A California bill that would require the two largest public pension funds in the U.S. to divest from fossil fuels may be on hold but it's not dead yet, said Marcie Frost, CEO of the California Public Employees' Retirement System, Sacramento.
"It will likely come back" in the next legislative session, Ms. Frost said Thursday in a talk with Pensions & Investments at the TIDE SPARK 2023 conference in Dana Point, Calif.
The bill's author is "very committed," Ms. Frost said.
The measure would mean that the $458.9 billion CalPERS would have to shed about $9.4 billion in fossil fuel holdings, which would be its largest-ever divestment, and as of Jan. 1, CalPERS would no longer be able to invest capital in fossil fuel-related assets, Ms. Frost said. CalPERS would also lose the opportunity as a shareholder to engage with companies to push them along on their energy transition journeys, Ms. Frost said.
At a June board meeting, Ms. Frost told members that the divestment would result in an estimated 4.4-basis-point hit to returns per year to the plan over 10 years. Over a 20-year period, CalPERS estimates that fossil fuel divestment would result in a 3.6 basis points annual decline, amounting to $327.6 million per year.
Officials at CalPERS as well as the $309.3 billion California State Teachers' Retirement System, West Sacramento, which also would have to divest from fossil fuels, have taken part in "education tours," speaking with legislators and explaining why divestment is not the right way, Ms. Frost said during her talk at the conference with Nikki Pirrello, P&I's president and publisher. The two pension funds oppose the bill.
The bill has so far passed the Senate and next year the bill will pick up where it left off in the state Assembly's Public Employment and Retirement Committee. In the interim, the committee members are expected to engage with labor groups as well as CalPERS and CalSTRS about the bill, Ms. Frost said.
As a two-year bill, the measure will not need to be reintroduced.
Ms. Frost also decried the politicization of ESG, saying it doesn't fit with CalPERS' role as a long-term investor that makes sure its investments reflect the full measure of risks and returns.
"There's no common definition of environmental, social and governance factors," she said. "It's being weaponized."
One issue that is very important factor to consider in making investments is private and public companies' human capital management. Most recently, on July 12, Schroders in cooperation with CalPERS announced a framework to give investors information on how companies manage their human capital.
Ms. Frost said that the new effort is very similar to work CalPERS has been doing with alternative investment firm Carlyle Group called the ESG Data Convergence Project. The project, which launched in September 2021, aims to advance an initial standardized set of ESG metrics and a mechanism for comparative reporting. It now has more than 325 general and limited partner members worth a total of roughly $27 trillion in assets under management from an initial $4 trillion.
Companies that manage human capital well, which includes creating an equitable incentive structure, paying attention to on-site job injuries and prioritizing their employees get better results and provide better returns, Ms. Frost said.
