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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, 2022

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

Engagement spotlight

CalSTRS continues to wield influence in the global investment industry 

CalSTRS can trigger change by building strategic relationships with investors, policymakers, business leaders and other influential decision-makers. An effective way to develop these relationships is by participating in flagship industry events where we can exchange ideas about global solutions to pressing issues, such as climate change.

We played an active role during two notable events this quarter:

PRI in Person

The Principles for Responsible Investment is a United Nations-supported network of investors, representing more than $121 trillion in assets under management, that focuses on responsible investment, including understanding the implications of environmental, social and governance-related risks and opportunities. The PRI recently hosted its annual conference, which boasted more than 2,400 attendees from around the world. CalSTRS’ Teachers’ Retirement Board Vice Chair, Sharon Hendricks, other PRI board members, the UN secretary-general, and the UN special envoy for climate action and finance, participated in the conference’s opening panel, which set the tone for the event by focusing on the growing expectation of responsible investors.

Responsible Investor USA

This annual event focused on sustainable business and finance issues in North America. More than 400 top-level sustainable finance and ESG investment professionals gathered to learn, share and debate ESG opportunities and challenges. CalSTRS Portfolio Manager Aeisha Mastagni was among them. Mastagni spoke on a panel discussing new rules proposed by the Securities and Exchange Commission that outline mandatory climate-related disclosures for public companies. Better disclosure of climate-related issues has long been a part of CalSTRS’ broader strategy to reach a net zero portfolio by 2050 or sooner.

    Stewardship priorities update

    Corporate and market accountability 

    Federal regulators strengthen rules against insider trading and improve market transparency

    In December 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. This rule, created more than 20 years ago, allows company executives and other insiders to set up stock trading plans. These plans establish the amount of stock insiders can sell and the timeframe in which they can sell them. The plans help combat insider trading, a federal crime in which someone trades a stock while possessing information not publicly available and that may impact a stock’s future price.

    The amendments to Rule 10b5-1 are meant to strengthen disclosure rules and close loopholes that circumvent the intent of the rule. Disruptive and illegal practices such as insider trading can impact investor confidence in the stock market. Transparent and fair financial markets, where everyone plays by the same rules, is beneficial to all investors, including CalSTRS.

    Net zero transition

    Policy engagement on the road to a low-carbon economy 

    A priority of CalSTRS’ stewardship efforts is using our influence as a significant global investor to promote long-term sustainable business practices and public policies. This priority was a highlight of 2022 with the passage of the Inflation Reduction Act—the largest package of climate investments in the United States.

    This law includes $370 billion of new energy-related tax credits designed to support companies on the path to net zero. Additionally, the support for net zero at the federal level is creating favorable conditions for sustainable transportation and power sector policies and regulations. This means there will be additional opportunities for the CalSTRS stewardship team to influence policy development.

    How does CalSTRS, a fund managing over $300 billion, influence the public climate policy debate? Beginning in 2018 and as a lead investor in Climate Action 100+, we committed to urging companies in high-emitting sectors to publish a corporate policy that describes how the board of directors oversees the management of climate-related risks. This includes asking corporate boards to disclose a framework that will ensure direct lobbying and advocacy activities are aligned with the company’s stated climate goals. Public actions of the company should demonstrate commitment to these climate goals.

    According to a report issued by the nonprofit group Ceres, 11 companies in the Climate Action 100+ Benchmark, including Duke Energy and Southern Company, two companies in which we lead engagement efforts, made public statements in support of the Inflation Reduction Act in the weeks between its introduction in the Senate and subsequent passage in August 2022. In the fourth quarter of 2022, at the request of CalSTRS and other investors, Dominion Energy, Duke Energy and Southern Company published climate lobbying and trade association reports describing their activities.

    With the Inflation Reduction Act in place, now the work begins to influence the development of policy and regulatory infrastructure to guide its key provisions. In 2023, we will engage with companies and federal regulators to support the establishment of rules and policies aligned with the transition to a low-carbon economy.

    Nations of the world convene on climate change, CalSTRS’ net zero strategy recognized 

    The 2022 United Nations Climate Change Conference, known as COP 27, was held for two weeks in November. About 35,000 representatives from 190 countries attended the annual event, which allows government representatives to discuss climate change policies. This year, a significant focus was on the concept of “loss and damage,” or the negative consequences of climate change that go beyond what people can adapt to. The event established the first loss-and-damage fund, where high-carbon-emitting developed nations most responsible for climate change agreed to provide financial support to developing nations who are most vulnerable to climate change.

    Before COP 27, CalSTRS signed the 2022 Global Investor Statement to Governments on the Climate Crisis. Coordinated by The Investor Agenda, a coalition of sustainability-focused organizations, the statement called on world governments to take bold action to help avert the worst effects of climate change by limiting global temperature rise to 1.5 degrees Celsius above preindustrial levels, which aligns with the goals of the Paris Climate Agreement on climate change.

    The Investor Agenda also published a case study of our net zero strategy. These case studies are meant to inspire other institutional investors to adapt similar policies that will help address climate change risks.

    Responsible firearms

    Merchant Category Codes could provide vital insight on firearms transactions 

    When the International Organization for Standardization announced earlier in 2022 the creation of a Merchant Category Code for retailers of standalone firearms, safety advocates recognized it as an opportunity to better understand how data can be used to reduce firearms-related violence.

    The four-digit merchant codes identify retailers individually or by the type of products sold. These merchant codes are primarily used for tax reporting purposes, to determine credit card point eligibility for specific purchases, or to track consumer spending habits. While the codes do not provide a detailed account of the items purchased, safety advocates say the data could be used to help identify suspicious activity associated with gun trafficking and mass shootings.

    To determine which companies to engage on this topic, we worked with other investors and compiled data on the number of credit card customers and transactions served by individual companies. A list of the 10 most influential banks and financial institutions to engage on this topic was developed, and conversations with these companies are scheduled to start in January 2023.

    Advocates for the new Merchant Category Code say existing processes designed to identify potential fraud or money laundering could be adjusted to identify suspicious firearms-purchasing activity. One hurdle still to address is determining whether and how companies could use collected data to inform law enforcement of suspicious activity related to firearms transactions. While there is no requirement for businesses to use the new codes, the hope is that companies will use them, thereby providing a way to gather helpful data. Another hurdle is to determine whether and how companies could use such data to report to law enforcement suspicious activity related to firearms transactions.