When it comes to his fund’s poorly-performing cleantech investments, John Dear, CIO of the $250 billion California Public Employees’ Retirement System, doesn’t try to qualify or hide his disappointment: the exercise of pouring $460 million into a cleantech fund has so far proven to be little more than “a noble way to lose money,” he said at the Wall Street Journal’s ECO:nomics conference in late March, adding that the fund has lost 9.7 percent since its launch five years ago.
Despite that clear disappointment, CalPERS is still betting that there’s money to be made from playing the environmental theme, and in other parts of the portfolio, that bet seems to be paying off. At the same conference in late March, Anne Simpson, a senior portfolio manager at CalPERS and its head of corporate governance, explained how the nation’s biggest pension fund is endeavoring to layer environmental and sustainability factors into its risk management process, by pushing its managers to take a closer look at oft-ignored factors like companies’ climate impacts, social issues, and governance structures.
“What’s our role as fiduciaries? It’s really to make sure that those to whom we delegate responsibility are good stewards of that capital—preserving it, making it grow, ensuring it’s safe,” Simpson said. “That sets an agenda for us looking at environmental issues.”
Over the past decade, Simpson explains, CalPERS has been building up the hard evidence that there is in fact a financial benefit to demanding that companies address sustainability problems like poor environmental disclosure and weak governance oversight. Between 1999 and 2009, CalPERS tracked the performance of the 169 companies on its Focus List—that is, those firms with whom CalPERS initiated discussions and demanded specific changes in this realm. Companies engaged through the Focus List program yielded an excess return of 13.83 percent above their sector average after 3 years, and 7.92 percent after five years. Simpson added that this fiscal year, CalPERS’ board “has decided to monetize that portfolio in a modest way,” by buying additional stock in Focus-List companies.
One company that CalPERS recently successfully engaged was Chesapeake Energy, an Oklahoma City-based oil and gas company. CalPERS board members, concerned about the company’s poor financial performance, traveled to Oklahoma to discuss a range of environmental and governance slipups that they believed were hurting the energy company and its long-term prospects. This year, Simpson said, the company has “made some dramatic changes, including a full sustainability report and a whole set of governance improvements, like the ability of the long-term owners to put forward candidates for the board in the event that we’re not satisfied with the people who are there.”
But Simpson also made it clear that the market isn’t providing CalPERS with what it needs to factor in environmental, governance, and other factors into its investment process to the extent that it would like. One major failing, she said, is in transparency and reporting.
“What we want is reporting that really not only gives us the financial, forward-looking part of the reporting that we need, but also is going to contain the material information on environmental, social and governance issues, because that’s how we’re going to get a grip on the sustainability agenda,” she said.
To this end, CalPERS was part of a group of major investors led by Ceres, a coalition of investors and other interest groups that raise awareness about sustainability issues, that in 2007 successfully lobbied the SEC to issue guidance to companies to report on environmental risks material to their operations. Earlier this year, CalPERS joined the Sustainability Accounting Standards Board, a nonprofit focused on identifying and standardizing that factors that companies disclose in their sustainability reports. Other major investors have taken up the cause, too—in early April, a group of investors that includes BlackRock, Rockefeller & Co., and Boston Common Asset Management proposed a global sustainability listing standard for companies.
Simpson said another failing in the wider market environment is the government subsidization of the cleantech sector, which she believes could be stymieing the maturation of the space. The integrated sustainability reporting that CalPERS and others promote would address this problem, she said.
“We’ve got to get to the point where we’re helping these markets function efficiently, but without the artificial prop of ill-thought-through or unreliable subsidy,” she said. “If we could get reporting to include externalities and indeed move in that direction, you’d have a much better functioning market that would set us up for that transition that needs to take place in energy.”