CalPERS gives its managers ESG ultimatum

In what promises to be a transformational moment for ESG integration and investment manager accountability, CalPERS will require all of its managers to identify and articulate ESG in their investment processes.

CalPERS staff led by Anne Simpson, senior portfolio manager and director of global governance, presented the ESG manager expectations, and draft sustainable investment guidelines, to the investment committee this week.

The $307 billion fund will factor into its decisions about hiring and monitoring external investment managers the degree to which managers assess ESG factors and integrate them into their process.

“If for example a manager hasn’t addressed how to carry out an environmental impact, if that can be easily integrated, that will affect our decision,” Simpson says.

“This is going beyond asking are you a signatory to the PRI? It lifts the lid, as they have to report to us on this.”

In an exclusive interview with conexust1f.flywheelstaging.com, Simpson said that CalPERS considers managers that do not identify and manage these risks as having a “sub-par investment process”.

The purpose of the project, which has been two-years in the making, is to integrate ESG risk and opportunity considerations into the investment processes and decision making across the total fund at the same time CalPERS wishes to recognise the complexity and differences across asset class strategies.

It also fulfils fits in with the fund’s mandate of integrating its investment beliefs across all asset classes. One of CalPERS investment beliefs is that long-term value creation comes from management of financial capital, human capital, and physical capital.

“All of these have to be understood as part of value creation,” Simpson says. “If you’re investing in private equity and not paying attention to how the development might impact the community, then you’re ignoring the value drivers in the business, which are also the risks.”

As part of the planning process for the manager expectations, each asset class within CalPERS surveyed its existing managers to assess what was the norm with regard to ESG.

“In some cases they were already considering factors but they weren’t articulated to us in due diligence. In other cases managers were surprised that we were asking the questions.”

Simpson says that CalPERS considers ESG risks as material considerations to its total portfolio due to the characteristics of the fund.

One of CalPERS investment beliefs is that risk is multi-faceted and not fully captured through measures such as volatility or tracking error.

“Because of our size and the fact we are globally invested we believe it is part of the multi-faceted nature of the risks we face. At $307 billion we can’t hide if there is systemic risk,” Simpson says. “But we are not only huge in size, we are long term to the point of being virtually permanent.”

Read complete article by Amanda White for Top 1000 Funds here.

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