The value of CalSTRS engagements
Third quarter, 2021
CalSTRS pledges a net-zero portfolio by 2050 or sooner
At the September 2021 Teachers’ Retirement Board meeting, the board’s Investment Committee adopted a pledge for the CalSTRS Investment Portfolio to become net zero by the year 2050. A net-zero portfolio includes investments that do not increase overall greenhouse gas emissions in the atmosphere. Net zero can be accomplished by reducing human-caused emissions, removing existing emissions from the atmosphere, or a combination of both. This pledge is in alignment with the science-based targets of the 2015 Paris Agreement—a global accord between more than 190 countries that seeks to limit global warming to below 2 degrees Celsius to avoid the most severe impacts of climate change. Achieving net zero globally by the start of the second half of the 21st century is a key component of the Paris Agreement.
The CalSTRS net-zero pledge is the first step of a four-part implementation framework:
This framework is consistent with the United Nations’ Race to Zero campaign, the largest global effort to address climate change, and this pledge is the next step in navigating our portfolio through the shift to a low-carbon world.
CalSTRS sees positive diversity outcomes in the market
In the last year, CalSTRS and other long-term institutional investors continued to push for board and workforce diversity at companies within our portfolio. Diversity is critical to companies’ long-term financial success, which in turn strengthens the Teachers’ Retirement Fund on behalf of California’s public educators and their beneficiaries.
Studies repeatedly show that increasing board and workforce diversity is not only the right thing to do for an organization’s culture, but also leads to better business outcomes and smarter decision-making, plus powers innovation, among other benefits.
Collectively, CalSTRS and our peers have been driving board changes on a case-by-case basis through letter writing campaigns, company engagements and proxy voting activities. We co-chair the Thirty Percent Coalition and the Human Capital Management Coalition, which focus on board and workforce diversity, respectively. We are also a leading member of the California Investors Group, which includes the California Public Employees Retirement System, the Los Angeles County Employees Retirement Association and the San Francisco Employees Retirement System, and work closely together to encourage gender, racial, ethnic and LGBTQ diversity on corporate boards.
Specifically, we ask companies to:
- Appoint diverse board members or disclose existing diverse board members.
- Disclose a matrix of current board member skills and backgrounds, including diversity characteristics and how they align with the company’s forward-looking strategy to create and sustain value.
- Embed a commitment to identifying qualified candidates of diverse gender, racial and ethnic backgrounds, and the LGBTQ community, in key governance policies, such as the nominating and governance committee charter.
- Incorporate procedures by which women, diverse racial and ethnic backgrounds, and the LGBTQ community are identified for consideration in every search for a board nominee (a practice commonly known as “the Rooney Rule,” after its use in the National Football League).
- Assure that searches for new directors will consider suitable nominees from corporate backgrounds beyond the executive suite, and noncorporate backgrounds (academia, government, nonprofit organizations, etc.) where additional diverse talent may be identified.
These collaborative efforts culminated in the following successes:
Thirty Percent Coalition
After writing to 250 companies in the Russell 3000 Index, 127 companies appointed women to their boards. Of those, 65 companies with all-male boards appointed a woman for the first time and 62 companies appointed a second woman.
California Investors Group
After writing to 74 companies in the S&P 500, 52 companies appointed female and/or racially and ethnically diverse directors:
- Twenty women and 36 men of underrepresented groups were appointed.
- Thirteen women not from underrepresented groups were appointed.
- Twenty companies adopted the Rooney Rule—which requires women and underrepresented groups be included among interviewed candidates.
CalSTRS diversity tour
CalSTRS is committed to enabling a diverse pool of external investment managers to establish a direct relationship with us. We do this partly by establishing collaborative relationships across a vast network of industry associations. In summer 2021, we embarked on a virtual tour with seven industry organizations: TOIGO Foundation, National Association of Securities Professionals, National Association of Investment Companies, The Investment Diversity Exchange, Hispanic Heritage Foundation, The Association of Asian American Investment Managers, and New America Alliance. The meetings allowed us and those organizations to engage openly, exchange diversity, equity and inclusion initiatives, and identify potential opportunities to collaborate.
While the COVID-19 pandemic led to severe restrictions on travel and in-person events, CalSTRS continued our record of strong representation at industry events through virtual participation to share and build knowledge:
- Fixed Income Senior Delegate Roundtable – “ESG Investing—Easier Said Than Done” panel
- Environmental Finance Webinar – “The Shifting Focus of Pension Funds” panel
- CFA Institute: Americas Materiality Roundtable
- The Economist – “Climate Change Transition Risks” panel
- New Statesman – “Making Sense of Net Zero” panel
- Sustainability Accounting Standards Board (SASB) Meeting
- Securities and Exchange Commission – Meeting with SEC Chair on climate disclosure
Stewardship priorities update
Corporate and market accountability
2021 proxy season highlights
During the 2021 proxy season, CalSTRS voted nearly 100,000 proxies at more than 9,500 companies’ annual general meetings. Proxy voting is an important tool for shareholders to ensure their voices are heard on important issues related to the management of the company. Through proxy voting, shareholders elect directors to represent them in the boardroom. We view proxy voting as another asset to the fund, and a useful mechanism to open dialogue with companies. This year, like last, many annual general meetings were held virtually due to the COVID-19 pandemic. Despite the virtual environment, our staff met and engaged with more than 130 portfolio companies to discuss voting issues—a sizable increase from the 80 meetings held last season.
