The dialogue around environmental, social, and governance (ESG) investing factors is growing. Most of it is productive: identifying investment solutions where everyone wins. But as the ESG strategy gains traction, some critics see an opportunity to politicize the issue and spread misinformation.
At CalPERS, we use ESG simply as another lens to identify risks and opportunities and, therefore, increase our long-term returns. We’re responsible for managing the retirement fund of more than 2 million members and beneficiaries. We oversee the CalPERS fund with the exclusive purpose of providing benefits and paying plan expenses.
Simply put, our investment office is focused on increasing investment returns.
Below are three of the most common myths we hear about ESG, followed by the facts.
1. ESG wants to ideologically influence companies.
Some critics falsely insist that an ESG approach is intended to force companies to fit a “woke” ideological agenda or to embrace certain ethical positions. That assumption is incorrect.
“Applying the lens of ESG is not a mandate for how to invest. Nor is it an endorsement of a political position or ideology,” said CalPERS CEO Marcie Frost at the November CalPERS Board of Administration meeting. “Those who say otherwise are actually advocating for investors like CalPERS to put on blinders, to ignore information and data that might otherwise help build on the retirement security of our 2 million members.”
ESG is about recognizing risk in an evolving economy, regulatory climate, and ecological reality. ESG helps increase transparency in publicly traded companies, and thus, CalPERS’ ability to invest with confidence.
Ignoring ESG issues when evaluating companies “would be contrary to our fiduciary duty and might put the performance of our investments in jeopardy,” added Frost.
2. ESG is all about correcting climate change.
ESG considers issues of climate impact and sustainability, but does so from the lens of fiscal responsibility. According to a 2021 CDP report (PDF), some 8,000 companies around the world anticipate $1.26 trillion is likely at risk over the next five years due to the effects of climate change, deforestation, and water insecurity. As shareholders, we need to know how companies plan for the future.
Plus, ESG is about more than the impacts of sustainability and a changing climate. You might be surprised to learn about some ESG issues that receive less attention:
- Executive pay
- Employee treatment
- Ethics/fraud protection
- Privacy and data security
- Board structure and governance
In some cases, ESG factors help hold executives and board members accountable and ensure customers and employees are treated fairly—all issues that are good for business and, therefore, good for returns.
3. CalPERS invests in “ESG funds.”
The basic definition of an “ESG fund” is one in which money managers have used ESG criteria to gather qualified companies into a single investment vehicle.
While ESG funds have become a hot item for some environmentally conscious investors, CalPERS does not currently invest in ESG funds. Instead, we use an ESG framework to enlighten our portfolio decisions, especially as investment targets shift around fluctuating economic conditions and trends.
The U.S. and other nations are increasingly moving to reduce their carbon footprints and lessen the impacts of climate change. The Inflation Reduction Act of 2022 (PDF) “includes billions of dollars in grants and loans to spur financing and deployment of new clean energy projects that cut greenhouse gas emissions and other pollutants, with a focus on projects in disadvantaged communities, energy communities, and other communities in need.”
Years prior, we increased our investments in various renewable energy holdings, such as solar in Riverside County and wind farms in Kansas and Oklahoma. There are more opportunities to come.
Learn more about our exposure to low-carbon and climate solution investments in CalPERS’ Response to the Taskforce on Climate-Related Financial Disclosure (TCFD) and Senate Bill 964 (PDF).
Bottom line
CalPERS manages investment dollars based on the fund’s targeted rate of return over the long term, just as we always have. That’s our fiduciary responsibility and highest purpose. The ESG lens provides for a dynamic understanding of investment potential, helping us to best manage the funds of our more than 2 million members and their beneficiaries.
This article is part of the CalPERS ESG series, where we examine ESG basics, hard facts, common myths and specific ways CalPERS has mitigated investment risk using an ESG lens.