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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 second quarter, 2023

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

Engagement spotlight

Global sustainability reporting standards arrive 

In June 2023, the International Sustainability Standards Board announced its first two disclosure standards for capital markets worldwide. These standards are requirements that will bring needed consistency to sustainability reporting by companies. The standards are intended to serve as a global baseline that will allow investors to better assess company sustainability risks and opportunities and make more informed decisions, as these risks and opportunities can have a material impact on a company’s financial performance.

The ISSB was established in 2021 by the International Financial Reporting Standards Foundation and its creation was announced at the United Nations Climate Change Conference, better known as COP26. Even before ISSB was founded, CalSTRS has strongly advocated for the establishment of global sustainability standards to inform investment decision-making.

ISSB developed its standards after years of consulting with numerous stakeholders, including investors, companies, governments and nonprofit organizations. Throughout this period, CalSTRS provided feedback and gave detailed recommendations on how to develop these standards to be most decision-useful for investors.

The ISSB itself is built upon years of sustainability-related standard setting development and progress. For example, the ISSB integrates the reporting schemes of the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board. TCFD provides a framework for company reporting on governance, risk management, and measurement and disclosure of climate risks. SASB developed disclosure standards on material and industry-specific sustainability risks and encourages companies to report based on these standards. CalSTRS was integral in helping to develop both reporting frameworks.

The ISSB focused on ‘interoperability’ when developing its standards. Interoperability means the standards work in a complementary manner with existing local and regional reporting requirements. This is important as some jurisdictions are more advanced in their reporting requirements, or have stricter requirements, than others. Many companies also operate in multiple countries; thus, a single global baseline reporting standard alleviates some of the administrative burden for these companies and supports how global investors, like CalSTRS, invest.

The ISSB standards require companies to disclose scope 1, 2 and 3 greenhouse gas emissions. Scope 1 emissions come from a company’s direct operations; scope 2 emissions are associated with the electricity the company purchases; and scope 3 are indirect emissions from the company’s supply chain and emissions from the use of the company’s products. In the global shift toward a low-carbon economy and in advancing CalSTRS’ net zero pledge, emissions measurements and disclosures are valuable tools for assessing a company’s risks and opportunities.

The ISSB standards go into effect in January 2024, with the first company reports available for investors in 2025. Meanwhile, CalSTRS will continue to support the ISSB by playing an active leadership role in the Investor Advisory Group and by encouraging companies to adopt the new reporting standards.

    Stewardship priorities update

    Corporate and market accountability 

    New rules ensure appropriate use of share buybacks

    Last May, the Securities and Exchange Commission strengthened disclosure rules for public companies that utilize share buybacks. Share buybacks refer to the practice of companies purchasing their own stock back from shareholders, thus decreasing the amount of their stock available in the public market.

    Sometimes these buybacks can be used for reasons not in the best interests of shareholders. One example is when share buybacks are used to manipulate stock prices, which can benefit executives with compensation packages linked to the company’s stock price. The newly enhanced disclosure rules will provide better insight into the amount and timing of share buybacks and will help reveal a company’s rationale for conducting the buybacks. CalSTRS believes better disclosure will deter companies from using buybacks for reasons that may negatively impact shareholders like CalSTRS.

    Share buybacks have long been a focal point for the Council of Institutional Investors, an organization that promotes best practices in corporate governance. CalSTRS has a long-standing relationship with CII, including serving in leadership roles. CalSTRS staff currently serves as the board chair of CII.

    Board effectiveness 

    2023 peak proxy season closes

    Proxy voting is when shareholders like CalSTRS vote on matters related to the management of a company, such as who to put on the Board of Directors or to approve the compensation of the company’s executives. While CalSTRS votes proxies at nearly 10,000 annual general meetings each year, more than 6,000 of these votes took place during peak proxy season, from April through June.

    Going into this proxy season, CalSTRS announced our intent to increase the scrutiny of our votes against boards that are not appropriately managing and addressing sustainable business practices. This includes companies who are not doing enough to address climate risk or who are moving too slowly to improve the diversity of their boards. During the fiscal year, CalSTRS voted against more than 10,000 directors for climate-related purposes and more than 14,000 related to board diversity. A detailed summary of the 2023 proxy season will be included in the next edition of Engagements in Action.

    Net zero transition

    Climate Action 100+ launches second phase 

    Climate Action 100+ recently launched the second phase of the world’s largest investor-led initiative to reduce greenhouse gas emissions. Phase 2 builds on the success of the initiative’s first five years, which included hitting a major milestone: 75% of Climate Action 100+ focus companies have committed to a net zero emissions strategy.

    In phase 2, CA100+ investors will continue to encourage companies to align their businesses with the global goal of reducing greenhouse gas emissions by 50% by 2030 and delivering net zero emissions by 2050. These goals are in line with CalSTRS’ net zero strategy and are consistent with the target set by the world’s governments at the Paris Agreement to limit global warming to 1.5° Celsius above preindustrial levels.

    Phase 2 will last through 2030 and shift the initiative’s focus from corporate climate-related disclosure to the implementation of climate transition plans. After a year-long consultation with member organizations, CA100+ evolved its core goals and asked companies to demonstrate climate action in three ways:

    1. Implement a strong governance framework that clearly articulates the board’s accountability and oversight of climate-change risk. 
    2. Reduce greenhouse gas emissions across all business activities, including engagement with stakeholders, such as policymakers, to address barriers to decarbonization in sectors where the technology solutions have not been developed or are not financially feasible.
    3. Provide enhanced corporate disclosure and implement transition plans to deliver on robust targets.

    As a lead investor in CA100+, CalSTRS plans and leads engagements with nine companies: Dominion Energy, Duke Energy, Phillips 66 and Southern Company in the United States; and Daikin, ENEOS, Nippon Steel, Toray and Mitsubishi Heavy Industries in Japan.

    CalSTRS was one of the first investors to join CA100+, and the coalition now has more than 700 signatories representing a combined $68 trillion in assets