Episode 99: Anne Simpson, CalPERS

Financial Services

Apr 16

Today's guest is Anne Simpson, Director of Board Governance & Strategy at CalPERS.

As the largest public pension fund in the U.S. and one of the top ten private investors globally, CalPERS (The California Public Employees’ Retirement System) covers the retirement and health benefits of California’s public employees, which include firefighters, janitors, teachers, among many other workers. Public employees, with some support from their employers, pay into those benefits and have contributed to a fund which has grown to $400 billion to date. Of the $24 billion paid annually to pensioners, 60 cents of every dollar comes from investment returns, making it critically important that CalPERS makes sound investment decisions and mitigates risk in its portfolio.

Anne’s career at CalPERS spans over a decade, beginning as a Senior Portfolio Manager of Global Equity. She went on to become the Investment Director of Sustainability, overseeing CalPERS’ ESG strategy across a $330 billion fund. In her current role, she ensures governance among the boards of CalPERS’ portfolio aligns with the strategic priorities set forth in its “Pension Beliefs.”

It was great speaking with Anne who was able to articulate the impact large shareholders have on corporations and their governance, as it relates to the fight on climate change. It was also fascinating to hear how a fund, taking investment positions with a hundred-year time horizon, feels the urgency of addressing climate risks in its portfolio today. I hope you enjoy Anne’s deep perspective.

Enjoy the show!

You can find me on Twitter @jjacobs22 (me), @mcjpod (podcast) or @mcjcollective (company). You can reach us via email at info@mcjcollective.com, where we encourage you to share your feedback on episodes and suggestions for future topics or guests.

In today's episode, we cover:

What is CalPERS, its origins and its mission?
How its priorities and concerns about climate change is rooted in its fiduciary responsibility to pensioners current and future
Anne’s career at CalPERS and early work focusing on corporate governance
What CalPERS learned from the 2008 financial crisis and how it informs its perspective and priorities regarding climate change
CalPERS’ ten “Pension Beliefs” that define its investment strategy
How being a longterm investor is both an advantage and a responsibility
Avoiding the curse of short-termism and how simply following the money isn’t sufficient
How CalPERS views types of capital beyond the financial
How Anne developed a strategy for sustainable investment
CalPERS’ top three sustainability factors (diversity & inclusion, demographics and climate change)
The role CalPERS plays as a climate change advocate
How it leverages its shareholder position to influence companies to be in accord with The Paris Agreement
Research done to better understand the portfolio’s contributions to emissions
Work performed to assess climate-risk among CalPERS’ assets
The fund’s emissions commitments over the next thirty years
The double-edged sword of divesting from companies not meeting climate goals

