The value of CalSTRS engagements
Second quarter, 2021

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Engagement spotlight

Historic win at ExxonMobil

On May 26, 2021, shareholders delivered a resounding message to the management of ExxonMobil when they elected three directors to the board who had been nominated by activist investment manager Engine No. 1. This marks the first time in the company’s history that directors they did not support were elected to their board. CalSTRS was the first investor to announce support of Engine No. 1’s slate of alternate directors when it was introduced in December 2020. The backing of a significant investor such as CalSTRS brought immediate legitimacy to the board candidates nominated by Engine No. 1, and our support contributed to the successful campaign. This action by shareholders reinforces the message that ExxonMobil and other publicly traded companies can no longer continue with the status quo. Change is necessary for long-term success.

We recognized the need for a shakeup in the boardroom and supported director nominees who have the relevant skills and experience to strengthen long-term performance, resiliency and strategic positioning. This form of stewardship is in alignment with CalSTRS’ Stewardship Priorities of board effectiveness and low-carbon transition. Of the incumbent board members, only the chairman, who is also the CEO, has any experience in the oil and gas industry. At the same time, the company has undergone an extended period of financial underperformance. These new board members add desperately needed expertise in significant business transformation and experience at both renewable and traditional energy companies. Additionally, ExxonMobil has lagged many of its peers in preparing its business to undergo the strategic transition toward a low-carbon economy by focusing capital expenditures on carbon energy sources.

This victory is the outcome of a longer-running series of escalating engagement tactics at ExxonMobil. When traditional tactics of engagement such as meetings with the company failed to deliver meaningful results, we implemented our new strategy of activist stewardship—a heightened and more targeted approach to engagement. The ExxonMobil campaign sought to replace a significant portion of the board. Leading up to the company’s annual general shareholder meeting in May, we participated in a large array of media appearances and engagements with fellow investors and other market participants to build the case for change at ExxonMobil.

Engagement tactics in order of increasing resources: Proxy voting, engagement letter, teleconference, in-person meeting, shareholder proposals, engagement with regulators, collaborative engagements, activist stewardship

While every company is unique in its governance, strategy and operations, the campaign at ExxonMobil provides a useful blueprint for future engagements. We will continue to refine our stewardship activities to best remain an influential voice in the economy. This influence affords us the ability to prepare our investment portfolio for the global transition to a low-carbon economy, while maximizing returns for California’s educators.

Industry events

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:

  • CalPERS and CalSTRS 2021 Diversity Forum – We co-hosted a virtual diversity forum with more than 900 participants focused on promoting diversity, equity and inclusion in the investment industry.
  • Pensions & Investments – Participated in the “Qualifying as ESG: How to spot a wolf in sheep’s clothing” panel discussion.
  • Private Equity International – Participated in the “Structuring impact to go mainstream with institutional investors” panel discussion.
  • Pension Bridge – Participated in the “Climate change: Impact, risks and opportunities” panel discussion.
  • CFA Institute Brazil – Participated in the “Brave new world: Integrating ESG into portfolios” panel discussion.
  • Fitch Ratings and CFA Institute – Participated in the “Climate change across portfolios, sectors and regions” panel discussion.
  • CFA Institute – Participated in a roundtable focused on materiality.
  • GreenFin 21 – Participated in the “Investment value chain live—Environmental” panel discussion.
  • JP Morgan Global ESG Conference – Participated in the “ESG in the U.S.: A new dawn” panel discussion.
  • SASB Standards Board – Participated at a board meeting on current research projects and standard setting.
  • Reuters ESG Investment North America Conference 2021 – Participated in the “Financing the 1.5o pathway” panel discussion.
  • Financial Times Investing for the Good: Europe event – Participated in the “In a fast-moving market, does active beat passive for sustainable investing?” panel discussion.
  • Association of Investment Management Sales Executives 2021 Conference – Participated in the “ESG: It’s what’s for dinner” panel discussion.

