Face to Face: CalPERS CEO Marcie Frost on working under a microscope

CalPERS CEO Marcie Frost, hailed as one of the most influential women in institutional investing, talked to Pensions & Investments about America’s largest public pension system’s approach to artificial intelligence, ESG and Climate Action 100+, as well as the responsibility of women leaders supporting other emerging women stars.

Frost, who joined California Public Employees' Retirement System as CEO in October 2016 and oversees a global investment portfolio of $492.8 billion, also discussed the scrutiny that comes with running the nation's largest public pension fund, on herself as well as on its employees. “I've yet to find organizations that have the same level of personal attention put on employees,” Frost told P&I. “I've not seen that anywhere else. The turnover has simply been with the CIO position. I've got managing investment directors in the investment office…(with) combined tenure (of) over 100 years, probably.”

Frost was named to P&I’s inaugural Influential Women in Institutional Investing list in 2023 and appeared in Barron’s 100 Most Influential Women in U.S. Finance in 2021. “Women need to be more supportive of one another,” she said. “When women make it to a certain level of organization, you have a responsibility to bring others up with you. I think we can do a lot better job there.”

This is the second installment of our two-part interview with Frost. Questions and answers have been edited for style, clarity and conciseness.

Q: There's been a lot of discussion around artificial intelligence. How are you folks approaching AI at CalPERS?

A: I think there are two approaches. One would be internally at CalPERS, how are we thinking about making ourselves even more efficient, how are we thinking about having more insightful information into our investment decision processes because this predictive AI can sort through a lot of data and reach conclusions. Now you always have to have an adult oversight, or adult supervision, on the conclusions to make sure they actually make sense. But there are opportunities. We're seeing companies and venture (capital), they're taking full advantage of AI to make themselves distinctive from other VC firms or other companies.

Secondly, being able to distinguish the managers (who we are working with) and how they might be using AI — you can use a lot of informational tools, you can use a lot of technology — but unless you have the people with the right behaviors running that company and really pushing for performance and pushing for results, these are just tools that are not going to help you.

There are places that are using AI very, very well. Those will be the winners in this long term. And then, again, we are working through, as CalPERS as an employer and CalPERS as an asset owner, where do we take more advantage of this, including with the data and technology project that we are hoping to get underway for our investment office by sometime this year.

Q: Let’s shift to ESG and the anti-ESG movement. BlackRock CEO Larry Fink was very public about ESG last year. Against the backdrop of heightened political tensions, Fink said he was ditching the ESG term — but not its strategy — because it’s “been misused by the far left and the far right.” And related to ESG, could you talk about your continued work to address climate change risk?

A: Speaking of an area that I have passion and drive, this would be one of the areas for me personally as well as professionally. It is different here in the U.S. I have a lot of relationships outside of the U.S. and these types of political headwinds or "green hushing" and shushing and washing are not as prevalent in those conversations as they are when I'm here in the U.S.

The moment we start letting politics decide how we invest, then we're all in trouble. For me, we've always looked at the E, S and G in terms of risk to long-term capital formation and long-term value creation. We've always looked at it that way, from the time we started, we co-founded Climate Action 100+. That was an engagement group; we had like-minded investors, whether they were managers or owners, really working with us around data transparency. And creating that CA 100 benchmark so we had some standardized information to use as we were evaluating those risks, and so we don't see it much differently.

The only thing now that we believe that we are poised to do is with our SI 2030 plan (CalPERS’ Sustainable Investments 2030), and the enhanced engagement elements, is that we're going to have deeper conversations with some of our high-emitting companies and those conversations are around, ‘Is there an energy transition plan in place?’

And if so, how are they planning to accomplish it? How can we measure what they're doing, how they are measuring it, how can we monitor what they're doing? Over time, we may see, the team, based on that data, taking a position that a particular company is not managing their long-term risks, and we may move or weight that company differently if it's a public company or we may move away from a manager in private equity who we don't believe is really managing this.

Now, my belief, based on conversations, is that it is going to continued to be managed. People have just stopped talking about it publicly. The reason is things that you stated: those political headwinds, the fact Larry Fink got attacked pretty personally about this. Others have been publicly attacked personally about this. There have been laws in certain states that make it a criminal act to invest in ESG. ESG doesn't have a common definition so it's easy to toss that around and define it as one thing over another.

