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Engagements in action

CalSTRS invests a multi-billion dollar fund in a unique and complex social-economic milieu and recognizes we can neither operate nor invest in a vacuum. As a significant investor with a long-term investment horizon, engagement is a critical tool used by the CalSTRS Sustainable Investment and Stewardship Strategies team to influence changes in public policies and corporate practices that support long-term value creation.

We engage, through meetings, letters, shareholder proposals, investor coalitions and proxy voting, to influence companies to adopt best practices in managing environmental, social and governance issues to create sustainable businesses. We also engage policymakers to codify strong governance practices that improve the financial market landscape for long-term investors and their beneficiaries. Our history of engagement activities has resulted in better relationships and outcomes across global industries.

CalSTRS engagements for the third quarter, 2022

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

CalSTRS provides updates on net zero strategy; Teachers’ Retirement Board approves bold set of actions 

At the August/September 2022 Teachers’ Retirement Board meeting, we presented a comprehensive progress update on our net zero strategy. This marks the one-year anniversary since the board first committed to achieving net zero greenhouse gas emissions across the investment portfolio by 2050 or sooner.

Throughout this first year, we focused on identifying methods to reduce carbon emissions in the portfolio, increasing exposure to low-carbon investments, and escalating engagement strategies with companies, regulators and policymakers. At the meeting, the board approved a package of investment actions to enhance its efforts to achieve a net zero investment portfolio, address climate change and support the retirement security of California’s public teachers:

  • Interim science-based goal. Reduce greenhouse gas emissions across the CalSTRS Investment Portfolio by 50% by 2030, consistent with the latest findings of the United Nations’ Intergovernmental Panel on Climate Change.
  • Systematic decision-making process. Adopt processes to incorporate greenhouse gas emissions into investment decisions as part of traditional risk-and-return analyses and their potential impacts on the CalSTRS Funding Plan.
  • Reduce emissions: Target a 20% allocation of the Public Equity Portfolio to a low-carbon index to significantly reduce portfolio emissions while managing active risk. We estimate this allocation shift alone could reduce portfolio emissions by as much as 14%.
  • Climate scenario integration: Incorporate future climate-related scenarios into CalSTRS’ asset-liability modeling framework to help guide investment allocations.

In addition to these actions, we continue to influence the market broadly through escalated engagement strategies. In 2022, we voted against directors at the 1,900 largest global companies who failed to disclose fundamental greenhouse gas emissions data. We will continue this practice in 2023 plus engage lawmakers and regulators, such as the Securities and Exchange Commission, to advocate for the adoption of policies that support the transition toward a net zero economy.

    Stewardship priorities update

    Corporate and market accountability 

    Long-term efforts yield results

    Fundamental changes in the market sometimes require persistent effort over extended periods of time. Engagement does not happen overnight. Recently, we’ve seen multiple long-running engagements come to fruition with positive outcomes for investors.

    International Sustainability Standards Board

    The ISSB fills a long-lasting information gap by establishing global, sustainability-focused disclosure standards that CalSTRS and other investors have been seeking. Globally adopted sustainability standards, which are aligned with traditional accounting standards, will enable companies to provide investors with the necessary data to make fully informed decisions.

    We’ve been involved with the development of these standards for many years. In July 2022, we provided comments on an initial draft of disclosures released by the ISSB. We will continue to work with the ISSB to ensure the final disclosure standards will enhance our ability to provide a secure retirement for California’s educators.

    Universal proxy cards

    In September 2022, a new SEC rule went into effect that mandates the use of universal proxy cards. Investors select the directors of a public company board through a process known as proxy voting. Directors are often nominated by the management of the company, although in some instances alternate directors are nominated by investors.

    Under previous SEC rules, investors were forced to choose between the directors nominated by management and those nominated by investors. Universal proxy cards eliminate that scenario and instead allow investors to mix-and-match any combination of directors nominated from both sides. This means investors can vote for whom they believe is the strongest mix of directors. We first wrote to the SEC in 2018 to stress the importance of finalizing a universal proxy rule.