Jason Jacobs: Hello everyone. This is Jason Jacobs and welcome to My Climate Journey. This show follows my journey to interview a wide range of guests to better understand and make sense of the formidable problem of climate change and try to figure out how people like you and I can help. Today's guest is Anne Simpson, Senior Portfolio Manager Investments and Director of Global Governance at CalPERS. CalPERS is the largest public pension system in the United States with approximately 300 billion in global assets. Anne is leading CalPERS sustainability project to integrate environmental, social, and governance, also known as ESG factors across the total fund, and is the first person that I've had on the show from a big pension fund and she did not disappoint.
We have a great discussion about CalPERS work. When and how ESG first started becoming important to them as an organization, where they are now in transitioning their portfolio of holdings to clean, how they're going about it, what barriers are holding them back, how Anne thinks that they can move faster, and also just her advice for how people like you and I can help. Without further ado, Anne Simpson, welcome to the show.
Anne Simpson: Thank you for having me.
Jason Jacobs: Well, thank you so much for making the time. I'm really excited for this one. This is actually, I want to say it's a hundredth episode, or if it's not a hundred it's right around there, but this is the first one I've had with a big pension fund or one of the biggest pension funds, and it's a real honor to be able to have this discussion today.
Anne Simpson: All right. Well, count me as a humble servant of a very big pension fund. That might be the way to put it.
Jason Jacobs: Well, maybe for starters, since I'm sure most listeners are familiar, but in case anyone isn't, maybe talk a bit about what is CalPERS?
Anne Simpson: So CalPERS stands for the California Public Employees Retirement System, and that was set up nearly a hundred years ago to take care of state workers in their old age. CalPERS has grown over time to now include almost 2 million people, and their day jobs could not be more varied. We cover the judges of California, but also the janitors that clean schools and universities, environmental scientists, firefighters, university professors, people who clean up the rivers and streams and trim the trees and look after the physical environment of California.
So these nearly 2 million people rely on CalPERS for two things. One is for their health care, and the other is to provide them with a basic income in retirement. And the way that we do this is we receive contributions from those nearly 2 million people. They have money deducted from their paycheck every week or every month, and then their employer also puts money in and unfortunately, that is not enough to cover what people need in their old age for the many years they might live. So we also invest the money that we receive from the workers and from their employers. And right now, for every pension dollar that we pay out, about 60 cents comes from investment returns. So that explains really why CalPERS is probably known for its role in finance more than for its role in paying pensions or even paying health benefits.
The accumulation of all that money over many decades has just topped $400 billion. It'll bounce up and down a bit with market volatility, but it's an enormous sum of money and it makes CalPERS one of the top 10 largest pools of private financing. So that's good news for the employers; it's good news for the workers because it means we are building out this pot of money to help contribute towards the pension and also to sustain the health benefits as well.
But it also means that CalPERS is influential in the financial markets just by virtue of our size. And also because we're a pension fund, we're very long term. So when we start looking at issues like, say climate change, it really is because we have not only one generation to think about, that's our current pensioners are retirees, but we also have an obligation to think about the people just joining this game who may not retire for another 30 40 or 50 years.
So even if the door's closed in the morning, we said that okay, CalPERS is being shut down. We would have to be investing in paying pensions out for probably the best part of a hundred years. Which is what officially gets called our liabilities. That's all the people to whom we owe a pension or health benefits and their dependents.
People in their family or people who are relying on them. So once you've got this very large pool of money, it means we're globally invested. We're too big to hide anywhere. And once you've got nowhere to hide, you need to deal with systemic issues like climate change. And then the other dimension is not just being too big to hide for safety anywhere in the world because of our very long term investment horizon issues, which accumulate over decades.
And even, over generations as something that CalPERS really has to pay attention to because it's going to impact our ability to pay pensions, which is our prime duty.
Jason Jacobs: And then what about your purview within the organization? What are you thinking about as, I believe it's the director of global governance. Did I get that right?
Anne Simpson: Once upon a time, that was my title. I've had several. I'm in my third role at CalPERS. I first joined CalPERS just over 10 years ago. As a senior portfolio manager in our global equity asset class, and I was responsible for what was then called our corporate governance program. So what does that mean?
Governance is a rather odd word. Well, if you think about government, that's how that idea gets described in the political sphere. We understand what government is. It's where we have a system for ensuring decisions are made for the exercise of power and for ensuring accountability. And when we say corporate governance, we essentially mean the same thing, but applied to companies.
Why is that important? Well, because companies themselves have become so dominant in the global economy. And even compared to when I was a child, you cannot get yourself out of bed and to your place of work without bumping into probably a dozen or more big companies, whether it's companies providing you with water from your tap, coffee, your phone or internet connection.
