Interview with Anne Stausboll, CalPERS Investment Executive and UN PRI Board member

By April 23, 2008News

Anne Stausboll is the Chief Operating Investment Officer for the California Public Employees’ Retirement System (CalPERS), the US$242 billion fund that provides pension and health benefits to 1.5 million California public employees, retirees, and their families. She oversees CalPERS’ search process for external managers, advisors, and pension consultants; coordinates internal investment policy; and represents CalPERS on investment-related legislation at the State and federal levels. Ms. Stausboll also serves on the governing Board for the United Nations Principles for Responsible Investment (PRI).
1. Can you explain, in a few words, CalPERS philosophy and approach towards responsible investment?

CalPERS’ mandate is based on a state constitutional fiduciary provision that requires that all investment activities and transactions be designed and executed solely in the interest of, and for the exclusive purpose of, providing benefits to participants and their beneficiaries, minimizing employer contributions, and defraying administrative expenses.  CalPERS has a diverse board of trustees and a wide constituent base with a broad range of interests, including responsible investment.  Over the years CalPERS has been a leader in designing and implementing programs, consistent with its fiduciary duty, which also reflect responsible investment practices.  These include, for example, CalPERS’ leadership in the corporate governance movement, its environmental initiatives, and its California based investments.

2. You are responsible for the selection process of CalPERS external investment managers. How do you evaluate their ability to incorporate environmental, social and governance (ESG) analysis in the risk assessment and stock selection process, particularly in international equity and emerging markets?

Two examples where CalPERS has evaluated its managers’ ability to incorporate ESG analysis into their process relate to our environmental equity managers and our emerging market managers.  CalPERS currently has allocated about $500 million to external managers who screen stocks based on environmental considerations.  In our Request for Proposal (RFP) for these managers, we inquired as to how they would incorporate this analysis into their programs, and we scored their proposals in part based upon their response to this inquiry.  In the Emerging Markets program, CalPERS has adopted comprehensive principles that guide its investments in these markets.  In addition to explaining in their responses to the RFP how these principles will be adopted, the emerging managers make a presentation once annually to the CalPERS Board regarding their application of the principles.  At our upcoming Board meeting in May, the Board will hear from six managers on this important issue.

3. Among ESG extra-financial considerations, social issues – including labour and human rights issues – are analytically the least developed, and the least integrated into investment decisions. How quickly is this changing? What are the major gaps CalPERS faces in this regard?

CalPERS approaches all investment decisions from a fiduciary perspective, which relies heavily upon process. Therefore it is critical to have appropriate tools, metrics, and best practices in place. The tools and metrics for analyzing, applying, and measuring “social” issues are less developed than those for the environmental and governance issues.  The recent Sudan and Iran divestment bills in the United States have accelerated the development of tools in the human rights arena.  For example, several firms have now developed services to identify relevant companies for engagement.  In addition, there are now several models available for how to engage these companies and what specific actions to request of them.

4. CalPERS has significant investments in alternative assets, but comparatively little has been done in terms of ESG analysis in alternative asset classes.  What challenges does this raise for CalPERS? What are the major gaps that you face in being able to incorporate ESG issues into your investment decision-making in alternatives?

CalPERS has been a leader in addressing ESG issues, within a fiduciary framework, in the alternative asset classes.  For example, in its real estate program CalPERS has adopted a Responsible Contractor Program, and in its private equity program CalPERS has adopted a policy to restrict investments in public sector outsourcers.  With respect to environmental issues, CalPERS has made a substantial allocation to clean technology in its private equity program, and also has instituted an energy efficiency program within its real estate portfolio.  We also have made significant allocations to urban development and historically underserved segments in California.  An area for improvement in the alternative asset classes is developing metrics for assessing the impacts of these programs.

5. Responsible Property Investing is a growing area, but most work to date has focused on the environmental footprint of built environments, not on the social impact of real estate – such as labour standards or affordable housing.  How does CalPERS investment policy reflect the social aspects of real estate? Has the CalPERS responsible contractor policy been effective in communicating expectations around labour practices?

CalPERS California Urban Real Estate (CURE) Program policy establishes an investment strategy targeted to domestic urban real estate, and specifically focuses on affordable housing, economic development or redevelopment, urban infill and smart growth.  CalPERS established the Economically Targeted Investment (ETI) Program in 1992.  As a result of the success of the ETI program, the CURE program was created in 2000 to extend urban investment strategy to more partners and more urban markets, primarily in California.   CURE investments include all property types but are primarily multifamily residential, for sale housing, office, retail and hospitality.  CURE program investments are often targeted to underserved urban markets with subsidies provided by public entities in recognition of affordable and workforce housing, community serving retail, and mixed use development.

Based on our 2007 Responsible Contractor Annual Report to the Board, the Real Estate equity program achieved a 96.1% compliance with CalPERS Responsible Contractor Program (RCP) goals and requirements.  CalPERS Real Estate advisors awarded in excess of $3.5 billion in RCP contracts for the 2007 reporting period.  For the same reporting period, all CalPERS partners have certified in writing that, to the best of their knowledge, they have complied with the RCP Policy, and specifically, the roles and responsibilities stated within the Policy.

6. What opportunities did CalPERS see in terms of both returns and collateral benefits from investing in workforce housing?

Workforce housing is recognized as an important aspect of CalPERS urban real estate programs.  Of the twenty-two urban program investment partnerships, nine have a strong focus on investment in workforce housing.  Workforce housing strategies include detached single family homes and large multifamily developments targeted to moderate income households.  However, at this time CalPERS does not track the returns of workforce housing separately from other types of investments made by urban partners.

7. Infrastructure is another asset class of growing interest to institutional investors. In 2004, CalPERS adopted a policy on restricting AIM investments in public sector outsourcers. What are the overall objectives of the policy, and how does it apply to your infrastructure investments?

The Alternative Investment Management (AIM) program has as its primary objective to achieve the highest possible risk-adjusted return for CalPERS while minimizing the risk of loss.  The strategic objective of the outsourcing policy is to restrict private equity investments in entities that are likely to outsource U.S. state and local public sector jobs, because of the potential negative impact on the employees and members of the system.  Investments in public sector outsourcers may involve unique risks, such as political resistance, as well as labour disputes and public relations risks.

The CalPERS Board has recently adopted a new Inflation Linked Asset Class, which includes an infrastructure component.  Staff are currently working on an infrastructure policy, which will address – among other issues – responsible contracting and minimization of job loss.  We currently plan to present this policy to the CalPERS Investment Policy Subcommittee in April and to the full Board in May.

8. You are a Principles for Responsible Investment (PRI) Board member. Speaking in a personal capacity, what are, in your view, PRI’s successes? From your perspective, what challenges lay ahead?

The UN PRI has been very valuable in building bridges among institutional investors across the globe, both through the Clearinghouse and the development of informal relationships.  This has been enlightening in terms of exposure to regional issues as well as to different philosophical approaches to responsible investment. In addition, the collaboration with the UN has opened doors in terms of access to various new entities and ideas, including NGOs and academics.

Recruiting signatories in North America and particularly in the US has been a challenge.  I hope we will see that change over the coming months.