The value of CalSTRS engagements
First quarter, 2021
Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation for the period of January 1 through March 31, 2021, are listed below.
California Board Diversity Initiative expands geographic focus after six years of successful campaign
In 2015, CalSTRS and CalPERS launched the California Board Diversity Initiative to engage California-headquartered companies who lacked board diversity and had zero women on their corporate boards. This decision was driven by research showing that companies with diverse boards attain better financial results, on average, than those without diversity.
Over the next four years, CalSTRS collaborated with other California pension systems (CalPERS, LACERA and SFERS) to encourage companies to improve their corporate board diversity. The group sent letters to California-based companies in the Russell 3000 Index asking nominating and governance committees to include individuals with diverse backgrounds on their board, inclusive of gender, race, ethnicity, and LGBTQ+ identity.
The initiative’s efforts were bolstered by the California legislature passing, and the governor signing, Senate Bill 826 in 2018. This law required the corporate boards of California-based companies to have at least one woman director by the end of 2019.
By mid-2020, 150 companies in the Russell 3000 Index had appointed 186 women to their boards, and only five of the companies originally engaged by the coalition had failed to appoint any women directors. When private engagement with two of these companies failed to produce outcomes, CalSTRS escalated efforts by co-filing shareholder proposals. The three other companies agreed to appoint women to their boards.
As of the end of 2020, Source: Equilar, an executive compensation and corporate governance data firm
Building on its success, the group has now shifted its focus toward companies headquartered outside of California. The re-named California Investors for Effective Board Diversity is now engaging 74 companies in the S&P 500 index and asking companies to improve board diversity inclusive of gender, race, ethnicity, and LGBTQ+ identity. As shown in the graphic above, there is still much work ahead to diversify corporate board rooms and reach gender parity in the United States. The coalition intends to leverage its techniques and prior engagement successes as a roadmap to push for ongoing change.
While the COVID-19 pandemic led to severe restrictions on travel and in-person events, CalSTRS continued its record of strong representation at industry events through virtual participation:
- ALTSLA Conference Panel, ESG and Socially Responsible Investing – Implementing a Practical Approach in a Post-COVID World, a discussion on how capital allocators are working to establish ESG industry standards
- Carmo Mission and Impact Investing Conference
- Ceres 2021 Annual Conference: Transform Tomorrow Today
- Council of Institutional Investors (CII) and the Center for Audit Quality roundtable discussion on ESG reporting, frameworks, and the role of the auditor and audit committee
- London Stock Exchange Group/Principles for Responsible Investment: COP 26 Investor Action on Climate Action series
- NYC Strategic Human Resources meetup discussing human capital management disclosures and the importance to investors
- Pension Bridge ESG 2021 conference panel on how to benchmark ESG investments
- SOCAP, “Balancing Scale, Returns and Measurability in Impact Investing,” a conversation on how impact investors are balancing scale, returns and measurability
- Top 1000 Funds Conference Panel, “What’s Next for Investor Action,” discussing strategies and tools for investor engagement
- University of California Hastings School of Law Center for Innovation meeting to discuss human capital management data
- 2030 Investment Vision for Natural Climate Solutions convening to discuss investments in sustainable forestry, land use and agriculture
Stewardship priorities update
In January, investors with more than $2 trillion in assets under management met virtually with some of America’s largest firearms retailers to focus on best safety practices for the sale of civilian firearms. The meeting was initiated by the CalSTRS-led Principles for a Responsible Civilian Firearms Industry. This first of its kind meeting was significant, as 2020 marked a record year for firearms sales in the United States.
During the meeting, retailer representatives discussed their safety precautions for firearms purchases. The conversation focused on best practices in the areas of firearms transportation and storage, employee training, and customer education.
Retailers stressed the need to track each firearm individually as it enters the custody chain through distributions centers. Radio-frequency identification (RFID), which uses electromagnetic fields to identify and track merchandise, was cited as an example of how technology can be used to enhance safety. Retailers also rely on a two-person serial number match verify the accuracy of firearms inventory. The group also addressed safety concerns that led to the removal of firearms from display cases at some retail locations.
Investors learned that the companies have robust training and certification programs. This includes training on how to spot irregularities at the point of sale, specifically with regards to background checks and straw-buyers. The training is continuous and focuses on how to demonstrate and educate customers on safe firearms handling and storage. Additionally, the companies shared that their training continues throughout an associate’s career. One company shared that its compliance team conducts surprise drills which emulate safety inspections conducted by the Federal Bureau of Alcohol Tobacco and Firearms.
The companies agreed to continue to work with investors and meet regularly to discuss methods for reducing risk and improving safety in the sale of civilian firearms. Lessons learned will be used by CalSTRS to engage other entities throughout the firearms industry.
