Asset Allocation, Defined Benefit, ESG/SRI, Institutional Investors, Pension Funds, Private Equity, Public Funds

CalPERS’ New ESG Investment Boss Presents Vision for Program

Beth Richtman, the California Public Employees’ Retirement System’s (CalPERS) first managing investment director of its sustainable investment program, on July 16, delivered her first presentation to the system’s board of trustees, outlining her vision and initial steps for implementing ESG principles across the pension fund’s portfolio.  She said in the presentation that her overriding vision for the program is that it helps the fund’s investment office sustainably generate the cash flows the system needs to meet its liabilities.  Among her first priorities, she said, is improving the fund’s ESG research and integration; utilizing to a greater degree CalPERS’ reputation as a responsible investor to access more and better investment opportunities and partnerships; careful prioritization of potential ESG opportunities; and recruiting more personnel for the sustainable investment program. Richtman was appointed to the position in April.

Beth Richtman Managing Investment Director, Sustainable Investments

“What we are trying to do with the program is to build a mindset and a resource for [CalPERS’]  investment office that helps it better identify and focus on the most critical environmental and social and governance factors that can affect our investments,” she emphasized.   “I want the investment office to understand the biggest threats and opportunities and invest with that insight. My vision is to help the investment office to be a better investor.”

Speaking figuratively, Richtman said her vision for CalPERS’ sustainable investment program is best represented as money tree, whose trunk represents the backbone of sustainable investment, with four main branches representing: research, advocacy, engagement, and integration, all of which support the total fund in generating long-term cash flow.

She noted that CalPERS has historically been very strong on advocacy and engagement regarding ESG investment issues, but that she believes that it is the research and integration branches that need dedicated attention now, and that is what she plans to build out.

“It is important that CalPERS figure this out,” she asserted, “because Other investors are out there getting better and better at analyzing ESG risks and opportunities, and if we don’t improve at this ourselves we might be on the wrong side of trades and the wrong side of societal, environmental and technological transitions. And we might take on risks that we don’t see until we lose money, or miss out on some of the world’s biggest opportunities.” She underscored, nonetheless, that the goal of the sustainable investment program is to help the fund returns and to improve its funded status.

The sustainable investment program has already helped CalPERS, she claimed, pointing to its real assets portfolio, in which some of the ESG tools and integration requirements have proved beneficial. “A recent investment opportunity considered for the portfolio looked very attractive on many counts at first,” she said, “but when the managers put on their sustainable investment lens, they discovered an unresolved environmental condition. The risk was large. Ultimately, they decided to walk away from that opportunity. Their discipline and focus on reviewing all material risk that could affect that investment protected our capital.”

Other investors are out there getting better and better at analyzing ESG risks and opportunities, and if we don’t improve at this ourselves we might be on the wrong side of trades and the wrong side of societal, environmental and technological transitions. And we might take on risks that we don’t see until we lose money, or miss out on some of the world’s biggest opportunities.

But, sustainable investment is not just about risks, it’s also about opportunities. In some cases, it’s about access to opportunities, Richtman said.  She explained that one of the fund’s private equity managers has found that its strong environmental and social track record is key to helping it source deals. Why?  “They are in the business of acquiring family businesses. It turns out that family businesses often have worked with long-term employees and often care a lot about who they sell their businesses to.” As such, she said, she wonders about the value of CalPERS’ own reputation as a responsible investor, and whether it has utilized it to the fullest in figuring out who might like to partner with the fund on sustainable investment and in accessing opportunities. “And, I think this may be a reputational asset that we might be able to use more fully in our new private equity models,” she said.

Regarding the recruitment of more personnel to the team, which now stands at approximately 12 individuals, Richtman said her plan is to build and nurture a team with deep and relevant expertise at the intersection of sustainability and investment returns.

She said that in March Wilshire Associates, one of the fund’s long-time consultants, recommended that CaLPERS:

  1. Prioritize emerging ESG issues –resources can be tugged in many directions, so we need to prioritize;
  2. Understand resources needed;
  3. Translate issues/topics into investment terms.

She explained that to her mind, prioritization is closely related to resources available. “ESG ideas come from many places –shareholders, external managers, NGOs, academics, partnerships and more, so we will prioritize topics that have the biggest potential effect on our returns. The gravitational pull of the program will be toward the topics that have the highest potential to affect our funded statue and to affect our returns.

The sustainable investment team will be doing a fair amount of research, but will also leverage some of the resources of the entire investment office, she explained, noting that about a month ago she sent an email to CalPERS’ investment office seeking collaboration on two new research projects, namely on:

  1. Water –focused on water risk and opportunities
  2. Disruptive technologies, including looking at some of the social impacts.

When asked by a board member if the sustainable program will address sexual harassment and diversify as part of ESG going forward, Richtman responded that recently the board adopted governance sustainability principles that contain such language and govern how the program will apply its sustainability principles.

When asked what is the program’s goal in conducting more research, she said:  “Our current research is of academic literature. But we think there are additional sources of literature to help us. We don’t think all the answers or all the questions are in academia. We think we need to research other industry groups and market participants.”

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