How ESG Helps Guide Our Strong Investment Strategy

At CalPERS, measuring investment risk plays an essential role in providing retirement benefits to our 2 million members for years to come. One way we’re ensuring the sustainability of our investments is through a strategy known as “ESG.”   

ESG is a thorough analysis of the environmental, social, and governance implications of investment opportunities. Adopting an ESG approach is just another lens through which we identify risk and opportunity. As fiduciaries, it’s vital that we do our absolute best in assessing and mitigating risk and taking advantage of opportunities that help us pay benefits. 

We know ESG has become a much talked about topic in recent months, so we’d like to provide some education around an approach we strongly believe in.

Case Studies

We use several strategies to reveal ESG risks. For example, we access research through an MSCI software tool that determines climate change risks to CalPERS real assets. The tool makes predictions based on a range of physical and transitional (or regulatory) risk scenarios. Physical risks are related to potential damage from extreme weather events, such as hurricanes, wildfires, and flooding. Each asset is assigned a low, medium, or high grade of risk, relative to a global benchmark.  

After submitting an address list of CalPERS-owned properties, along with their latitude and longitude coordinates, we found notable flood risks based on the coastal properties we own. While we’d like to gather additional data, this research has shown us which assets and/or geographies we should focus on going forward, and we plan on additional analyses in the future.  

Another example is our infrastructure program, which has investments in wind farms in Kansas and Oklahoma and a solar farm in California. These assets make up more than half of a portfolio and have paid off, outperforming their benchmark over the past five and ten years. On top of creating strong returns, these investments are helping in the transition to sustainable energy sources. 

These are just two examples of how we assess our investments’ monetary value and ensure their sustainability in the short and the long term. 

Milestones on the Road to Addressing Climate Change 

At our November Board of Administration meeting, the CalPERS investment team presented a report (PDF) from the Taskforce on Climate Related Financial Disclosure. The report highlights several important milestones on the road to addressing climate change. 

These milestones include a reduction in the carbon intensity of our global equity portfolio by more than 30% over the past seven years, and more than 50% in our global fixed income portfolio.  

On the opportunity side, $19 billion in our global equity portfolio and around $1 billion of our corporate credit portfolio is invested in companies designated as low-carbon solutions.  

And more than 51% of our infrastructure portfolio is invested in renewable energy, energy efficient infrastructure, sustainability-certified assets, and carbon-neutral assets. 

These accomplishments might never have been achieved without an ESG approach. 

Using Our Voice  

We’ll continue to leverage the power that comes with the size of our fund, in collaboration with our network of influential global partners, to advocate for governance best practices that will help the companies we invest in succeed. This includes ensuring they’re mitigating for climate risk, while planning for the transition to a net-zero economy.  

Additionally, our proxy votes at the companies we invest in will aid in advocating for better corporate governance and ensure we’re doing our part to improve transparency. 

We also support the adoption of consistent reporting standards across the financial marketplace so investors can continue to make well-informed decisions. As co-founders of the Climate Action 100+ initiative, this is helping us to achieve just that.  

Data Drives Our Decisions  

It’s important to note that applying the lens of ESG is not a mandate for how CalPERS invests, nor is it an endorsement of a political position or ideology. Using an ESG approach will continue to provide clarity on the risk and reward potential with the companies in which we invest. 

This article is part of the CalPERS ESG series, which examines ESG basics, hard facts, common myths and specific ways CalPERS has mitigated investment risk using an ESG lens.