The California Public Employees’ Retirement System is in the middle of integrating ESG into its alternative asset classes.
The pension fund’s five-year plan for ESG, which was released in August 2016, calls for private equity fee and profit sharing transparency.
In its private equity annual programme review released in November, CalPERS said adoption of the Institutional Limited Partners Association template was a bit slow, pointing to 77 percent of funds having provided information using the template as of the first quarter of 2017.
CalPERS has several milestones it needs to reach as part of the long-term plan. In 2021, it wants 90 percent of its private equity partnerships reporting through the ILPA framework, while by 2036, it plans to have 100 percent of private equity managers doing so.
Although fee and profit sharing transparency is the only initiative out of six in the ESG plan that specifically refers to private equity, others adopted from UN Principles of Responsible Investing apply broadly across the asset classes.
The other five strategic initiatives are: data and corporate reporting standards; the UN PRI Montreal Pledge on the carbon footprint; diversity and inclusion; manager expectations; and sustainable investment research.
CalPERS incorporates ESG issues into investment analysis, decision-making and monitoring processes. It engages with GPs to understand how ESG policies are implemented, how it is monitored across investments and how these decisions are communicated to LPs. During due diligence, the PE staff ask GPs about their ESG practices, including whether a formal policy exists.
Once it has approved a commitment, CalPERS typically creates side letters requiring the fund managers to incorporate ESG in their investment process and report regularly on it. The pension’s 10 top GPs by assets under management are proactively asked about ESG practices and issues at limited partner advisory committee meetings.
The institution’s next steps on sustainable investment practices will be more engagement with GPs on ESG concerns, accomplishments across its portfolio including portfolio company showcases and prioritising a broader adoption of the ILPA fee and profit sharing template.
CalPERS, which has $326.4 billion in assets under management of which about 8 percent is in private equity, was a founding signatory of the PRI.