Big Capital at Work

How do CalSTRS, HESTA, and APG — three pension funds representing nearly a trillion dollars in assets, collectively — think about their role in transforming capitalism? We spoke with their CIOs, COOs, and heads of impact to find out.

We borrowed a framework from the Climate Action 100+, a collaborative engagement effort of more than 450 global investors (including the three we spoke with), representing $40 trillion in assets under management and focused on the “E” in ESG. we looked at how these massive pools of capital leverage their influence to effect change across matters of corporate governance, action, and disclosure in impact investing.

CalSTRS

$246 billion under management

The California State Teachers’ Retirement System is the largest educator-only pension fund in the world. CalSTRS serves California’s more than 950,000 public school educators and their families.

We spoke with: Christopher Ailman, Chief Investment Officer

“What we’re trying to ask as a shareowner is that companies think longer-term. Stop thinking about 91-day time periods because nothing meaningful happens in that short a period. It’s long-term; think long-term.”

Approach to ESG

We don’t break out our investments between those that are, say, ESG and those that are not. Every single asset class has ESG integrated into its policy. The overall investment policy has ESG integrated into it. We look at ESG as another risk factor. I often say to people that traditional investment analysis — fundamental analysis — is the financial statements, but all of those are backward-looking.

For forward-looking risks, we think that ESG incorporates those. So for every investment that we’ve made in the last 15 years, we have analyzed the ESG risks of that investment and evaluated it for the pros and cons.

Capitalism is like evolution; it’s not pretty, and that’s part of it. It’s a balance. In many cases, any investment is a balance between ESG because it’s a balance between the risk of the future and the return.

Governance

You know 2008 taught us that even 100 to 200-year-old companies can destroy themselves overnight by being susceptible to groupthink and nobody backing away and asking the broader-picture questions.

So we’re really trying to expand diversity on boards because diversity of thought doesn’t solve or perfectly resolve groupthink, but it reduces the likelihood of it — and therefore improves the likelihood of better decisions.

Action

We are active in our votes. We’re actively engaging management through different mechanisms. A lot of our engagement is to get them to think longer-term, telling them we are not a random investor. We’re not going to be in and out of their stock. We’re going to be in their stock and hold it longer than they’re going to be CEO of the company.

That’s an important message, and I think we’re going to find more communication tools to be able to get that out to them. Sometimes we sing solos. A lot of times we do it as a chorus. It depends.

Disclosures

Overall, we’re frustrated with disclosures; we think they’re inadequate. We’re very active in several organizations focused on improving transparency — certainly 100% behind the Task Force on Climate-Related Financial Disclosures. We’re also pushing the Sustainability Accounting Board standards and their Materiality Map, because ESG means different things in different industries, and creating standards means we won’t get inconsistent information from different groups.

Information is neither good nor bad. It’s just information. One investor can read it and get a buy signal. Somebody else can read it and get a sell signal, and that’s OK. That’s why we’re fans of transparency, because it allows people to make their own decisions.

Is the information flow where we like it now? No. There are too many surveys, too many information formats, and investors are often confused. So we’ve been big proponents of the SASB and other standards, trying to push companies to adopt and report on them, and trying to push regulators to make them part of their mandatory filing requirements.

HESTA

$52 billion under management

HESTA is an Australian industry superannuation fund for workers in health and community service sectors. HESTA services more than 90,000 employers and has more than 860,000 members, 80% of whom are women.

We spoke with: Sonya Sawtell-Rickson, Chief Investment Officer & Mary Delahunty, Head of Impact

Approach to ESG

We have an integrated approach to impact. We think of impact as everything that we do, everything that we say, and everything that we invest in.

Our broad aim is to make sure that we’re making impact across as wide a sphere of influence as we can. The way to do that is to make sure that the entire portfolio has a mind to that achievement and a mind to understand what progress looks like.

So although we have some dedication to pure impact investment — investment that has to have a social outcome — we also want to take the lessons that we learn in that space and apply it to the whole portfolio.