The call that you might get in, bus if you're lucky, your bicycle. Every single element of our lives. Including, maybe any vitamins or pills you might need to take along the way to get you to work and keep you feeling well. So the rise of the corporation has really meant that corporate governance has become an extremely important issue.
So that was my first job, was thinking about what CalPERS could or should be doing as a part owner of companies where we invest money. And then my second job came several years later, and it was really, as we were bumping into a whole range of issues that didn't fit in a neat and tidy way into corporate governance thinking. We went rather beyond that, and it was in the wake of the financial crisis that CalPERS really went into a period of quite deep reflection about, well, what is investment all about? What are these financial markets all about? CalPERS went into the crisis with, if you like enough money in the cookie jar, we had 101% funding. That means if we owed $100 we had $101 in the kitty to pay. We had a little cushion. We came out of the financial crisis with only $65 in the cookie jar. And we still had $100 to pay because the pensions and the health liabilities, what we owe, it hasn't changed. And if anything, it's got biger because of the demographics of the baby boomers going through the system.
So what did we learn out of the financial crisis? Money that's here today and gone tomorrow. It's very alarming experience to go through. And when you've got nearly 2 million people relying on that money for their health care and for their pensions, this is a crisis of gargantuan proportions. So we, with our board, went into this period of reflection to really think about, well, where do we think investment returns come from, and how do we understand risks or some new understanding of risk given what's just happened to us and the beating that we took along with millions of others in the U.S. and around the world. So we decided that what CalPERS needed was the set of investment beliefs. If you like a credo, what is it that we.
As a pension fund actually believe about where money comes from and what the risks are that we need to address and what's our purpose. So over a two year period, we developed a set of investment beliefs. It was by a halting process is quite difficult if you think, if you get a financial organization our size and say to everybody, okay, what are the 10 things you can all agree on?
Apart from which day of the week it might be? How is that going to guide what you do in investment? So these 10 beliefs evolved for a process of consultation. And we also had a lot of stakeholder input. We had open meetings where stakeholders could come and talk about the issues that they thought were important and should be included.
So these times investment beliefs, you can find them on the CalPERS website and they were adopted in 2013 and they've been looked at and reviewed a couple of times by the board, but they're serving as well. And the several ideas in those investment belief, which transformed the approach that we have to finance.
One of the beliefs, number two states that being long term is both an advantage and a responsibility. So the advantage obviously is that you should be able to ride out volatility in the market. You should be able to invest in promising opportunities that might not bear fruit for some time, that's all good.
But the responsibility that we identified is that the markets themselves do not operate in that way. Or if they do, it's a sort of rather chaotic version of accumulated short terms, which in itself doesn't necessarily add up to something longterm. So we call out that we feel we've got a responsibility to engage companies.
Investment managers, but also policy makers on this topic of making sure that we don't suffer from the curse of short termism when in fact our liabilities are very long. So that was quite a foundational idea. Another foundational thought in these investment beliefs was number four. And when we say longterm value creation comes not from managing one form of financial capital, which is traditionally thought of as the job of an investor.
I have this money. Where do I put it? To make sure that when it comes back to me, there's more, not less than I started with. It was a basic investor proposition. But what we recognized is that financial capital is only part of the story, and that we also need to be thinking about human capital. And it's an obvious statement if you've ever thought about life or staring out of the window, how do things get done? People are involved at every turn. But the third form of capital that we identified was physical capital, and we are recognizing both the importance of natural capital, as economists would call it, which is our ability to rely on supplies of water.
Natural resources, not just water, but things like rare earths, even agricultural land and extending that out. You can even start thinking about things like the weather, to be blunt, if the weather lets you down, it's a whole cycle of investment that just falls apart. We see that on an increasingly regular basis.
We now have this investment belief that says longterm value creation comes from the management of three forms of capital, financial, human, and physical. And to be blunt, this is really just old fashioned economics, which is how I got into the whole world of investment in the first place. When you're taught economics, your theory of the firm or the company as it might be called these days, really involves looking at fixed assets, labor and capital.
Your social is financial capital. But what we were doing for CalPERS in reframing this with saying simply following the money isn't going to be enough. We've actually got to start thinking about human capital and physical capital. So I know around that time, the acronym E S G became popular, but it's not something I think that ever has suited us very well because ESG has got one letter missing for a pension fund and that F for finance.