    Pay for performance

    Pay for performance refers to how company executives are compensated relative to performance measures. It’s important for executives to be appropriately incentivized and have their interests aligned with investors and the long-term performance of the company.

    In August 2022, the SEC adopted rules requiring companies to report pay-for-performance data publicly and consistently. These rules are in response to the wide-ranging impacts of the 2010 Dodd-Frank Act, which was intended to improve the stability of the U.S. financial system after the global financial crisis of 2008. We’ve engaged the SEC on this issue for years, most recently with this March 2022 letter.

    Board effectiveness 

    Leading the way on board diversity

    The California Investors for Effective Board Diversity wrapped up their seventh successful year of engagement at the end of June. The group (CalSTRS, California Public Employees Retirement System, Los Angeles County Employees Retirement Association and San Francisco Employees’ Retirement System) continues to build on the success of the California Board Diversity Initiative, which began in 2015 with a focus on increasing the board diversity of California companies.

    In 2021, the same California-based investors expanded their focus to 57 companies in the Russell 1000, advocating for the inclusion and diversity of gender, race, ethnicity and LGBTQ+ identity. The California group’s engagement resulted in 43 companies appointing 53 diverse directors. Additional engagement successes include:

    • 32 companies updated their definition of diversity to include gender and race/ethnicity in either their proxy or governance documents.
    • 29 companies included enhanced diversity disclosures in their proxy statements.
    • 19 companies included a skills matrix in their proxy statements.
    • 10 companies adopted the Rooney Rule, a policy that requires candidates from underrepresented groups be included in the initial search pool of candidates.

    For the 2022–23 engagement season, the group will engage 60 companies in the MSCI USA Investable Market Index. The focus of the engagement will be to increase diverse director representation and encourage clear guidance in corporate governance policies, addressing board diversity in board refreshment and recruitment practices.

    Net zero transition 

    Climate Action 100+ successes and next steps

    Since launching in 2018, the world’s largest investor-led initiative on climate change, Climate Action 100+, has broadly met its original goals for its first phase of engagement with 166 carbon-intensive companies:

    • Climate Governance: 148 companies now have oversight of the management of climate-change risks at the board level.
    • Climate Action: 110 companies made a net zero commitment, while 134 companies set greenhouse gas emissions targets.
    • Climate Disclosure: 110 companies now report emissions in line with the Task Force on Climate-Related Financial Disclosures.

    While these initial successes are encouraging, investors are asking for even more action from companies by 2030. The focus of the next phase of Climate Action 100+ is for companies to increase the ambition of their short- and mid-term emissions reduction targets. This includes developing robust decarbonization plans to achieve a 50% reduction in greenhouse gas emissions by 2030 to stabilize the climate.

    The enhanced goals are part of a strategy to accelerate decarbonization in sectors where current renewable technology exists, while other sectors continue to research and develop new low-carbon opportunities. Additionally, investors work with companies on thematic projects like achieving a just transition, climate lobbying alignment, accounting for stranded assets, and using emission offsets prudently.

    As with the first phase of Climate Action 100+, we will be a lead investor in the initiative’s next phase, spearheading engagement efforts with eight companies.

    Responsible firearms 

    Letter to Visa, Mastercard and American Express

    With the support of investors and companies, the International Organization for Standardization decided to create a merchant classification code for firearm retailers. The codes are used by financial institutions to track transactions and determine the types of services or goods being sold to consumers.

    Last year, the IOS rejected a request from New York-based Amalgamated Bank to establish the codes, even though many believe they could be useful for identifying irregularities in the purchase of firearms and ammunition. In a welcome change of circumstances, the bank announced in September 2022 that its most recent application had been approved by the IOS.

    Earlier this year, CalSTRS and New York City’s three public retirement pension funds coauthored a letter urging credit card companies to support the IOS in the establishment of the unique code for firearms retailers. The letter opined that the establishment of a firearms code would allow banks to comply with their regulatory obligation to report suspicious purchasing activity, such as an unusually large number of firearms bought over a short time span. We are following up by engaging with the major credit card companies to determine how the new codes will be implemented and how the collected data will be used.