CalSTRS moves to 'principles-based' ESG approach

The shift is part of a wider update to the way the pension approaches environmental, social and governance risks.

The Californian State Teachers’ Retirement System is set to adopt a revised environmental, social and governance investment policy in July, according to recent board meeting documents.

The pension fund is dropping its ‘21 Risk Factors’ staff must consider when making an investment decision. Instead, a ‘principles-based’ approach will be applied, in line with its LP peers. The move is the fourth revision since the policy was first revised in 2006.

CalSTRS is also revising its ESG investment risk calculation, adopting a two-limbed approach to assessing ESG risk to its overall investment portfolio, in qualitative and monetary terms.

The policy’s quantitative assessment will analyze the material risk of ESG to the portfolio as well as how ‘violation of an ESG risk’ over a long period could be loss making for the LP’s portfolio.

Increased ESG adoption in the industry is being driven by the prevalence of policies by GPs and LPs alike, and investor pressure on managers to implement ESG standards, according to a survey by Adveq and the Chartered Alternative Investment Analyst Association published in March.