Slanted 'Study' on the Role of ESG Falls Completely Apart
The American Council for Capital Formation has released a report (PDF) critical of CalPERS' investment strategy on sustainability — what's often known as environmental, social, and governance, or ESG. The report argues that our efforts to engage with companies on policies that can impact their bottom line have harmed returns. The report is dead wrong.
The Washington, D.C., group is a pro-business organization that believes investors should have little say in how a company they put their money into is operated. It professes to advocate for "policies that encourage savings and investment, economic growth, and job creation." But the four recommendations in this so-called "study" — including lowering the discount rate to around 4 percent — would do serious damage to many California cities, counties, other public agencies, and schools. If implemented, they would forever jeopardize the retirement security of millions of current and retired California public employees and their beneficiaries.
We'd like to believe these suggestions simply represent a fundamental misunderstanding about CalPERS' investment strategy and operations. But the truth is this report cherry picks a thin set of loosely-related facts to subliminally promote an anti-pension ideology. That's certainly the crystal-clear conclusion drawn by one of its big supporters, who in praising the work also briskly calls for end to "California's system of defined benefits."
Misconceived, Misguided, Misinformed
In its story on this report, Pensions & Investments said the American Council for Capital Formation "offers little evidence" in its claim that investment returns have suffered because we ask companies to tell us what impact climate change is having on their business. Or that we want them to open up the process by which talented and qualified candidates are selected to serve on their boards.
MarketWatch echoes that point: "It is important to note that ACCF's report doesn't conduct a comprehensive impact of ESG investing on the pension fund's performance."
Let's be clear. ESG issues are important because they can greatly impact a company's performance (Access information on our ESG approach). It's precisely because we're fiduciaries responsible for paying benefits for generations that we work and engage with companies on issues that can have a material impact on their financial future. We have a constitutional obligation to sustain and protect the CalPERS fund. We need these companies to get it right. When they succeed, we succeed.
The Story Behind the Story
ACCF's report cites four "environmental" investments as proxies to feebly argue its anti-ESG message (Access our Private Equity Program Fund Performance Review). They're correct — these private equity funds haven't done well.
But here's the context that was willfully ignored: These are just four funds totaling about $600 million out of about 240 in a $26.4 billion private equity portfolio.
And this: Private equity earned 13.9 percent last fiscal year, 11.5 percent for the preceding five-year period, and 11.3 for the preceding 20-year period. In fact, our private equity program has produced higher returns for the CalPERS fund than any other asset classes.
ACCF's analysis of the poor performance of five public solar companies falls victim to the same dismal logic. At nearly half of the entire CalPERS fund, our public market holdings represent the vast majority of all listed global companies — around 10,000 — and largely follows a passive, index-like investing approach.
We don't stock pick or try to time the market. What we do pick is a long-term investing strategy — with a 50- to 60-year horizon — and we stick to it.
We Believe in Engagement
As MarketWatch notes, ACCF is funded in part by the Koch Brothers and energy companies like Exxon, Chevron, and Occidental (all of which, by the way, we own (PDF)). That's why it's not surprising that one of its four recommendations is that public pension funds insist that outside managers "not vote for proposals that require additional disclosures beyond those mandated by regulatory authorities."
That tired and tortured argument really means this: ACCF wants us to act like the index funds we invest in — passive and silent.
We won't surrender our rights to engage with companies to help improve their governance practices or environmental stewardship, or to adequately plan for the impacts of climate change. It would be dereliction of our fiduciary responsibility. We work within the parameters of our five-year ESG Strategic Plan (PDF), and have a long and successful track record of talking with companies to encourage better behavior or operations and improving the bottom line.
And studies have shown that engagement works. Companies with better governance and more diversity perform better. Companies that respect their employees and show care for their supply chain perform better. Companies that adequately account for natural resource allocation in their business plans perform better. And companies that evaluate how their operations are susceptible to the pending effects of climate change, and then plan accordingly to deal with those effects, will be better prepared to deliver value to investors for decades to come.
Our Fiduciary Responsibility
We vote our proxies and engage the companies we own because it's our duty to do so as an informed investor. Our beliefs (PDF) inform our actions on these issues, not because they make us feel good but because there is sound economic reasoning to do so. That's why as a founding member of the Climate Action 100+, which includes over 220 large investors with $27 trillion in assets, we are proud to join the newly launched effort urging the 100 major greenhouse gas emitters to fight climate change by cutting greenhouse gas emissions.
We raise our voice because our members, partner agencies, and taxpayers trust us to be a responsible steward of the more than $344 billion entrusted to us so that we can pay promised benefits to California's public employees after a career dedicated to public service.