CalPERS Puts ‘Laser-Like Focus’ on ESG, Board Diversity, and Executive Pay

Says actions from Climate Action 100+ initiative are starting to bear fruit.

As proxy season reaches its height in April and May, the California Public Employees’ Retirement System (CalPERS) is taking “a laser-like focus” in examining the records of companies in its $178.4 billion global equity portfolio towards addressing climate change, corporate board diversity, and compensation of top executives.

The focus on the three areas are a top priority for CalPERS, Simiso Nzima, the pension system’s global equity investment director, told the system’s investment committee on March 18, shows a video of the meeting.

While CalPERS investment officials won’t offer a full accounting of their efforts in engaging corporations in the ongoing proxy season for months, Nzima did detail that, more recently, oil and gas companies like BP, Shell, Xcel, Glencore, and A.P. Maersk have publicly committed to reducing carbon emissions.

Nzima said the companies agreed to change polices as part of an initiative by CalPERS and other institutional investors, called Climate Action 100+, aimed at 100 systemically important emitters that account for two-thirds of annual global industrial emissions. In addition, more than 60 other companies considered significant to drive the clean energy transition are part of the initiative.

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The actions by the companies to reduce emissions included BP’s announcement in February that it will align its business more closely with global climate goals and link the bonuses of 36,000 employees to greenhouse gas reduction targets. The following month, Shell announced it would deliver emissions reductions over the next three years and compensation of its top 150 executives would be linked to the target.

CalPERS, the largest US pension plan, is one of the founding members of Climate Action 100+, which represents 300 institutional investors and $32 trillion in assets under management.

Climate Action 100+ publicly discloses all of its more than 160 target companies, in an approach that resembles in part CalPERS’s former policy of “naming and shaming companies” that were underperforming because they did not have good corporate governance or were lax in sustainability policies.

CalPERS dropped the policy in 2010, choosing to engage companies privately, but Climate Action 100+ takes a public approach to naming the companies, although negotiations between institutional investors and corporations are usually in secret.

The pension plan isn’t just engaging companies in its global equity portfolio on carbon emissions. It is also reviewing its own private markets portfolio, looking at its infrastructure, real estate, and private equity investments to ensure they have low carbon emissions. However, obtaining results from private equity general partners has been difficult, disclosed Beth Richtman, managing investment director of the CalPERS sustainable investment program, at the March 18 meeting.

Richtman said a scheduled 2020 report of the carbon profile of investments held by general partners in CalPERS’s $27.4 billion private equity program won’t be ready that year because of the limited information available.

“When you compare [the private equity data] to other asset classes, there are dozens of examples and a cottage industry of experts willing to help us sort through reported data, different methodologies for estimating and for then aggregating the [carbon] footprint at the total portfolio level,” she said.  

Richtman said CDP, formerly known as carbon displacement project, has been developing an approach to looking at private company disclosure, “but still their data set of disclosed company information pales in comparison to the publicly listed asset classes.”

She said the CalPERS report would be delayed but did not specific how the pension system could gather the data when private equity partners have limited data. Complicating the problem is that CalPERS has dozens of private equity partners.

As part of its environmental, social, and governance (ESG) investment plan for 2019, CalPERS investment officials continue to push diversity on corporate boards, including adding women members, a priority carried over from last year.

They also plan to continue to study what standards companies in its portfolio should adhere to regarding social factors. Those factors could include whether companies pay their employees fairly, the pay ratio between the chief executive officer and other employees, and other workplace issues.

Carrie Douglas-Fong, an associate investment manager with the pension plan, said at the March 18 investment committee meeting, that CalPERS is continuing to research the issue with the aim of implementing guidelines for the pension plan to evaluate companies.

She said that a CalPERS-commissioned review of academic papers on the subject released in 2017 was inconclusive as to whether fair pay for workers and investment returns were linked.

Douglas-Fong said a follow-up by CalPERS investment staff since then involved reading articles and industry reports on the subject, and speaking with experts and other investors. 

“Throughout our research, we focused on what was most relevant to an investor,” she said. Douglas-Fong said the new examination is still inconclusive in terms of how the treatment of employees connects with a company’s financial results, but one thing was certain: “Economic inequality has increased in the United States dramatically since the 1970s,” she said. “The 2008 global financial crisis exacerbated existing inequality in the United States.”

Investment committee member Theresa Taylor agreed there is too large a pay gap between the salary of CEOs and employees at a company.

 “When CEOs are being paid 340 times what the average employee in the United States is being paid, that’s a huge income inequality,” she said.

Taylor expressed concern that recent changes in the tax code favor the wealthy and have exacerbated the situation and asked if Richtman could look into it. However, the sustainability investment director expressed reservations about analyzing the tax plan pushed through Washington by President Trump and Congressional Republicans.

She said there needed to be “substantial discussions” before CalPERS would weight in on tax policy, given CalPERS tax-except policy.

Statistics from the pension plan show that during the 2018 proxy season, CalPERS voted against 43% of say-on-pay plans. The shareholder votes are mandated by the Securities and Exchange Commission.  They allow investors to vote on whether they feel compensation is fair for the CEO of a company and other top officials.

The vote is strictly advisory, so corporate boards are not required to make any changes even if the vote is against the pay plan.

Related Stories:

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CalPERS: Board Diversity Efforts Beginning to Work

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