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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 fourth quarter, 2023

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

Engagement spotlight: Methane emissions

Meaningful progress toward tackling methane emissions 

Meaningful progress toward tackling methane emissions

Most people tend to associate carbon dioxide with greenhouse gases and climate change. However, carbon dioxide is just one of the gases that can lead to the warming of the planet. Methane is also a greenhouse gas and is more than 28 times as potent as carbon dioxide at trapping heat in the atmosphere. Some methane emissions come from natural sources, but many are a product of human activities, such as operations to extract oil and gas, and agriculture. Methane is estimated to be responsible for 30% of the current rise in global temperature since the industrial revolution, so addressing it is vital to the global effort to avoid the most substantial impacts of climate change.

Oil and Gas Methane Partnership 2.0

The Oil and Gas Methane Partnership 2.0 is a United Nations-led program focused on the measurement, reporting and mitigation of methane emissions. Methane emission reduction is one of the most economically viable and immediate means to slow climate change. We are steadfastly engaging companies to join OGMP 2.0 as we believe that effective management of climate risks, including methane emissions, is important to the long-term sustainability of a company. So far, more than 120 companies, with assets in more than 70 countries on five continents, representing more than 38% of the world’s oil and gas production, have joined OGMP 2.0. We conducted heightened engagements this year focused on OGMP 2.0 adoption, including:

  • Co-hosting a workshop in conjunction with Nordea Asset Management, New York State Teachers’ Retirement System, Environmental Defense Fund and the United Nations Environment Programme. The workshop took place in Calgary, Alberta, Canada, and was attended by representatives from some of Canada’s largest oil and gas companies. Investors spoke directly to companies to educate them on OGMP 2.0 and share why we believe participation in the partnership is important to risk management.
  • We wrote letters to 38 companies across the natural gas value chain asking them to join OGMP 2.0.

OGMP 2.0 adoption saw notable progress in 2023. Some companies that joined the partnership include:

  • ExxonMobil: America’s largest multinational oil and gas company
  • Williams Companies: Oklahoma-based natural gas company
  • Romgaz: largest gas producer in Romania
  • INPEX Corporation: largest oil and gas exploration company in Japan
  • Bapco: Bahrain state-owned oil and gas company
  • KazMunayGas: Kazakhstan state-owned oil and gas company
  • Petrobras: Brazil state-owned oil and gas company

While large, publicly held oil and gas companies, such as ExxonMobil, are more recognizable household names, less familiar state-owned companies like Petrobras produce most of the world’s oil and gas. Therefore, it’s critical to persuade these state-owned companies to commit to initiatives such as OGMP 2.0, which are focused on best practices in emission mitigation.

New Environmental Protection Agency rules address methane

The U.S. Environmental Protection Agency announced new rules in December 2023 meant to drastically slash methane emissions. The rules would achieve a nearly 80% reduction from expected future methane emissions. We provided feedback to the EPA during an open comment period and sent letters to 46 oil and gas companies that the rules would apply to urging them to also submit clear, specific and constructive comments to the EPA as well.

    Stewardship priorities update

    Corporate and market accountability 

    Protecting the rights of shareholders at Masimo and beyond

    In 2022, investor Politan Capital Management sought to nominate directors to the board of Masimo, a publicly held medical devices company. In response, Masimo adopted measures intended to block Politan’s ability to nominate directors. Politan filed a lawsuit against Masimo over the measures adopted. Additionally, Masimo’s CEO had an employment contract that would have rewarded him an exorbitant payout at the expense of shareholders if certain changes occurred on the board, such as Politan’s directors being elected. The measures adopted by Masimo along with the CEO’s employment contract made it almost impossible for shareholders to elect independent representatives to the board. The ability for shareholders to choose directors, including nominating their own, is a fundamental shareholder right.

    In 2023, we joined Politan in its lawsuit against Masimo. For us, litigation is generally a last resort option and only used when other engagement options have been exhausted or are not viable. The rationale to join was both to remedy the poor corporate governance practices and erosion of shareholder rights at Masimo and deter setting a precedent that other companies may try to follow. The company ultimately rolled back the adopted measures, and the CEO agreed to forgo the payout stipulated in their employment contract. The judge presiding over the case ordered Masimo to reimburse Politan nearly $18 million in legal fees and stated: “This court recognizes the obvious fundamental benefit of preserving stockholders’ right to vote and elect directors of their choosing.”