We've always defined it as, these are long-term risks, we have a fiduciary responsibility to protect the fund, to protect the members’ assets and our investment earnings on those members’ assets. This is just the next evolution of that, the accountability piece. Not that we're telling the company how to manage their business, but for us to understand how they're managing the risk, and then we make the call on whether we want to provide that capital at the same level that we have historically. That's really the enhanced engagement piece of SI 2030.

Q: Can you elaborate more on SI 2030?

A: SI 2030 is really around climate risk and it's around diversifying managers where we're providing capital. It's also finding that $100 billion in climate solutions, of which half has been allocated, and I really can't give the number right now, but there are a number of deals going through due diligence in the pipeline today that we're hopeful to be able to announce ... at least one of those deals within the next 30 days or so. It becomes harder to invest based on risk than it has been in the past, but again as a large capital provider, a long-term investor like CalPERS, we have to continue to provide that counterbalance to the markets, to the regulatory environment.

Q: Marcie, What keeps you up at night? What is at the top of your worry list?

A: Geopolitical risk. We're a global investor and supply chain issues … I think we all had a bit of a wake-up call about the dependency and supply chains. I would not want to see those become more concentrated.

And keeping our own team in a place where they feel supported and can make the investment decisions that are needed to pay these benefits for a very long period of time. A 6.8% return assumption over all the various market cycles is not an easy feat.

I spoke with my own team this morning about how do we measure whether we've got the passion, the drive and the grit, and how do we bring those attributes into the way that we hire in some of these really key positions. We can't predict the future, but we certainly need to be sitting down and thinking about what the future could look like and where are the opportunities, where are the threats, and how do we take advantage of one and mitigate the other. How do we keep this system moving forward, getting our next CIO on board, in place, feeling like they're thriving. I don't sleep well in this job just because I feel a lot of responsibility for what we do … protecting 2.2 million people's livelihoods into retirement.

I feel that personally. It's a job I decided to do professionally and a lot of that is based on my grandparents and how I was raised. I come from very humble beginnings and so that has always kept me up at night and probably will continue to do so.

Q: Let’s discuss your grandparents and how they’ve played a crucial role in your career.

A: I grew up in a very small community and had a large family that my mother married into. I spent a lot of time with my grandparents. I essentially spent the entire summer with my grandparents my entire childhood. My grandfather was a timber faller, my grandmother didn't work. My grandfather was a decorated World War II veteran. I tell the team all of these things that he used to tell me about: ‘You have to learn to take a punch!’ He didn't mean that physically, he meant you're going to have to mentally learn how to take a punch. I recall a lot of the conversations I had with him.

They had to survive on Social Security and whatever they were able to save personally. Timber falling is not an easy job on your body, but he got up every single day to take care of his family. At the end of that very long career, he didn't have an employer-sponsored retirement plan. He had Social Security and personal savings, and they saved extremely well.

But it only took one catastrophic event — and they were living on his Social Security, which did not provide a lot of options. Social Security is not meant to be the sole income provider. I don't think it's meant for that. It's going to have (to be) some combination for people to maintain buying power and to really have what we call at CalPERS an identified retirement (source). When I was going into the retirement industry back in 2000, those are the stories that came to mind when I was looking at a couple of jobs and what I might want to do next.

That's what really pushed me into the retirement and pension side, thinking about my grandfather and what they endured over time simply because they had one crisis that wiped out their entire personal savings, so it's personal to me. I feel that responsibility sitting in this chair every day.

Q: What are your thoughts on women leadership overall and what can we do to increase the number of women leaders?

A: We need more women leaders. We started this Pathways for Women event back during COVID-19. I remember throughout the first year sitting in these Zoom meetings, where more often than I would have liked, I was the only female in the room. You have to have more balance, whether that's in the boardroom, whether that's in your C-suite. You have to have balance whether that is gender, whether that is ethnicity, race, LGBTQ. You have to have people with different backgrounds and different experiences and women's pathways tend to be quite different than their male counterparts.

I know my pathway's very, very different than anyone else who sat in this seat. You've got these people who are motivated, you've got these really smart women who just have not had equal opportunity because of the way that a job was written. And women tend to excuse themselves if they don't feel like they've got a 100% of it, where often our male counterparts say, oh, I've got 70% of this, I'm good. I'm going to apply for that.

