What’s this? An actual expression of common sense in California? Yes, it has actually happened.
CalPERS, the public employee retirement system in California, has one of the largest investment portfolios in the world (0ver $350 billion), though it is still not large enough to fulfill its pension obligations. Naturally being a political plaything, several years ago CalPERS board decided that it should use its investment clout on behalf of “social investing,” which of course means in plain speaking “lower return investing.” By its own estimate, CalPERS decision to exit tobacco stocks back in the late 1990s reduced portfolio returns by $3 billion from 2001 to 2014.
It seems CalPERS has decided to beat a retreat from social investing. Barron’s reports today:
A funny thing happened recently in the left-leaning Golden State. In a board election last month, members of the California Public Employees’ Retirement System, or Calpers, the biggest pension fund in the nation, threw out their president and gave ESG investing a bloody nose.
ESG is the increasingly popular asset-management style that applies environmental, social, and governance standards to screen potential investments. Following this approach, an investor might avoid certain stocks or push shareholder proposals to modify corporate behavior. Unfortunately, they often favor hard-to-define social objectives rather than the narrower goal of maximizing shareholder returns.
In the vote, Jason Perez, a sergeant in the Corona, Calif., police department, upset board member Priya Mathur, a 15-year Calpers veteran, who was also board president and a champion of Calpers’ focus on ESG investing. . .
In an interview with Barron’s, Perez credits his win to a growing belief among members that ESG wasn’t doing them any favors. “Calpers’ social investment focus and lack of returns received a lot of attention of labor up and down the state….Everyone noticed the performance and [Calpers’] desire to concentrate on social issues.”
The Barron’s story passes along CalPERS estimate that its unfunded future liability is $138 billion, but most independent observers place the number much higher—over $500 billion by some estimates. Not even Warren Buffett-level returns will suffice to bail out public employee pensions in California or many other states. But this is a small step in the right direction at least.
P.S. How long, however, will it be until California politicians demand that CalPERS divest from corporations that don’t meet California’s new legal mandate that half of their boards of directors must be women? I give it one year or less.