Some call it altruistic investing. Others use adjectives like responsible, sustainable or social impact. The concept is to strategically choose where to invest so that you can have a positive effect while still making a profit. The California Public Employees Retirement System has made recent changes to make them a leader in this field.
Usually, individual investors have a limited impact in the business world, especially investors who are middle-income government employees. But there’s strength in numbers, and the pooled resources from 1.8 million retirees can impart significant change on company executives’ decisions and behavior. CalPERS’ Environmental, Social and Governance 5-Year Strategic Plan, officially adopted in August 2016, outlines its members’ influence through stock purchases, mutual fund choices and private equity investments.
The long-term strategy is that a clean environment, sustainable energy resources and open governance of public companies is good business — and good for business. CalPERS aims to invest in public companies with business practices that reflect this philosophy. When CalPERS shareholders believe the company is not doing that, they can wield their influence.
Strength through size is not new for the pension system. CalPERS and its sister pension fund, the California State Teachers Retirement System, are among the largest public pension funds in the country — numbers two and three after the retirement system for federal employees. How they invest their billions ($324.5 billion for CalPERS and $206.5 billion for CalSTRS) is closely watched: CalPERS has strategically set out to invest back into California, and has been known for decades to aggressively push for improved corporate governance.
CalPERS’ plan is the latest iteration in a number of advocacy efforts. The pension fund is a founding member of a United Nations-supported global effort called Principles for Responsible Investment, and it has been an active member for over a decade of Ceres, a U.S.-based national sustainability coalition that addresses challenges like water diversity.
But CalPERS recent strategy is something special. In May, CalPERS took home Responsible Investor’s prestigious award for Innovation & Industry Leadership, beating out 130 rival nominees.
“Responsible Investor is at the forefront of investor news,” says CalPERS spokeswoman Megan White. “This is the first time they have had this award.”
Industry experts take statements from the pension-fund executives seriously. “CalPERS’ leadership in this area comes from their longevity,” says Ben Thornley, a managing partner at San Francisco-based Tideline, a financial advisory firm that specializes in impact investments. Thornley says that CalPERS’ specific actions and plans, combined with its history of financial activism, make companies take notice. “They are putting policy into practice.”
In June, CalPERS thumbed its nose at President Trump’s declaration of abandoning the Paris Agreement, in which 149 countries spell out steps they will take to mitigate climate change. “As a global investor and as fiduciaries focused on the long-term sustainability of our investments, we will continue to support the Paris Agreement on climate change,” said CEO Marcie Frost in an official statement.
The decades of advocacy has impact beyond direct actions, Thornley adds. When CalPERS leaders release public statements and research on different issues — income equality, for example — people in the financial world start thinking about the subject, even in the absence of immediate actions by CalPERS. “Their influence can shift markets,” he says.
The June announcement about the Paris Agreement came just a day after a major turn at ExxonMobil, where a consortium of powerful shareholders — the investors and pensions, such as CalPERS, who own stock in the oil company — insisted on more-detailed climate change reporting from the company, against the recommendation of the ExxonMobil board.
The long-term impact of these efforts remains to be seen, and results may have more to do with the political battles against Trump’s position on the environment than CalPERS’ efforts alone. The effort with ExxonMobil was an effort by a group of pensions and was strongly supported by a series of major financial firms, not one fund working alone. And there’s the question whether the ESG philosophy will even have an impact: Disasters like BP’s fiasco with the Deepwater Horizon show that one accident can undo years of environmental work in an instant.