CalSTRS revises ESG policy, mulls direct investing models

The $196bn retirement system points to Dutch, Canadian and Australian pensions for their direct and co-investing approaches.

The California State Teachers’ Retirement System, which allocates 8 percent or $16.1 billion to private equity, revised its environmental, social and governance risks policy to base it on principles rather than on both rules and principles, according to the meeting materials for its 5 April meeting.

According to other materials for the same meeting, CalSTRS is also considering shaking up its operating model to focus more on direct and co-investments. 

At the January subcommittee meeting, CalSTRS found that while its ESG Policy is based on both rules and principles, all of its peers addressed ESG issues through a principles-guided approach. As a result, the $202 billion Sacramento-based pension decided to remove its list of 21 risk factors in the policy and incorporate it into a set of staff guidelines instead, according to the materials. 

The shift will reflect concepts, ideas and approaches used by other institutions in their ESG policies, CalSTRS wrote. 

The revision was an effort to integrate ESG into the investment processes of all asset classes, address issues with wording in the policy and focus on the material impact on CalSTRS’ portfolio, the pension said in the materials, adding that the first draft of revisions will be revisited by the subcommittee at its May meeting. 

Regarding the consideration to focus more on direct investments, this isn't the first time CalSTRS is entertaining the idea. 

Its investment advisors, Pension Consulting Alliance, Meketa Investment Group and its staff acknowledged that additional resources and a new operating model would be necessary to grow its internal management capabilities for direct and co-investing, and recommended that the key objective of the investment committee for the 2017-2018 fiscal year be studying alternative models for these strategies. 

Noting that this study of alternative business models for its direct and co-investing programme may last beyond the 2017-2018 fiscal year, CalSTRS said many non-US pensions – including several in the Netherlands, Canada and Australia – have established new investment management models, the most recent one being the British Columbia Investment Management Corporation (bcIMC). 

As an example, bcIMC divided its private markets programme into two – private equity, and infrastructure and renewable resources – and hired Jim Pittman, who had experience in direct investing as a managing director of private equity at fellow Canadian limited partner Public Sector Pension Investment Board, to lead its new private equity department. 

bcIMC said in its 2015-2016 annual report that strong performance of its direct investments contributed to generating a private equity portfolio return of 25.5 percent for the year ended 31 December 2015. 

PCA, Meketa and staff are presenting this new work plan for the upcoming fiscal year to the CalSTRS board in June for its approval. 

CalSTRS was not available to comment.