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CalSTRS looking to manage ESG index strategies internally

Move follows search for up to 10 managers in ESG-focused equities portfolios

Christopher Ailman
Christopher J. Ailman

CalSTRS plans to expand its environmental, social and governance investments to include running new internally managed index equity strategies, said Christopher J. Ailman, chief investment officer of the West Sacramento-based $193.2 billion pension fund.

Mr. Ailman said in an interview that he sees the pension fund managing at least two separate smart beta-type equity strategies, one that could be tied to a governance index targeting companies implementing or that have good governance practices, and a second that could be tied to combined ESG factors.

Mr. Ailman said his staff will examine commercially available indexes that could be licensed to run the strategies. He said the staff has not yet set a timetable for implementation. Mr. Ailman said initial commitments to the strategies might be about $275 million to $300 million, but they would grow over time if they are successful. About half of CalSTRS' $109 billion equity portfolio is managed internally.

The new strategies come on the heels of CalSTRS' announcement Monday that it had issued an RFP for up to 10 managers to run ESG or corporate governance equity strategies.

The California State Teachers' Retirement System has around $3 billion invested with managers in corporate governance or activist strategies and another $1 billion invested with managers who use an ESG slant for their strategies.

Mr. Ailman said those combined allocations could be increased by several billion, but a lot will depend on the proposals submitted.

“We want to see who is out there,” he said. “In the long run, we think these managers can outperform the market.”

In July, the CalSTRS board committed to invest $2.5 billion in a low-carbon index strategy as part of the larger plan to invest its stock portfolio in companies with more sustainable business practices. Most of the index strategy is expected to be managed internally.

The initial $2.5 billion allocation is just a fraction of the pension fund's approximately $100 billion equity portfolio. But Mr. Ailman said CalSTRS will invest a larger percentage in the index strategy if the low-carbon index can outperform the MSCI All-Country World index.

The CalSTRS board plans to outline guidelines on future ESG and corporate governance investments as it develops its first set of investment beliefs. It is expected investment staff and the CalSTRS board could start finalizing those beliefs by early next year.

The plan also includes increasing the allocation to so-called sustainability managers — which invest in alternative energy companies or companies that are committed to sustainable environmental practices — to $3 billion from $1 billion.