CalPERS spells out expectations on ESG

The LP pacesetter has created its first ever stand-alone report on responsible investment, in effect providing CalPERS' chosen fund managers a bigger window into how their ESG-related work is reviewed.

The $232 billion California Public Employees' Retirement System has created its first stand-alone report on sustainable investment policies. The report, the first of its kind by a large US public pension fund according to CalPERS, provides GPs a detailed look into what they expect around environmental, social and corporate governance (ESG) matters.  

CalPERS has always taken a leadership role, and we’ll continue to push the boundaries on sustainable investment both through our own efforts and by collaborating with our peers around the world

Priya Mathur

CalPERS, which has $32 billion invested in private equity, said one of the primary aims of the report was to “outline what we are doing now so that we can track improvements over time and report our progress on sustainable investment in the future”.

The pension said it was in the process of developing a “Manager Assessment Tool” to help in its manager selection process by ranking GPs on key ESG issues and other areas. 
“CalPERS has always taken a leadership role, and we’ll continue to push the boundaries on sustainable investment both through our own efforts and by collaborating with our peers around the world,” said in the report CalPERS board member Priya Mathur.


On private equity-related governance issues CalPERS highlighted its work with the Institutional Limited Partners Association (ILPA) in creating the “Private Equity Principles”. The principles outline some best practices fund managers can follow around transparency, alignment of interests, and good governance issues. Additional praise was provided to ILPA’s standardised reporting templates which CalPERS described as creating a consistent framework for GPs to use in their disclosures to investors. 

On a wider basis CalPERS has engaged government agencies on ways to increase investor protections and other areas of market reform. Internally the pension has also recently introduced more rigorous regulation of placement agents, stricter limitations on gift giving to board members and staff and a new 24-7 ethics helpline to identify fraud and waste.

On the environmental front the pension system cited progress with fund managers now able to quantify and improve their environmental-related performance. Overall CalPERS said it seeks more disclosures in environmental reporting, and has directed its alternatives unit to work with the United Nations Private Equity Principles for Responsible Investment to send GPs questionnaires asking for disclosures in how they incorporate ESG matters into their portfolio companies. 

Lastly, on social matters CalPERS said it has committed $6.3 billion to emerging managers (defined as partnership raising a first or second time fund). The pension described emerging managers as channeling funds to capital-deprived businesses in the mid-market arena that are often overlooked by established GPs. CalPERS said it expects all of its emerging market fund managers to follow its “Emerging Equity Market Principles” which detail the pension’s requirements around best labour practices, transparency, corporate social responsibility and other areas which carry a social impact. 

CalPERS said it plans to eventually provide each asset class in its portfolio specific tools and metrics to implement the pension’s responsible investment strategy. A CalPERS “Expectations Document” on sustainable investment is also in the works for both internal and external managers.