In addition to proxy voting, shareholder proposals can communicate a consensus of views that may be a catalyst for a company to change or adopt best practice governance principles. This was a historic proxy season for environmental and social-related shareholder proposals, and a total of 81 proposals received majority shareholder support. This easily bested last year’s record-breaking 21 proposals with majority support. Notable and emerging social proposals were related to racial equity audits, lobbying and political contributions, human rights and workforce diversity. Emerging environmental proposals included climate action plans, greenhouse gas emissions, nuclear power and renewable energy. We vote on shareholder proposals, and occasionally file our own, when we perceive changes are needed at a company.
Increase in failed say on pay votes for S&P 500 companies
Thus far in the 2021 proxy season, 18 S&P 500 companies failed their say-on-pay vote. That is up from the 12 that failed in 2020. Of the varied reasons why support failed, we consistently saw misalignment between pay and performance and one-time payments or other incentive plan adjustments that resulted in payouts that would have otherwise not happened due to the COVID-19 pandemic.
Those companies that failed support for the reasons above typically had a track record of one-time awards and discretionary adjustments in the past. One-time payments and discretionary adjustments come with extra scrutiny because they could potentially undermine the principle of a company’s established incentive plans. Say on pay is important to investors because it’s a means to ensure the interest of company executives is aligned to that of shareholders.
Japan corporate governance: Engagement and progress
CalSTRS staff also engages with domestic and international regulatory entities to advocate for positive changes in corporate governance practices globally. A highlight of the 2021 proxy season is the continued engagement and progress seen with representatives from Japanese companies and regulatory and proxy advisory firms.
As a significant investor in Japanese companies, we are keenly interested in corporate governance practices in Japan. In June 2021, the Tokyo Stock Exchange released a revision of Japanese Corporate Governance Code that focused on key issues of board independence, diversity and sustainability. This was a significant positive step toward modernizing corporate governance in Japan.
Enhanced diversity-focused voting
CalSTRS held companies accountable by increasing the number of votes against boards with zero women in the 2021 proxy season. Over time, CalSTRS, other institutional investors and proxy advisory firms have refined voting policies regarding board diversity. We will continue to review and revise our voting practices to further incentivize portfolio companies to increase gender, racial, ethnic and LGBTQ board diversity.
CalSTRS is part of the Pandemic Resilient-50 (PR-50) coalition, which is comprised of nine institutional investors with more than $3.8 trillion assets under management. The PR-50 is conducting a multiyear engagement initiative targeting 50 companies most affected by the pandemic. The PR-50 has corresponded with the target companies and met with 35 of them to understand how their response to the pandemic, to date, should inform the next phase of the engagement.
Members of Pandemic Resilient-50:
- Achmea Investment Management—Netherlands
- APG Asset Management NV—Netherlands
- BNP Paribas Asset Management—France
- British Columbia Investment Management Corporation (BCI) —Canada
- California State Teachers’ Retirement System—United States of America
- Domini Impact Investments LLC—United States of America
- Etica Funds (ETICA SGR S.p.A.)—Italy
- Legal & General Investment Management—United Kingdom
- Resona Asset Management Co. —Japan
Publicly traded companies have been put on notice by shareholders asking them to “walk the talk” when it comes to transparency on political activities involving climate—a priority of our net-zero strategy.
In the 2021 proxy season, climate lobbying proposals gained shareholder approval at Phillips 66, Norfolk Southern, ExxonMobile, United Airlines and Delta Airlines—a record for votes getting majority support in a single year. This recent success has resulted in a number of companies voluntarily reaching out to our staff to discuss their willingness to produce a lobbying report, driven by their desire to avoid shareholders’ filing a proposal to request one. Climate lobbying reports are an opportunity for a company to reassure investors about how it uses its financial influence to support climate initiatives at federal, state and local levels and to avoid contradictory positions.
Having a company voluntarily produce a climate lobbying report saves our staff considerable time and resources normally required to file a shareholder proposal and allows staff to focus on other low-carbon transition engagements.
Through research and engagement with companies regarding the sale of ghost guns—privately assembled firearms lacking commercial serial numbers—CalSTRS identified legal, reputational and financial risks that contribute to violence in communities across the country. We developed a plan to influence the firearms industry through regulatory channels by supporting a proposal aimed at eliminating ghost guns. Since the purchases are considered legal and credit card companies do not receive data regarding the items being sold, they are incurring risk associated with this practice—a risk that is passed on to our portfolio.
Understanding that violence associated with ghost guns creates additional health and safety risks to society at large, and negatively impacts the financial condition and operating performance of businesses, we submitted a letter to the Bureau of Alcohol, Tobacco, Firearms and Explosives. The letter supported an ATF proposal to require identifying markings, background checks and transaction records for the sale of key firearms parts. We support regulations requiring all sales of ghost guns be processed through federally licensed retailers following established best practices, including conducting background checks and keeping accurate records of transactions to ensure children and prohibited individuals do not have access to firearms.