On August 15, 2016, the California Public Employees’ Retirement System (CalPERS), the largest defined-benefit public pension in the U.S. with an investment fund valued at over $300 billion, announced that it has adopted a five-year strategic plan with respect to environmental, social and governance (ESG) initiatives. The stated goal of the plan is to enhance CalPERS’ own investing and proxy voting standards with respect to ESG matters, including its policies with respect to proxy access, board diversity, climate risk reporting and mitigation, water risk and supply chain issues (among others). The press release and strategy review document are available [here] and [here].

This continues the trend toward purposeful engagement by many institutional investors both with the financial markets generally and with companies in which they own securities. The documents outline initiatives to:

  • Enhance disclosures of ESG considerations in periodic filings by public companies, and to track progress by portfolio companies on those issues.
  • Encourage and track performance of public companies in their measurement and reduction of their carbon footprints, and compare it with their financial performance.
  • Track financial performance of companies with diverse boards (broadly defined).
  • Establish expectations for CalPERS’ own portfolio investment managers to understand the ESG components of investment risks and to include ESG in decision making.
  • Enhance CalPERS’ research and understanding with respect to ESG factors relevant to investment risks and returns.
  • Move CalPERS’ private equity investments toward adoption of the Institutional Limited Partners Association (ILPA) framework for transparency of fees and profit sharing.

The CalPERS work plan includes an emphasis on corporate engagement, proxy voting, shareholder campaigns and legislative activities to support these initiatives.

This is obviously an important development for public companies and private equity funds for which CalPERS is a significant current or prospective investor. Even companies for which CalPERS involvement is not currently significant, the CalPERS initiatives may set the tone for investor engagement with respect to ESG initiatives in the coming years.