CalPERS Receives Top Score for ESG | Chief Investment Officer

America’s largest pension fund has earned top marks for its adherence to environmental, social, and governance issues.

The California Public Employees’ Retirement System (CalPERS) released the results of its 2015 Principles of Responsible Investment (PRI) Assessment Report Thursday. The $300 billion fund said it received an ‘A+’ for its overarching approach to responsible investment, the highest possible grade offered by PRI.

“A commitment to sustainable investing is ingrained throughout our investment beliefs.”PRI, an initiative backed by the United Nations, scores participating asset owners, investment managers, and professional service partners on their compliance with a set of standards for responsible and sustainable investment.

“We are proud of our exceptional score,” said Ted Eliopoulos, CIO at CalPERS. “A commitment to sustainable investing is ingrained throughout our investment beliefs.”

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In addition to being a PRI signatory, CalPERS is involved with the Global Real Estate Sustainability Benchmark (GRESB). Earlier this month, the pension fund led a coalition of asset owners backing the GRESB’s new infrastructure benchmark.

Anne Simpson, investment director for global governance at CalPERS, said the fund’s PRI scores were indicative of its progress toward sustainable investment activity.

“We know this is an evolving field and there is still much work to be done,” said Simpson.

PRI signatories manage a collective $59 trillion in assets. As of June 2015, 286 asset owners had signed onto the initiative, representing $15.5 trillion in assets under management.

Other signees include the California State Teachers’ Retirement System and the New York City Employees Retirement System. Harvard University became the first endowment to join the organization in April 2014.

Pension plans failing to consider the strength of their corporate sponsor may be drawing up a flawed investment strategy as a result, according to research from the Cass Business School and University of Melbourne.

In the paper—“Managing Financially Distressed Pension Plans In The Interest Of Beneficiaries”—David Blake, director of pensions at the Cass Business School, and Joachim Inkmann and Zhen Shi of the University of Melbourne proposed a new asset-liability model taking this into account as well as factoring in the pension’s strategic asset allocation.

“We cannot value the pension obligation without knowing the strategic asset allocation policy of the pension plan.”Currently, valuing a pension’s liability is treated as a separate task from investing the assets, the authors said. Their model merged the two tasks as well as treating pension funds as “an integral part of the company”.

Blake said the model “has important advantages for all stakeholders of the corporate pension plan”. Adding: “Staff taking out pensions will have a clearer picture of the true value of their pension promise.”

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“The ability of the pension plan and its sponsoring company to fund the future pension payments promised to the beneficiaries depends on the future values of pension plan assets which themselves depend on the current strategic asset allocation policy of the pension plan,” the authors wrote. “We cannot value the pension obligation without knowing the strategic asset allocation policy of the pension plan.”

Using 2002 data from General Motors’ pension plan as a case study, the authors demonstrated that the strategic asset allocation used at the time was far too risky as it did not take into account the funding shortfall and the size of the company.

At the end of 2002, GM’s pension held assets worth $60.9 billion, or 76% of its obligation to members. The market cap of the car maker was $6.8 billion at the time—less than half the value of the pension shortfall of $19.8 billion.

More than half (55%) of GM’s pension was invested in stocks at the end of that year, the paper shows, meaning the fund was exposed to a volatile—and falling—equity market. Including real estate, the pension had 65% in risky assets.

However, when taking into account the sponsor’s position, as well as the nature and time frame of the liabilities, Blake, Inkmann, and Shi said GM’s optimal bond allocation was 70%, shifting from an aggressive investment strategy to liability hedging.

“Pension plans which are sufficiently well funded to reduce funding risk to a negligible amount optimally choose an asset allocation in our framework which is close to a liability hedging portfolio,” the authors wrote in their conclusion, “but which additionally includes a small allocation to stocks to help keep future underfunding probabilities low as a result of the higher expected mean-reverting return to stocks.”