Corporate and market accountability
CalSTRS promotes best practices for virtual-only shareholder meetings
Due to the spread of COVID-19 in early 2020, restrictions on travel and in-person meetings accelerated the transition toward virtual-only shareholder meetings (VSMs). In 2016, there were just 187 VSMs and in 2020, there were 1,957 VSMs. Many companies indicated they will maintain the practice in the future. CalSTRS participated in a working group to develop best practices and protect shareholder rights at VSMs.
After engagement, U.S. Department of Labor suspends enforcement of final rule on ESG investments and proxy voting
In March, the U.S. Department of Labor (DOL) announced it will suspend enforcement and revisit a recently adopted rule regarding environmental, social and governance (ESG) investments and proxy voting. This rule would have applied to retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The DOL heard from many stakeholders, , on the proposed rule and its impacts. While CalSTRS is not subject to ERISA, CalSTRS urged the DOL to reject the proposal. CalSTRS opposed the rule because it would have created a perception that retirement plans need special justification to consider ESG factors when making investments. As a long-term investor, CalSTRS sees the integration of ESG risks into the investment decision-making process as an important part of our fiduciary responsibility to our members.
Investors representing a quarter of capital markets back SASB
CalSTRS was a founding member of the Sustainability Accounting Standards Board (SASB) Investor Advisory Group (IAG) in 2016. Originally 14 members, the IAG has grown to 57 members with combined assets under management of more than $47 trillion, representing a quarter of global capital markets. CalSTRS is pleased to contribute to this group of investors who recognize the need for comparable, consistent, and reliable disclosure of financially material, decision useful ESG information to investors. Most recently, CalSTRS contributed to SASB’s Human Capital Management Framework research project, which seeks to identify the financially material impacts of relevant human capital management issues.
CalSTRS supports development of global sustainability standards
In 2020, the International Financial Reporting Standards Foundation (IFRS) asked for feedback on whether the foundation should engage in the development of sustainability reporting standards. CalSTRS submitted a to encourage the IFRS to serve the needs of investors, who are the primary users of the reported data. CalSTRS also encouraged the IFRS to use existing standards and frameworks to build upon the well-established and well-supported work developed to date.
In February 2021, the IFRS announced it received enough support to take an active role in ESG disclosure. CalSTRS was encouraged to learn in March 2021 that the IFRS would maintain an investor focus and build on existing frameworks, in line with CalSTRS requests. CalSTRS will continue to advocate to the IFRS and other bodies that sustainability standards should encompass the full range of material sustainability risks and opportunities facing businesses.
CalSTRS discusses corporate governance trends with Japanese ministry
CalSTRS met virtually with Japan’s Ministry of Economy, Trade, and Industry (METI) to share views on corporate governance trends as a long-term institutional investor. CalSTRS shared our observation that many Japanese companies adopted long-term corporate governance frameworks but failed to set plans for short or medium time horizons. Our team also expressed support for majority independent directors on corporate boards and committees.
Board effectiveness: Human capital management
CalSTRS advocates for human capital management disclosures at SEC
In March 3, CalSTRS met virtually with the office of Allison Lee, the Acting Chair of the U.S. Securities and Exchange Commission (SEC). CalSTRS encouraged the SEC to require companies to report human capital management data as part of the material environmental, social and governance (ESG) disclosures already required by Regulation S-K. This meeting was a follow-up from a meeting with SEC staff in August 2020 and outlining our recommended metrics for disclosure. CalSTRS supports mandatory universal and specific disclosures consistent with the Human Capital Management Coalition. These disclosures would be in addition to industry-relevant metrics described by the Sustainability Accounting Standards Board.
Update on CalSTRS-supported activist campaign with ExxonMobil
In December 2020, CalSTRS announced its support for an alternate slate of directors at ExxonMobil in an effort to prepare the company for the global low-carbon transition. CalSTRS joined the campaign because our prior engagement activities with the company had failed to produce meaningful results. CalSTRS issued a statement in February 2021 stating that ExxonMobil’s underperformance, declining returns on capital expenditures, and undisciplined capital allocation continued to erode shareholder confidence and value in the company.
Climate Action 100+ releases annual report, CalSTRS continues to play leadership role
Climate Action 100+, a global investor initiative representing $52 trillion in assets, released its annual progress report. Climate Action 100+ reports that half the companies targeted by the organizations have established commitments to reach net-zero carbon emissions by 2050 or sooner.
Alongside Climate Action 100+, CalSTRS is the engagement lead of eight companies, four located in Japan and four in the United States. Out of the eight companies, five companies (Duke Energy, Southern Company, Dominion Energy, Daikin Industries, and ENEOS) committed to net zero by 2050 or earlier, one company (Nippon Steel) committed to a 30% greenhouse gas emission reduction by 2030, and one other (Torray Industries) committed to a 30% greenhouse gas intensity reduction. CalSTRS continues to engage Phillips 66 to secure an emission reduction commitment. CalSTRS recently escalated engagement by filing a shareholder proposal asking Phillips 66 to prepare a report on how the company’s lobbying activities align with the Paris Climate Agreement. This proposal will be voted on at the company’s Annual General Meeting in May.