Earlier this year, Institutional Shareholder Services and Glass Lewis announced a review of their voting policy recommendations in relation to diversity, equity and inclusion considerations. These proxy advisory firms provide research, voting recommendations and voting technology platforms. Institutional investors rely on these services to efficiently vote their proxies and implement custom voting principles. CalSTRS uses both firms for proxy research and Glass Lewis for its voting technology platform, which enables us to adeptly vote proxies at about 10,000 global companies per year. Voting proxies gives us direct say in how companies we invest in are governed for the benefit of California’s educators.

In February, Institutional Shareholder Services (ISS) announced it would indefinitely halt consideration of the gender and racial/ethnic diversity of a company’s board when making vote recommendations for U.S. company board directors. In the past, ISS recommended voting against board members responsible for a board lacking diversity. There was no warning or opportunity for ISS clients to weigh in on this decision. Shortly after, Glass Lewis announced it was similarly evaluating their voting recommendations. CalSTRS met with Glass Lewis executives to express strong support for existing practices, because diverse boards are better suited to manage risk and improve financial performance. In March, Glass Lewis shared they would not change their current practices.

At CalSTRS, our Corporate Governance Principles and our three-year Stewardship Priorities guide our shareholder engagement and proxy voting activities. These principles and priorities improve the long-term performance of the CalSTRS Investment Portfolio and intentionally transcend short-term trends. We pursue diverse and effective corporate boards and encourage companies to recruit and retain the most engaged and qualified workforce possible. Having a variety of perspectives leads to high performing and resilient workforces, which results in improved financial performance at our portfolio companies.

More information on our proxy voting.

Protecting the independence of proxy advisors

In January, CalSTRS joined an amicus brief authored by the Council of Institutional Investors, and supported by four other institutional investors. The amicus brief is related to a court case stemming from a 2020 Securities and Exchange Commission rule that classified proxy advice from proxy advisors as solicitations. Doing so would require proxy advisors to follow additional regulatory steps that would have compromised their ability to provide timely and independent voting advice to clients such as CalSTRS. The amicus brief supports the perspective that proxy advice is not a solicitation, and this rule has a chilling effect on the use of proxy advisors providing independent third-party advice to investors. We will continue to monitor developments in the court case and look for opportunities to constructively engage where appropriate.

Shaping climate regulation in California

In March, CalSTRS responded to a solicitation from the California Air Resources Board to develop regulations to implement Senate Bills 253 and 261, which passed into law in 2023. SB 253 requires companies with more than $1 billion in annual revenue that do business in California to report their scope 1, 2 and 3 greenhouse gas emissions. SB 261 would require companies with more than $500 million in revenue that do business in California to biannually produce a Task Force on Climate-Related Financial Disclosures (TCFD) aligned report. We expressed a strong desire for the California Air Resources Board to pursue regulations aligned with existing international disclosure frameworks, specifically the standards established by the International Sustainability Standards Board (ISSB). Alignment with existing frameworks will reduce unnecessary reporting burdens and costs to companies, while ensuring investors receive climate-related data necessary to manage risk and make informed investment decisions.

Building influence in the energy industry

CalSTRS staff recently attended multiple industry events intended to maximize the effectiveness of corporate engagement efforts, build influence and increase our team’s knowledge and expertise of the energy sector.

• Thrive Energy Conference: Staff met with executives from 21 oil and gas portfolio companies. The companies universally reaffirmed previous commitments related to managing climate risks. Many companies stressed consistent strategies are necessary due to the global nature of shareholders and differing regulatory regimes across global markets.
• CERAWeek Energy Conference: Staff participated on a panel about methane emissions from oil and gas operations hosted by the Environmental Defense Fund. We showed continued support to one of our partners in the effort toward decarbonization and continued communicating to the market the value we place on cost-effective methane emissions reductions from oil and gas portfolio companies.
• Piper Sandler Energy Conference: Staff met with executives from more than 30 portfolio companies across the oil and gas and renewable energy sectors. The group discussed emissions, workforce diversity and turnover, artificial intelligence, water and tariffs.

Tangibly reducing flaring

We recently subscribed to an oil and gas analytics platform that provides data about the operational performance of oil and gas wells in the contiguous United States. Data can be filtered by company, basin, county, and individual wells, and includes a metric called flaring. This practice burns off excess natural gas due to issues ranging from safety to infrastructure constraints to economics, and results in the release of greenhouse gases and other pollutants. The data is updated monthly, which gives us timely information to identify regions with poor flaring practices so we can focus our engagement efforts for optimal effect.

In reviewing the data, we observed three portfolio companies accounted for approximately one-third of all flaring in the Permian Basin in Texas, in 2023. Throughout 2024, we engaged executives at these companies multiple times regarding their flaring practices. We focused on why the flaring was happening and what could be done to reduce it. We communicated how important it is to minimize flaring and received commitments that progress would be made. Data for 2024 shows these companies have reduced flaring by nearly 30%.

Protecting worker safety to boost long-term company performance

In January, CalSTRS submitted a comment letter to the Occupational Safety and Health Administration outlining our support for proposed rules to protect workers from health risks associated with extreme heat. OSHA is a regulatory agency that falls under the U.S. Department of Labor and is tasked with setting and enforcing standards to ensure safe and healthy working conditions. Currently, regulation for working conditions in extreme heat is managed through a patchwork of state-level policies. Many companies’ operations expand beyond state lines, creating regulatory and legal risks for companies which must comply with different rules in different jurisdictions. Rules implemented at the federal level by OSHA will create consistency and certainty for compliance. Extreme heat negatively impacts a company’s workforce and can lead to an increase of work-related injuries, which drives down productivity. It’s in the best interest of workers, companies and investors to establish federal minimum standards as put forth by OSHA’s proposed rule.