Governance

If we keep talking about decisions, then we miss the chance to fix the process. We have to keep bringing it back to, “Why do we care about this?”, and it’s the governance process that led to whatever decision is being made that we care about. Everything that comes at us, we have to lift it up to the system level.

So that constant shining of the armor is currently our job. And we’re going to take that very seriously.

Action

We’ve got a long-held view that ownership buys influence. Sometimes it’s not intentional that we’ve taken a stake in a company in order to get them to change their ways, [but] while we are owners, we have an obligation to make sure that our company is acting in a way which our members would find appropriate.

Being an active owner also means that we seek opportunities to influence laws, regulations, standards, or guidelines established by government or regulators to protect or increase the long-term economic value of individual companies or the market as a whole.

An example of our advocacy activities is encouraging the Australian government to establish a Modern Slavery Act or encouraging the G-7 governments to take action to achieve the goals set in the Paris Agreement on climate change in 2015.

Disclosures

It’s challenging to get the data that we want in a standardized format across our portfolio. There are a lot of players starting to step into this space, understanding that investors like us are looking for quality data on a broader range of metrics than just financial.

What we’re missing is a commitment at a policy level to standardized data. Even within TCFD reporting, you can see differences in how, for example, scope level emissions are captured and understood. SASB is trying to standardize some of this data by sector, which is definitely a step forward. But even the fact that they’ve recognized there are going to be different metrics across different sectors that define excellence is a hint that maybe one metric for all is not going to ever be the answer.

We’ve got to try and figure out what “good” looks like for each industry we invest in.

APG

$607 billion under management

APG works for over 22,000 employers, providing the pension for one in five families in the Netherlands.

We spoke with: Marcel Prins, Chief Operating Officer

Approach to ESG

The traditional triangle for investors is that you need to find a balance between cost, risk, and return. For us, it’s cost, risk, return, and ESG, which is an integrated part of our decision-making process. So it’s not about the easy way out but really seeing how ESG can be thoroughly embedded in our investment process. We also ensure that portfolio managers we hire are feeling this as part of the DNA.

Governance

Our approach to China might be of interest. From an investment perspective, you need to invest in China. It’s just a big economy from a risk-diversification perspective, but the Chinese market is considered to be very opaque and it might be a little bit fishy regarding governance discussions. Following a series of meetings we had with E Fund, which is the largest Chinese asset manager, we started a partnership where they can provide research, but we are allowed to engage with the companies the same way we do in America or in Europe, because our clients want to have a certain ESG or responsible-investing approach globally.

Action

We have our protocols in terms of engagement. Where we have concerns, we engage with the board of a company. For example, as has been exposed in the media, we still invest in Royal Dutch Shell. However, we rejected their transition plan two years ago. So at a minimum, that resulted in a new transition plan for Royal Dutch Shell. Engagement is an important instrument.

An easy way out is to say, “I’m not going to invest any more in your company,” but then you lose the right to vote. That being said, having a clear policy that you can explain to the broader society is helpful because you will always find a group of people that oppose any company in the world. If you listen to everybody, then you can invest in nothing.

Disclosures

One of the steps that we have been taking on behalf of our clients is actively contributing to some of the global standards being set in this field. For example, we are working with the European Union to define the taxonomy around the United Nations Sustainable Development Goals.

Three years ago, we took a completely atypical step for an asset owner and made an acquisition of a team of data scientists from Deloitte consulting. With this team we did a lot of cool stuff from an investment point of view: we are now able to automatically scan — on the basis of structured and unstructured data — which companies contribute to SDGs, make automatic assessments of greenwashing risks, and support portfolio managers in their engagement with the companies.

The even cooler next step there is to spin out this product as a platform to other asset owners. This as a standard is more important for the broader group. And that’s, I think, where you have the balancing act between doing it for yourself or pursuing a course for the growth of the greater good.

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