San Francisco Employees’ Retirement System Becomes Major ESG Force

Almost overnight, the San Francisco Employees’ Retirement System (SFERS) has gone from a bit player to a major force among US pension plans in making investments using factors such as sustainability and advocating that companies in its portfolio be better corporate citizens by reducing emissions.

The changes follow years of disagreement between the city of San Francisco’s governing body, the Board of Supervisors, and the retirement system. In 2013, the supervisors approved a resolution calling on the independently structured retirement system to divest of its holdings in fossil fuel companies. The retirement board and staff took no action, maintaining divestment would be a violation of its fiduciary duty. In 2017, the Board of Supervisors intervened again, with supervisor Aaron Peskin threatening to put up the issue for voters to decide.

A legal battle over whether the retirement system could be forced to divest never happened because retirement board members started to push for divestment.

The media spotlighted the $24.4 billion pension system when its board approved a more limited divestment plan on October 10 to begin a process that would result in the divestment of five fossil fuel companies if they don’t transition to cleaner energy companies.

Divestment if companies don’t comply with SFERS requirements for progress is expected to take one to three years. Another 18 companies were put on a watch list.

SFERS invests in dozens of energy companies, so the plan doesn’t fully comply with the wishes of the Board of Supervisors, but for now, the supervisors have quieted their tone.

What is clear is the Board of Supervisors in environmentally friendly San Francisco would not have any qualms with the pension system’s increased sustainability and other responsible investing efforts.

 Since the beginning of 2018, the pension system has committed $1.4 billion, or more than 5% of its assets, to low carbon or other investment strategies with an environmental, social, or governance (ESG) focus, making it one of the biggest ESG players among US public pension plans.

Board documents, memos, and interviews show that prior to 2015, the pension system didn’t have dedicated strategies related to sustainability. Total ESG investments between 2015 and 2017 were $240 million, meaning more than $1 billion was committed in 2018 alone.

The key initiatives in 2018 by the San Francisco system include:

• A $500 million commitment to a Goldman Sachs Asset Management passive index equity strategy that is weighted towards companies with lower emissions. On aggregate, the index aims to achieve investing in companies with 50% lower emissions than the Russell 1000 index.
• A $500 million commitment to a reduced carbon equity strategy managed by Generation Investment Management, the London-based money manager co-founded by Vice President Al Gore. The active strategy aims to have 70% to 80% less carbon emissions than the MSCI All Country All World Index.
• A $50 million commitment to Sustainable Asset Fund II managed by Vision Ridge Partners. The fund invests in sustainable real assets including solar, EV charging, and energy efficiency.
• A $50 million commitment to New Energy Capital Infrastructure Credit Fund II, L.P., managed by New Energy Capital Partners. The fund invests in renewable clean energy or clean infrastructure projects including solar, wind, energy storage, and energy efficiency.
• A commitment of up to $300 million to Cartica Management, an activist investor that engages with emerging market companies within its public equity portfolio with the goal of improving the company’s ESG record.

In addition, in December 2017, SFERS committed up to $100 million to the private equity firm TPG’s Rise Fund, an impact investing fund that invests through an ESG framework.

SFERS Chief Investment Officer William Coaker Jr. said at the Oct. 10 meeting that he knew of no other pension plan in the US that had invested more percentage-wise using ESG factors than the San Francisco system. Coaker would not discuss the ESG program with CIO, saying the system’s record spoke for itself.

Long-time SFERS board member Victor Makras, who left the SFERS board in 2018, said “relentless pressure” by board members over a five-year period led to the broader ESG divestment policy. He said Coaker, who joined the system in 2014, was so intent on other investment portfolio priorities, that sustainability investing didn’t rise to the top of the priority list.

“I think the chief investment officer was so focused on hedge funds that he allowed the rest of the portfolio to ride on itself,” said Makras, who had been pushing for SFERS to focus more on sustainability investing as well as divestment of fossil fuel securities.

Another difference in the larger ESG focus is the hiring of a full-time director, Andrew Collins, as head of ESG investing, said the system’s general consultant, Allan Martin, at the Oct. 10 meeting.

“I don’t want to underestimate the hiring of a director of ESG,” said Martin. “Every company I ever worked in, when they have a problem, they put together a committee and the committee comes up with brilliant ideas to fix it, but if you don’t say to someone it’s your job to deal with this, it never gets done.”

Martin said that Collins is responsible for SFERS’s progress in ESG investing in such a short time period.

SFERS has also joined other global institutional investors active in Climate Action 100+, an initative aimed at curbing the emissions of the 100 worst polluters among global corporations. As part of its membership, the San Francisco system became the lead negotiator with two global supergiant oil and gas companies on reducing their emissions, Collins told the board in October.

Collins commented on the overall push by SFERS towards responsible investing in an Oct. 10 memo to the system’s board.

“This places SFERS as a national leader in terms ·of investing a significant percentage of plan assets in a manner that considers climate risks and opportunities,” the memo said. “Few other US public pensions with plans assets similar in size to SFERS have been as active. “

In fact, percentage-wise compared to its total asset allocation, the San Francisco pension system’s commitment of more than 5% to investing with a focus on ESG factors is bigger than those made by large pensions plans, such as the New York State Common Pension plan, the New York City Pension plans, California’s public employees and teachers’ plans, an analysis by Collins concluded.

The analysis showed that none of those plans’ ESG investments exceeded 3% of their total assets.