to where it is today?
CalPERS created the Sustainable Investments team with a total fund mandate. The team’s focus is on research, integration, advocacy, and engagement. It enables CalPERS to better integrate ESG considerations into our investment process. Over the years the CalPERS Principles have evolved from a guide to proxy voting in public markets, to a broader statement of our views on best practices. We now issue guidance on our engagement with companies, advocate with policy-makers in support of our Investment Beliefs, and engage internal and external managers on our expectations regarding sustainable investment practices. ii
What are the biggest challenges you face as an investor with regards to ESG?
Access to data and tools that allow us to measure our exposure to ESG topics in financial terms and across asset classes. This is important because it helps us measure our true exposure to an issue and think comprehensively about applications to investment research, improvements to our process based on best-use cases, and guiding ESG integration resources for team members. Most tools are developed only for listed equity and fundamental, bottom-up analysis as opposed to a highly diversified, systematic integration approach, or with consideration of how materiality may differ for each asset class.
Preqin Pro will soon feature information on fund managers’ and investors’ ESG investments. Uncover investor preferences and mandates for ESG-compliant vehicles and know which fund managers have investment criteria that incorporates ESG.
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i CalPERS Governance and Sustainability Principles
ii Private Equity Sustainable Investment Guidelines
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