As a portfolio manager, how do you interact with other teams within CalSTRS on ESG issues?
The group I’m in used to be called corporate governance; we recently changed our name to sustainable investment and stewardship strategies. CalSTRS has had ESG considerations in the investment department for decades, [but] around 15 years ago we started to build out our capacity to understand and act on ESG issues.
Back then, my CIO Christopher Ailman really wanted to avoid the structure you reference, where there was a responsible investor or ESG specialist group and it was always on the outside of the investment process. So we set about establishing team processes whereby everybody would be responsible for integrating ESG. We didn’t bring in a responsible investment person and have him/her sitting in and listening and then making a recommendation. It was about everybody being on a team learning from what everybody is doing and then taking that with them into their roles.
[For example], we have an environmental team, an ESG risk team and a diversity team, and every asset class has at least two members: a junior and a senior. Over time, people rotate off and others rotate on so that everybody from every asset class has some experience on these teams and can bring that when an asset class thinks about ESG.
When do ESG issues enter the investment decision-making process?
Ideally, you want ESG to be one of the considerations – not necessarily the most important or the least important, just a factor in a suite of investment considerations: do you like the management team? Does it have a good board? Is it a resilient business? [What’s its] governance profile? Is it attentive to environmental issues? Is it conscious of its workers and communities?
The way we work is that external managers make most of the investment buy/ sell decisions and internal managers run index portfolios. What we try to focus on doing is integrating ESG into the external manager process. When we consider external managers, we’re pushing them to integrate ESG into their philosophies, practices, analytics and decision-making, and then reporting that back to us.
Do you use data generated by external managers, or do you source that yourselves?
We get our own data – we don’t want to rely on the managers. One of the things we want to know from them is where [they] source data. We’ve got Bloomberg, Sustainalytics, MSCI – some of the bigger database providers. I also try to look at the various public sources.
We do a lot of engagement, which supports our passive portfolio, and a lot of what I’m doing and my colleagues are doing in this group is looking at companies and their integration of ESG. We also scour websites, filings – if firms are supposed to report to the Environmental Protection Agency, for example – and then use that data to assess a company and its ESG integration and exposure.
How do you address the fact that many ESG issues may involve intangibles that are tough to put into a traditional metric?
These data service providers are scouring all the publicly available information and then trying to put that into a usable form for investors such as CalSTRS. Certainly, the struggle continues to be [determining] what the right metrics are to be reporting on and [whether] a sufficient number of companies are reporting on them.
CalSTRS supports SASB, and one of the things SASB has done is establish material, sector-based metrics around ESG. Investors like CalSTRS are now trying to engage with companies about their recognition of these metrics – do they believe they’re material?, for example – and pushing for them to disclose on these metrics to [help address] the problem you allude to.
Many companies these days are trying to improve their efforts in terms of engagement. What progress do you see?
I definitely see improvements, generally speaking, from companies and how they engage with shareholders. There’s a lot more attention around ESG these days. I’ve been involved in corporate governance for 16 years and I’ve spent a lot of that time pushing companies to disclose more, to engage more around ESG. It’s amazing how many more are involved now. If you’re not willing to engage, you’re making yourself appear riskier from an investor perspective.
In terms of examples, I spend a lot of time looking at the oil and gas sector and I keep coming back to companies like Shell: it announced not that long ago its willingness to measure its net carbon footprint and commitments to reduce that footprint, establishing mid-term goals, disclosing annually around those goals and integrating meeting those goals into its executive compensation plan. Go back a few years and you’d never have seen anything like that.
Who do you like to speak with at companies when carrying out engagement? For example, people from the investor relations function, the corporate secretary’s office or board directors?
When we want to engage a company, we reach out initially to the chairman and CEO. Hopefully they are separate people… because we want to start at the top. [But] it depends on the issue. Most companies now have a chief sustainability officer or some sort of senior executive who focuses on ESG, so we’d want to have a conversation with that person.
A lot of what we talk about is capital allocation… [such as] what [the company’s] process is for considering climate change when doing project finance, in which case the CFO might be a person to come into the conversation.
There’s usually someone there from investor relations… but that’s evolved too, going back to what you said about companies trying harder. Usually it was the case that you got someone from IR on the phone but now more often than not you’ll get a senior-level person and occasionally we get board members meeting with us.
If you had a wish-list to give to issuers to improve their disclosures and make your life easier, what would be on it?
I go back to SASB and determining what is material. Materiality seems to be in the eye of the investor or stakeholder, and we need to establish a standard of what is most important for companies to help them [determine] the areas they should be focused on and the areas they should be disclosing on.
If I had a wish-list, it would cover that companies adopt SASB standards, based on what sector they are in, and disclose on those. How they do it is less important. Ideally, we like them to integrate [the disclosures] into their financial reporting.
To what extent do you look at opportunities as well as risks arising from ESG issues?
We recognize that there are a lot of opportunities around ESG integration. We have some degree of ESG-themed investment in pretty much each asset class. For example, in private equity we’ve got a clean tech portfolio, in infrastructure we’re invested in renewable energy generation and transmission, in real estate there’s a big push to make the properties we own energy-efficient [and] I oversee a public equity ESG-focused portfolio.
This interview appeared in Corporate Secretary’s special report on ESG engagement, reporting and integration
