CalPERS Calls ESG Criticism ‘Laughable’

Report accused system’s ESG practices of ‘jeopardizing the retirement fund.’

The $344 billion California Public Employees’ Retirement System (CalPERS) has scoffed at a report from the American Council for Capital Formation (ACCF) that is highly critical of the systems’ environment, social, and governance (ESG) investments.

The report laid much of the blame for CalPERS $138 billion in unfunded liabilities on “the tendency on the part of CalPERS management to make investment decisions based on political, social, and environmental causes rather than factors that boost returns and maximize fund performance.”

The ACCF said four of the nine worst-performing funds in the CalPERS portfolio as of March 31, focused on supporting ESG ventures, and that none of the system’s 25 top-performing funds was ESG-focused.

“CalPERS has demonstrated a troubling pattern of investments in social and political causes that are truly jeopardizing the retirement fund,” said Tim Doyle, ACCF’s vice president for policy and general counsel, in a statement. “Rather than focusing on getting the fund back on firm financial footing, CalPERS’s management is making questionable investments of pensioners’ money into social and political causes that are not yielding acceptable returns.”

However, CalPERS shot back at the accusations, saying that the CalPERS Investment Office’s investment decisions are based on its fiduciary responsibility to sustain the fund and pay the benefits public employees have earned.

“We work to achieve the best risk-adjusted returns possible. Incorporating environmental, social, and governance principles is an important part of our decision-making in our investment office,” said CalPERS spokesman Joe DeAnda in an email to CIO. “We have successfully pushed companies to publicly report on the impact that climate change is having on their business, and we have successfully pushed them to open up their board selection process because companies with a diverse group of talented people on their boards perform better financially.”

Backing up CalPERS is a report from Morningstar that said “academic and industry studies are demonstrating that sustainable investing does not underperform conventional investing, and there is mounting evidence that incorporating environmental, social, and governance factors can have a positive impact on performance.”

The report cited Oxford University researchers who analyzed nearly 200 studies, reports, and articles on sustainability, and found that 90% of the studies on the cost of capital show that sound sustainability standards lower the cost of capital of companies. It also said that 88% of the research shows that solid ESG practices result in better operational performance of firms, and that 80% of the studies show that stock price performance of companies is positively influenced by good sustainability practices.

Additionally, research from State Street Global Advisors shows that higher-scoring ESG companies in emerging markets, and within small caps, have outperformed lower-scoring ones in their respective categories. It said that “a thoughtful ESG evaluation process” should be able to find attractive investment opportunities across the capitalization range and within different regions.

“We stand behind our efforts,” said DeAnda. “Any suggestion that we stop engaging with companies on behalf of our members is laughable.”

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