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 first quarter, 2022
Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.
Persistence is paying off when it comes to engaging Duke Energy and Dominion Energy.
CalSTRS, as part of our commitment to the investor coalition Climate Action 100+, has led efforts to engage the two large utility companies since 2018. As lead engager, we continually encouraged both companies to address climate change and align their business models with a net zero emissions future.
In February, the two did just that.
Duke and Dominion separately announced they would strengthen their commitments to achieving net zero emissions across their operations by 2050 or sooner. Net zero means a company does not contribute additional greenhouse gases to existing global emissions. CalSTRS made our net zero portfolio emissions pledge in September 2021.
Duke and Dominion intend to achieve their goals by adding a portion of Scope 3 emissions—the emissions generated by their customers or suppliers—to the total greenhouse gas emissions covered by their commitments. Both companies are seeking to reduce emissions not only in how they produce electricity but also in how they provide electricity to their customers, which is very significant.
In addition, Duke agreed to accelerate the elimination of coal plants from its portfolio of power plants. By 2035, it will not operate any coal-fired power plants. Coal emits about twice as much carbon dioxide as natural gas, according to the U.S. Energy Information Administration.
Since we started engaging these companies, our staff sent a loud and clear message: Companies need to take climate change into account when developing business strategies. This is essential to create the long-term value that helps us ensure a secure retirement for CalSTRS members.
Staff wrote letters and talked to corporate management and leaders, building trust and understanding. In November 2021, we went a step further. Working with our fellow global investors, we drafted shareholder proposals that specifically called on each company to address risk related to climate change, including adding Scope 3 emissions to their net zero pledges. Ultimately, both proposals were withdrawn as engagement successfully led to both companies taking action and responding to investor requests.
Stewardship priorities update
ExxonMobil makes first net zero commitment, but there is still work to be done
In 2021, CalSTRS played an instrumental role by using our influence and proxy votes to elect three new directors with significant experience in the low-carbon transition to the ExxonMobil board. In January 2022, ExxonMobil announced its first pledge to achieve net zero greenhouse gas emissions by 2050.
While this was a significant step in the right direction, and a welcome change in direction, ExxonMobil’s initial pledge only covers greenhouse gas emissions from its own operations (known as Scope 1 and Scope 2). The pledge did not cover Scope 3 emissions—by far the largest category of emissions for an oil and gas company as they include emissions created using a product the company makes, such as drivers using gas produced by ExxonMobil.
Other U.S.-based oil and gas companies, including Phillips 66 and Chevron, have recently committed to reducing some of their Scope 3 emissions, following many of their European competitors. While the overall sector is accelerating its targets for reducing emissions, global investors, including CalSTRS, continue to push for additional progress.
CalSTRS keeps up pressure for regulators to connect executive pay with corporate performance
In March, CalSTRS engaged with the U.S. Securities and Exchange Commission to support a proposed rule meant to improve transparency and comparability in executive compensation plans. We worked for years to support this idea, which was first proposed by the SEC in 2015 as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Aligning executive pay with corporate performance is imperative to ensure executives have the right incentives for managing a company in a way that promotes long-term value beneficial to shareholders like CalSTRS.
California increases corporate board diversity, CalSTRS wants the rest of the world to follow
A new report released by the California Partners Project demonstrates increased gender diversity on the boards of publicly traded companies in California. CalSTRS supports this progress and is seeking similar improvement on the national and international stage.
We advocate for diversity in corporate leadership as part of our effort to ensure the companies we own maintain their long-term value. Companies with diverse leadership have better decision-making processes, documented in multiple academic studies, because people from different backgrounds bring fresh perspectives and new ideas.
A state law (SB 826) that requires California public companies to have more female directors led to some dramatic changes, according to the California Partners Project report:
- When SB 826 was passed in 2018, one-third of California’s public companies had no women directors. Now only 2% do not.
- In just three years, women have gained nearly 1,100 board seats. In 2018, there were 766 women on California’s public company boards, and as of September 2021, women held 1,844 seats.
- Today, women hold 29% of director seats, compared with only 11.5% in 2018.
A similar law (AB 979) that mandated companies to have members of underrepresented communities on their boards was struck down by a California judge in April. Despite this legal outcome, we remain steadfast in pushing for board diversity. During the upcoming proxy season, we will hold directors of laggard companies accountable for their inaction. For example, we will vote against the entire board of directors of companies that do not have at least one woman director.
CalSTRS aims to reduce ghost guns purchases
At first glance, credit card companies may not seem like they would play a role in the unregulated sale of firearms. Unfortunately, some do. Some are facilitating the purchase of “ghost guns,” a dangerous new type of weapon that has no serial number, no records and is readily available from online vendors without the purchaser requiring a background check. People who are not allowed to own guns—such as convicted felons and minors—can easily buy them.
At CalSTRS, promoting a safe and responsible civilian firearms industry is a stewardship priority because of the potential risks to society and the companies we own. We are zeroing in on ghost guns because financial, regulatory, reputational and legal risks are especially high.
Ghost guns clearly pose a threat. About 24,000 of these guns were found by law enforcement at crime scenes from 2016 and 2020, including 325 at homicides or attempted homicides, according to the federal bureau of Alcohol, Tobacco, Firearms and Explosives.
Ghost guns can be put together at home by people who buy separate parts from manufacturers or weapons’ parts kits. They are most often sold by small stores online and purchased through credit cards.
We are working on this issue with a coalition of investors that support the CalSTRS-led Principles for a Responsible Firearms Industry. As part of that effort, we asked the credit card companies we invest in to assess their policies related to transactions involving ghost guns and report to shareholders.
The Connecticut Treasury, a member of the Principles for a Responsible Civilian Firearms Industry coalition, shared our research with the Rhode Island Treasury and co-filed a shareholder proposal with MasterCard asking for similar disclosures.
The U.S. Securities and Exchange Commission is reviewing a challenge from MasterCard to determine whether the proposal will go to a vote of shareholders at the company’s annual meeting. But even if it does not go before shareholders, the proposal is shining a light on a critical problem for society and a large risk for companies that are involved.