And there's an assumption that you can be a specialist in E or S or G or maybe all three together, and somehow that's going to enable you to make investment decisions. And I think for a pension fund, you have to start off with what's the point of at all? We're here to pay pensions. So the financial side of what we're doing has to be primary, and then we have to think about all of these sustainability issues through that lens of having what gets called as a fancy word, fiduciary duty. In other words, legally CalPERS has a duty to look after the interests of its pension fund members above anything else, and that both protects the fund from all kinds of interference.
But it also means that we have to be thinking about paying pensions now. We pay about $24 billion in cash a year, every year out in pensions at the moment. And we also have to be thinking about those members. Just leaving school, just leaving college, who are joining this scheme, who won't retire for another 30, 40, 50 years.
So we've got to be able to be short term and longterm at the same time. The other idea in the investment beliefs, I'll just touch on. With an idea about risk, reframing risk. In the same way that we've reframed returns, value creation, we've got investment belief number nine, if you'd like to follow along looking at these on the website, this investment belief says for CalPERS risk is multifaceted.
No, we don't mean this in a corny way. You know, like love is a many splendid thing. Risk is very multifaceted for CalPERS. What we're talking about is the fact that the traditional ways in finance of measuring risk don't capture all the risks. To which we are exposed. So for example, tracking error, that's one typical way of measuring risk.
Volatility is another way, and we, like many other investors, have what we call a risk budget. Like how much are we willing to tolerate by way of risk on those sorts of measures. But if we look more broadly, we obviously are exposed to risks that can't be tracked with those tools. And the examples in the investment beliefs.
On risk that we provide include climate change. Demographics. Obviously what's happening for our employers is extremely important because they have to put in a fair chunk of the money that's needed to keep the pension fund, the float. So in other words, we have an interest in understanding what's happening out there beyond.
The spreadsheets that capture the financial dimension of what we're doing. Because we're so large, and we're so long term, we are impacted by and also have the ability to influence the various factors that can make a difference on our investments. So I was involved in the work around developing these investment beliefs and, at the time, we were also interested to know what is it that really matters.
We'd sort of done a counting exercise with the help of a consultant masters because there was a lot going on on environmental issues and labor issues. We found nothing short of 111 different things going on at CalPERS, which had some connection to this human capital and physical capital agenda. So what we did next was a review of all the evidence we took on a crowd of academics.
Ably led by Robert Jackson at Columbia who you might now recognize cause he's just stepped down as an SEC commissioner and a finance professor at UC Davis called Bob Baba. And they chaired a group of academics who reviewed, I think it was over 800 papers for us. And the idea of this was, is that evidence that one thing matters more than another.
We have to, if we think we're going to pay attention to certain things. In financial, human, and physical capital. They're not just mean. We just swim around in all of this and hope for the best. Well, we didn't. We want you to be strategic and identify what it was that really mattered to a pension fund, because obviously that gives us certain obligations, certain timeframe, certain investment objectives that might be different from someone else or another organization.
So what we found in this review of evidence was, first of all, that governance, the idea of how companies are governed is fairly well connected to their financial performance or certainly to everyone's satisfaction. In other words, if a company is badly governed, we can expect it to be badly performing.
And this might all sound very obvious, but these insights were fresh at the time. The other thing that we found is that environmental issues were clearly important on occasion, but it was very hard to draw broad market wide conclusions because there was such a poor set of data. In other words, the kinds of information that you could gather in on what companies were doing was more to do with say, the state of environmental regulation than it was to do with what companies have to disclose in their report and accounts.
So you would have a little bit of a patchwork quilt of information and out of that try to draw some conclusions. And then on the issue of human capital, it was even more difficult because there was even less available. There was plenty of rhetoric and warm words, hard to find a company. But it doesn't say our people are our greatest asset.
But then you would have thought, if it is true, people are their greatest asset. You'd have a bit more information about what was going on. But anyway, we accepted that it was the state of the art for what it was, more art than science. But out of that, and this really then explains my second job at CalPERS, which was as the investment director to develop a strategy on sustainable investment. So what we did was decide that we had to take account of our size of our longterm investment objectives. Also, the fact that in order to regain the lost ground during the financial crisis. The other time it was more than 7% on the investments, which is a huge constraint.
If you look at it now, the one of the top 10 funds GPIF the government pension investment fund of Japan works with us. We worked together with them on many things. Their target rate of return is less than 2%. And they don't have any current liabilities. That means they don't have to pay out $24 million a year in cash cause you have to pay people's pensions in cash.
And there are buffer funds, which means they're there to kind of top up the government social security system. And they expect that the money will be needed in about a hundred years. So all credit to the Japanese for thinking way ahead, but that means the job of the chief investment officer, Hiro Mizuno, just about stepped down and he's done wonderful things on sustainable investment that he's had room for maneuver that we don't have because he's got to hit 1.9% rate of return and doesn't have to pay out any cash today or this year or next year.