    Board effectiveness 

    Continued focus on improving board diversity

    We believe the boards of companies we invest in should use a director nomination process that considers a diverse mix of skills, background, experience, age, gender, sexual orientation and identification, cultural, racial and ethnic compositions that are most appropriate to the company’s long-term business needs. We often engage companies to consider improving the diversity of the board. Two oil and gas companies that we recently engaged on board diversity, ExxonMobil and SilverBow Resources, each announced the appointment of a new woman director. Both companies now have greater than 30% women representation on their boards. Thirty percent representation has long been viewed as an important threshold to ensure a minority has a sufficient voice in decision-making.

    Net zero transition 

    A look back at the success of Climate Action 100+

    When investors across the globe gathered for the Principles for Responsible Investment Conference in Tokyo in 2023, the theme ”moving from commitments to action” highlighted the work of Phase 2 of the Climate Action 100+ initiative. The PRI is one of five investor networks that guide the largest global investor engagement initiative on climate change. We led engagements with 10 of the 170 CA100+ focus companies and shared lessons learned from a successful year engaging high-emitting companies. Below are some highlights from the last quarter of 2023:

    • The Asia Investor Group on Climate Change, a CA100+ sponsor network, hosted an in-person forum in Tokyo entitled “Transformation of the Steel Sector in Asia.” Us and other global investors and steel companies from Japan, China and South Korea attended. The meeting resulted in a set of recommendations from investors and companies aimed at increasing progress in decarbonizing the steel industry. Eighty percent of the steel manufactured globally comes from Asian markets.
    • ENEOS, a Japan-based oil and gas company, met with us and Sompo Asset Management to describe the company’s plans to achieve carbon neutrality by 2050. The company discussed details of a carbon capture and sequestration operation planned in western Japan. The project is a collaboration between several business groups and has the backing of the Japanese government.
    • Duke Energy, a Charlotte, North Carolina, based utility company, is detailing how it is working to create a just transition in its move away from coal-fired power. “Just transition” refers to minimizing negative impacts on workers and communities during the global transition toward using cleaner energy. Led by CalSTRS, CA100+ investors met with Duke executives to better understand the company’s timeline to wind down coal burning power plants. Duke Energy plans to retire 15,000 megawatts of coalfired power by 2035.
    Responsible firearms 

    Continuing the pursuit of a firearms merchant category code

    Merchant category codes are used by credit card companies to identify types of goods or services being sold. At the start of 2023, the path for the major credit card networks, Visa, MasterCard, American Express and Discover, to implement a new merchant category code for firearms retailers was clear. The companies were preparing directions detailing how retailers and financial institutions would be affected by the new firearm retailer code. Firearms safety advocates felt the new merchant category code could help the credit card companies and retailers better manage risks. For example, identifying the purchasing activity of firearms traffickers and unusual purchasing activity by individuals that could potentially be involved in mass shooting events could lead to actionable steps to make communities safer.

    In March 2023, the credit card networks suddenly put a pause on the implementation, citing legislation in various states that would significantly impact their ability to make the changes. Since that time, Texas, Florida, Idaho, North Dakota, West Virginia, Montana and Mississippi have all implemented laws to restrict the use of the merchant category code for firearms retailers. The laws have slight differences, but all aim to prevent the collection of any data regarding purchases at firearms retailers.

    California went in the opposite direction, passing legislation to require the use of the merchant category code for firearms retailers. The California law will require the use of this new merchant category code by May 1, 2025.

    We are meeting with the credit card companies mentioned earlier to better understand how these laws will affect their businesses. Most of the companies acknowledge the difficulties this presents from an operations perspective, but all are committed to following the laws in each state.

    None of the companies have decided the next steps for implementing the firearms retailer merchant category code in states where there are no laws regarding a merchant code for firearms, but they believe there will be additional legislation in other states regarding this issue.