CalPERS adopts first-ever ESG policy plan

The five-year plan is made of six strategic initiatives, including one focused specifically on private equity fee and profit-sharing transparency.

The California Public Employees' Retirement System's board of administration adopted a new environmental, social, and governance (ESG) five-year strategic plan, according to the pension fund.

The new plan names six strategic initiatives to support the American public pension fund's efforts in sustainable investing.

One initiative is specifically centered around private equity, focusing on private equity fee and profit-sharing transparency through the industry adoption of the Institutional Limited Partners fee reporting template released at the beginning of the year.

This plan follows an increasing focus on ESG by the private equity community, with the most recent effort coming from KKR. The global private equity firm launched an award this month to reward its eco-friendliest portfolio companies with a financial prize, as  reported by   PEI  sister title  private funds management

This is the first time CalPERS has developed a long-term, comprehensive ESG policy, CalPERS spokesman Joe DeAnda told  Private Equity International .

Previously, CalPERS did not have an overarching ESG strategy, DeAnda said, with staff following the same six initiatives of this new plan, but in a less structured manner. The CalPERS board of directors had recommended that the staff incorporate ESG factors into all investment decisions, but this plan provides a long-term direction that unifies all ESG-related efforts, he said. 

A second initiative focuses on conducting sustainable investment research to better understand ESG factors, while another initiative is centered around setting expectations for external managers from different asset classes to allow CalPERS better understand and manage ESG risk and opportunity.

The initiatives also include data and corporate reporting standards for enhanced disclosure of ESG considerations, diversity and inclusion in CalPERS' corporate board that it believes will enhance total fund performance, and climate risk and opportunity management by engaging 80 of its public equity portfolio companies that generate half of the portfolio's emissions. This last initiative is based on CalPERS' commitment to measuring and disclosing companies' carbon footprints via the United Nations Principles for Responsible Investment.

The new CalPERS plan is the result of efforts that began more than a year ago. According to  CalPERS' investment committee meeting materials  for its August meeting, the process began in April 2015 with the formation of a global governance policy ad hoc subcommittee.

In 2016, CalPERS' investment committee focused on finalising key performance indicators surrounding topics such as climate change, human capital and alignment of interest with internal and external investment managers, and the board offered final guidance on the five-year strategic plan in July.

As part of the plan, CalPERS, which manages about $306 billion in assets and $26.3 billion in private equity assets, is planning to add new positions, including a sustainable investment manager, a sustainable investment officer, an associate governmental programme analyst, an investment director in global equity, two associate investment managers in global equity, and two staff services analysts.

These new appointments would add $1.9 million in global governance personnel costs, once approved by the board, according to CalPERS. Although the personnel structure has been proposed and not yet approved, the ESG plan has already been approved by the board.