CalPERS Unveils ESG Study, Research Competition

(January 28, 2013) — The California Public Employees’ Retirement System (CalPERS), the largest public pension fund in the US with assets totaling $251 billion, has unfolded a sustainable investment research initiative with an eye toward helping pension funds understand the impact of sustainability factors on financial performance.

“CalPERS has made it a priority to use sustainability factors in making investment decisions across our Fund,” said Anne Simpson, CalPERS senior portfolio manager and director of global governance. “This initiative will aid us in our application, and help us draw conclusions that can inform our investment strategy and beliefs.”

Steven Currall, dean of the UC Davis Graduate School of Management, added in a statement: “We look forward to working with CalPERS on this path breaking research to provide an independent analysis to better understand the potential impact of ESG issues on capital markets, companies and intermediaries in the investment chain. This project is both theoretical and practical.”

As outlined by the pension fund, there is a lack of global consensus on how environmental, social, and governance (ESG) factor influence investment risk and return across asset classes in current scholarship and in the investment world. Those ESG factors range from climate change, labor practices, and human rights, to executive compensation.

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In 2011, the CalPERS Board approved integrating ESG issues as a strategic priority across its investment portfolio. As outlined by the pension fund’s 2012 report titled “Towards Sustainable Investment,” ESG is grounded in the three forms of economic capital–financial, human and physical–that are needed for long-term value creation.

According to a statement by the fund, the research initiative also marks the start of a call for working papers from scholars and investment practitioners globally in the fields of finance, economics, accounting, law and business. The papers will contribute to a rigorous debate and discussion on the impact of ESG issues on long-term value creation and capital market stability. CalPERS will partner with the UC Davis Graduate School of Management to seek, collect and review the papers.

Investors need greater disclosure along with more aggressive and realistic strategies for addressing rising pension liabilities sooner rather than later, PIMCO's Christian Stracke says.

(January 28, 2013) — Companies should provide more information on both sides of their pension balance sheets while using realistic assumptions, Pacific Investment Management Company (PIMCO) advises.

“As corporate treasurers get ready to publish their 2012 annual reports, we ask for one New Year’s resolution: get real on pension liabilities,” PIMCO’s Christian Stracke writes in a whitepaper. “Creeping pension liabilities are an increasing source of concern for credit investors and full disclosure of the risks surrounding them is what credit investors need to regain confidence in the most affected issuers. A few companies have stepped forward in recent years with some admirable improvements in their disclosures, but in general the information available to investors is still far from what we need.”

According to Stracke, credit markets penalize issuers for lack of disclosure. “Yes, companies can generally keep some investors in the dark for a while, and enjoy lower spreads in the short term as a result of limited disclosures. Ultimately, though, credit investors wise up to the problem and in the end are forced to assign a steep uncertainty premium to issuers,” he writes.

Companies should know (and disclose) not just the pension liability under certain normalized assumptions, but also how volatile the pension liability could be over time, PIMCO’s paper outlines. “Because companies’ ability to make cash injections into pension plans is generally negatively correlated with the size of the required cash injection from one year to the next, the volatility of the liability is a critical factor in credit analysis,” Stracke asserts. More disclosure on the duration of liabilities could help significantly with that goal. Stracke also concludes that a common refrain that we hear from management teams is that companies already disclose so much information that any more would simply be too much to handle, especially complicated actuarial information on pension liabilities. “This is simply wrong…As with many new areas of disclosure, there could be a transition during which there may be some short-term volatility in stock prices and credit spreads, but robust engagement of the investor community to educate analysts on the disclosure could keep this transition period short,” he writes.

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The paper concludes: If investors obtain clearer disclosure along with more aggressive and realistic strategies for addressing rising pension liabilities, “companies should enjoy lower credit spreads (and, ultimately, a lower equity risk premium) by giving investors confidence that the pension problem is settled.”

PIMCO’s report follows follows a study from the Edhec-Risk Institute, which said that while investors were aware of pressures on public and private pension systems in Europe, a closer look into how each nation measured their liabilities uncovered some surprising results. “Due to the variety of national systems, obtaining a clear view of pension liabilities is not straightforward,” the study said. To demonstrate, the institute used a uniform discount rate to measure each member state in the European Union’s public pension obligations as a percentage of 2010 GDP. “Ultimately, the values for public pension liabilities that Edhec-Risk Institute has calculated can lead to solvability analyses that are substantially different from those habitually taken into account by rating agencies or investors, ” the study noted.

Click here to read PIMCO’s full paper.