We can remove ourselves from consideration naturally. We need to provide better support networks. That was part of this thinking around Pathways is to have women … It's the first woman in that particular occupation: ‘What/how did they get there, who were their allies, who were their sponsors, what do they think were their own behaviors that really allowed them to be successful in what had been a traditionally male environment?’ Those stories have been very impactful, very powerful, you can feel that energy in the room. We're looking forward to hosting that again in August.

We need to be advocates for more women, and I'll end this by saying: Women need to be more supportive of one another in this. When women make it to a certain level of organization, you have a responsibility to bring others up with you. I think we can do a lot better job there.

Q: I ask this of all of my Face to Face profiles: What is the untold story of CalPERS?

We are different. I know a lot of our stakeholders, sometimes our board, our members like to compare us to our sister fund (the California State Teachers' Retirement System). That isn't always a direct comparison. What happens at CalPERS is really quite different. This public nature, this transparency. We appreciate scrutiny. I have no problems interacting on why we made a business decision, but I've yet to find organizations that have the same level of personal attention on employees who work here. I've not seen that anywhere else, and that does take its toll, it takes people off the game, makes people a little more afraid of risk-taking.

The story is we've got this amazing group of employees here who are very much focused on our mission. Our member satisfaction rate is extremely high, our stakeholder satisfaction rate is extremely high. We've got a great board. I've got 12 board members who are really aligned and focused on this long-term mission. There is a bit of an untold story about what it means to be at CalPERS vs. essentially any other institution anywhere.

The turnover has simply been with the CIO position. I've got managing investment directors in the investment office. I don't know what their combined tenure is but it's over 100 years probably. You've got Dan Bienvenue here 20 years, you've got Arnie Phillips who's been here over 30 years. Jean Hsu and Sarah Corr. They’ve been here for a very long time. There isn't this chronic turnover in the investment office, there is this chronic turnover in the CIO. I think we really need to think about the attribution to that and find ways to help support that CIO position in the CIO community, but also the communities that operate around us.

Q: And what is the untold story of Marcie Frost?

A: I've been criticized because my path is different. I don't have a formal college degree, but I had this incredible career in Washington state. I spent 30 years there before coming to CalPERS. I started as a typist. I took typing classes in high school, took shorthand classes in high school, I worked during high school. I forfeited all my electives, so that I could go work in this real estate office. Just working from being a typist to, in 2013, the incoming Gov. Jay Inslee appointed me to be on his Cabinet. He didn't do that because I was a typist. I had worked other positions by that time, and I was actually at the retirement system by that time.

People wonder like, ‘How did she do that? Why did the CalPERS board hire this person who doesn't have a formal college degree?’

What I heard from the 13 who hired me — of which only one is remaining, Theresa Taylor is the only remaining board member who hired me seven-and-a-half years ago — it's the combination of being focused on the members; it's how I look at team engagement and really supporting our employees, being efficient. We're a trust fund, we have to be efficient with the assets that are entrusted to us, being that reliable partner, and these are things I've told the team from Day One. Being a reliable partner to all our stakeholders, being accessible. They may not always agree with us, but we're going to be accessible to them. We're going to share ‘our why.’

I don't think this job is about me. It's about me to the extent that it has my name as its head, but the organization, there are so many wonderful stories about our team and the people who work here and why they work here. That's why it gets me up in the morning to come to work. I love what I do.

I’ve told the story before, but this is what allies and sponsors and advocates do for you. Once I got the job here … Steve Hill, who was my direct leader at the time (at Washington State Department of Retirement Systems) said, ‘OK, so now you got the job, now what are the next 180 days going to look like?’

He gave me this book, and he said, ‘On this date, you're going to drive to Seattle, and I've gotten a group of individuals that you're going to share your 180-day plan with, and they're going to give you feedback.’ That group became really important to me my first two years on the job.

I would contact them. I had former Gov. Christine Gregoire, who I have a ton of respect for, and another former head of Weyerhaeuser, some healthcare industry leaders, some labor leaders in King County, who all took it upon themselves to use their time, these gifts that they gave to me. That cohort was really important to me in my first two years, so there are stories like that that people don't know.

I didn't graduate high school and then become the CEO of CalPERS. It was really this journey of working very, very hard and prioritizing where I spend my time, who I spent my time with, which was the most important thing. I always worked a little harder than the people around me.