CalSTRS Revamps ESG Guidelines | Chief Investment Officer

The investment committee of the California State Teachers’ Retirement System (CalSTRS) has approved new environmental, social, and governance (ESG) guidelines aimed at picking companies for engagement where CalSTRS can make a difference by influencing change and driving the stock price up.

The new policy approved at the pension plan’s January 30 investment committee meeting is meant to help CalSTRS determine which of the thousands of companies in the pension system’s $248 billion global equity portfolio should be the subject of CalSTRS engagement.

The new plan requires staff to not only evaluate CalSTRS’ ability to influence change at companies in its portfolio that it is selecting for engagement, but also assess the pension plan’s ability to deliver measurable outcomes.

The pension plan also approved a new investment principle aimed at expanding its ESG investment policy.

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The new principle requires CalSTRS investment staff to consider investment risks associated with climate change.

The pension plan already requires investment staff to look beyond traditional financial metrics to assess material ESG factors in the investment process for every asset class.

However, that ESG principle does not mention climate change.

The new climate change investment belief also states that CalSTRS “recognizes the critical role that carbon pricing frameworks may play in integrating the cost of common emissions into the global economy to accelerate an orderly-low carbon transition.”

CalSTRS now has nine investment principles. Other CalSTRS investment principles detail the benefits of a diversified portfolio and the need to be an active investor when there are market opportunities.

CalSTRS Chief Investment Officer Chris Ailman told the investment committee at the January 30 meeting that as members of the committee change over the next decade, the CalSTRS investment principles will help guide them.

“And it tells very clear instructions to the investment staff that what you’re doing better be in connection to these,” he said.

While much of CalSTRS’ engagement efforts are done behind the scenes, the pension plan cited last month its work as the lead investor working with public company Duke Energy. CalSTRS said its efforts have led the company to commit to a 50% reduction of greenhouse gas emissions by 2030 and net-zero emissions by 2050.

It also cited its efforts to convince vehicle manufacturer Volkswagen to become climate neutral by 2050 and launch 28 electric vehicle models by 2028.

The pension plan has been revamping its ESG program under the direction of Kirsty Jenkinson, who took over sustainability and corporate governance initiatives in January 2019. Jenkinson replaced CalSTRS long-term ESG director Anne Sheehan, who retired.

Jenkinson told the investment committee at the January 30 meeting that the new guidelines will give investment staff enhanced direction to pick which corporate engagements to take on. “We have a system that we can go through to determine, do we respond? Do we not respond?”

The revamp of CalSTRS’ engagement efforts and the new climate change principle comes as environmental critics have become more vocal in demanding that the pension plan divest of fossil fuel investments.

Drenched in fake oil and riding an “oil tanker” float, California school children marched with California teachers and retirees to CalSTRS headquarters before the investment committee meeting on January 30 to protest the mega-fund’s refusal to divest of its $6 billion fossil fuel portfolio.

The protesters have also been encouraging school children to attend CalSTRS meetings since last May to voice their displeasure at CalSTRS’ policy of engaging with fossil fuel companies instead of divesting. The children, along with adult environmentalists, also slammed the investment committee at the January meeting.

“I’ve never heard the word engagement except for when people get married,” Sujeith, a sixth grader from Oakland told the investment committee. “So you’re telling me you want to be in a relationship with fossil fuel companies? What have they done other than pollute the planet? That sounds like a toxic relationship.”

Fossil Free California executive director Vanessa Warheit, in a statement to CIO, said her organization appreciated CalSTRS’ efforts to pass the new climate change investment principle.

“But engaging with the energy sector—which is currently 100% comprised of fossil fuel companies—is a waste of staff time and resources,” she said.

CalSTRS investment committee members said at the meeting that they don’t think the environmental advocates are aware of all the efforts they are making as part of their engagement efforts with fossil fuel companies.

Ailman has said that divestment from fossil fuel companies would deprive CalSTRS of a seat at the table to influence sustainability efforts.

While energy stocks have been the worst-performing sector in the S&P 500 over the past decade, pension plan officials say the sector is important for the pension plan to maintain a diversified equity portfolio.

Many pension organizations see energy stocks as a hedge in case of an inflationary spiral.