Anne Simpson, CalPERS

The California Public Employees’ Retirement System has made good on a five-year plan to ensure all its private equity managers have ESG policies in place, according to an investment committee presentation on Monday. It also includes “ESG considerations” in side letters with all new managers.

CalPERS is the largest public pension plan in the US. Anne Simpson, senior investment officer for board governance and sustainability, delivered the presentation that also highlighted a number of measures it had taken regarding its real assets managers and their levels of ESG integration.

Investing to help people and the environment is not about simple “do-goodery” but a way for the $458 billion pension fund to “understand that sustainability is about investments, risk and return”, said Simpson.

Across the portfolio, “financials are at the heart” of the way CalPERS invests, Simpson said in an interview with New Private Markets, adding that “just doing the right thing does not get companies off the hook in terms of performance”.

CalPERS has achieved a 9.6 percent annual total return across its whole portfolio over a five-year period, narrowly below its benchmark of 9.8 percent, according to documents compiled for the meeting. Over the same time horizon its $45.6 billion real assets portfolio generated a 5.3 percent return (beating its 5 percent benchmark) and its $34.2 billion private equity portfolio generated 12.2 percent against a 15.3 percent benchmark.

Sustainable opportunities

Simpson said economic forces are increasingly pulling investors in the direction of sustainable opportunities.

“[Investors], at the end of the day, are interested in evidence and arguments,” Simpson explained. “Financial markets are beginning to bring their full force to bear on these issues.”

CalPERS has signed up to various environmentally friendly finance initiatives, including the Task Force on Climate-related Financial Disclosures and the Net Zero Asset Owner Alliance, which commits CalPERS to managing a carbon-neutral portfolio by 2050.

Simpson said that investing for the long term meant “accounting is based on sustainable assumptions”. While CalPERS has continued to receive criticism for its few remaining coal and fossil fuel exposure, “we will ultimately tackle the issue of stranded assets to actually make sure they’re getting valued with climate-aware assumptions”.

Social and governance improvements have been “one of the biggest areas of progress” for CalPERS and the broader finance industry, Simpson explained. In recent years, she said the pension fund has started framing issues in these categories as relating to “human capital”, including a portfolio company or GP’s workforce, supply chain and communities in which they operate.

“This makes it clear there’s a role for investors,” Simpson said.