Stewardship priorities update

Corporate and market accountability

CalSTRS supports mandatory climate disclosures to the SEC

In response to the U.S. Security and Exchange Commission’s request for comments on climate disclosures, CalSTRS submitted a letter registering our support for mandated universal and industry-specific climate disclosures. We asked the SEC to require registered companies of all sizes in all industries to disclose both direct and indirect emissions. We also asked for annual reporting on their governance, strategy, risk assessment, targets and metrics for managing the low-carbon transition. We also encouraged the SEC to require companies to disclose the broad set of material sustainability information investors need, including human capital metrics. The SEC is expected to move to rulemaking quickly following its review of public comments. We view climate disclosures as crucial to investors in understanding the climate risks faced by companies. This information allows investors to identify and consider in their decisions which companies can be resilient and contribute to a low-carbon future.

SEC rulemaking agenda prioritizes CalSTRS’ top issues

Looking at the SEC’s 2021 rulemaking agenda, we expect this year will offer more opportunities to support stronger ESG disclosure and market accountability through strengthened regulatory requirements and enforcement. This rulemaking agenda could culminate in positive action in the areas we have raised to the SEC through our letters and meetings with SEC staff and our collaborative engagement with investor coalitions. In the past three months alone, our staff has participated in six virtual meetings with SEC commissioners (five of them with the SEC Chair), advocating for our stewardship priorities.

Low-carbon transition

Progress with Climate Action 100+ at Toray Industries and Phillips 66

CalSTRS leads in shareholder engagement at eight companies as part of the Climate Action 100+ initiative. Seven of the companies have already announced carbon neutrality goals, including Toray Industries, an industrial chemical product company. At the company’s 2021 financial briefing presentation, Toray Industries announced its commitment to achieve carbon neutrality by 2050. The company aims to achieve the target through expanding carbon neutral technologies, including renewable energy, hydrogen and electrification, and cutting emissions through recycling and process innovation.

The remaining company is Phillips 66. At the Phillips 66 annual meeting in May, 62% of voting shareholders supported a CalSTRS proposal asking the oil and gas company to address concerns regarding corporate lobbying activities that are inconsistent with the Paris Agreement on climate change. In supporting the proposal, a majority of voting shareholders are recommending that Phillips 66’s board of directors conduct an evaluation and issue a report within the next year describing if, and how, the company’s lobbying activities align with the Paris Agreement’s goal of limiting average global warming to well below 2 degrees Celsius. Additionally, a second proposal passed asking the company to set and publish emission targets.

Other notable events in the oil and gas industry

A CalSTRS-supported shareholder resolution was passed at Chevron Corporation with 61% shareholder support. The resolution asks the company to substantially cut scope-three emissions (those produced by the use of the oil, gas and other products it sells). Furthermore, a Dutch court ruled that Royal Dutch Shell must cut its emissions by 45% (from 2019 levels) by the year 2030. We are seeing an increase in pressure from investors and governments on companies to make meaningful cuts to emissions and prepare for a low-carbon economy.

Responsible firearms

The proliferation of ghost guns is a major concern of gun-control advocates. These untraceable weapons are increasingly recovered at crime scenes, many times in the hands of those who would not otherwise be able to lawfully purchase a firearm.

A ghost gun is a self-assembled firearm built from kits or individually purchased parts that do not have an identifying serial number. They can be made using common household tools allowing anyone, including convicted felons and other prohibited individuals, access to firearms and makes it difficult for law enforcement to understand the history of ghost guns recovered at crime scenes.

As part of our Stewardship Priorities, we have learned from firearm experts that the sale of ghost gun kits and parts is primarily conducted by small retailers, online retailers and at gun shows. We are directly engaging credit card companies that facilitate many firearms transactions to discuss the safety and risk concerns, particularly regarding transactions occurring online. No firearms retailers in the CalSTRS Investment Portfolio are involved in the sale of ghost gun kits or parts.

Bar chart showing number of ghost guns recovered between 2016 to 2020

According to the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, from January 1, 2016, through December 31, 2020, there were approximately 24,000 suspected ghost guns recovered by law enforcement, including 325 that were used in homicides or attempted homicides.