Whereas CalPERS has to hit 7%. And we have to pay out close to $25 billion in cash every year. So starting with what's the point of view at all? Why are you making investments? Well, then explain what the strategy is that you can develop and also what issues you focus on. What we decided were two sort of parts of the strategic plan. There's a five year plan,
we're halfway through it, the board adopted it in 2016. I think we were one of the first pension funds in the world to do such a thing, or at least we won a prize for doing it. I now make an apology to whichever other pension funds were being overlooked and maybe got there before us. But anyway, we won an award for innovation.
For putting together the strategic plan and what have we got on the strategy? First thing we've got is six priorities out of the many, many, many options in front of us, and we took an issue with one issue for each of the three forms of capital. So on financial capital, we said our focus is going to be alignment of interest.
And the idea behind that is unless you have alignment of interest, you will be much as it have fallen. His money are soon parted, but unless you have alignment of interest, you're going to have all kinds of ways that you lose money either because fees are too high. Time horizons are wrong. That can be all sorts of ways that money's money gets squirreled out and companies rather than paid back to the shareholders.
Anyway, alignment of interest, and we focused first on private equity because that asset class as particularly challenging in terms of the limited circle of limited partners are both protected by that role. As you know, you're in Silicon Valley, you know how this whole works. But also getting alignment of interest or comfort that you have alignment of interest is tricky because you don't have a line of sight into the portfolio. Second issue was human capital, and there we felt that there was reasonable evidence to demonstrate something that was also very close to CalPERS core values, which is that diversity and inclusion are signs of a high quality board and high quality boards oversee high performing companies.
And so we set ourselves some targets, particularly around improving board diversity, and we've had a fair amount of success with that. Then the third issue was climate change, and I'll explain in a bit. Perhaps more about what we're doing on climate change because it's a flagship area of work for CalPERS, and we have just elevated climate change to be one of the three top risks facing the organization, which I can say more about in a minute.
We have three crosscutting themes, not topics, if you like. One was research, we, in other words, we knew we had to keep looking at research and we did repeat the review of evidence couple of years later and to another thousand papers, which was since published shows it's a very rapidly growing area of work.
The next issue was manager expectations. We thought we needed to talk very clearly what we expect from our managers, both internally and externally on these issues. And thirdly was that we would push very hard for the inclusion of reporting on these topics that we'd identified as relevant for longterm risk and return.
And that meant that we would be raising a voice with regulators and also working on voluntary best practice models as well. But ultimately, we genuinely think until all of this tracking of performance on sustainability factors. Until that's out in the market, we're going to have mispricing of risk.
We'll have poor decision making by investors because it's a question at the moment of how long is a piece of string? You don't know what's good, bad, or indifferent. When you've got these voluntary measures for reporting, you get a lot of false positives. The old example in a statistics class would be sign of his times.
Do you beat your wife? And surprisingly nobody does, even though the evidence is to the contrary. So if you have that kind of voluntary reporting without any auditing or validation, you're going to get a lot of false positives, or maybe is the better example. Every Lake Woebegone where all the women are strong and the men are handsome and every child is above average.
We've got, I kind of like Woebegone problem with corporate reporting at the moment on sustainability factors because we don't have standards and we don't have requirements and we don't have auditing.
Jason Jacobs: And you mentioned that climate risk is one of the top three risks facing the firm. What type of climate risk are you seeing and how is that risk allocated?
Anne Simpson: I should say climate change for CalPERS poses risk, but it also poses opportunity. And it's managing to mitigate or make sure you're rewarded for the one and at the same time deploying capital into those opportunities. So what we've said in a strategic plan on sustainable investment is that we've got three channels.
The tackling the priorities that we've identified, climate change being one of them. The first is that we can be an advocate. In other words, CalPERS can partner with other big investors and call on regulators to do the things that are needed to make the market work efficiently or more efficiently than it does at the moment.
So on climate, the two issues that we're focusing on is one, climate risk reporting. And making that mandatory and standardized and we're hopeful that this is going to become a recommendation out of cop 26 back in my home country. It will be in the UK in November, 2020. That will probably move more quickly through the international accounting standards known as IRFS.
We have a different path mapped out in our thoughts about how it will work in the U.S. The SEC has appointments which are made on a party political basis in the United States. So the role of the regulator in the U.S. is more influenced by party politics than perhaps some other markets on that affects what's possible on climate risk reporting in the near term.
Jason Jacobs: But you said that you have a a hundred year timeframe, and that climate risk, if not addressed, will affect returns. And so I'm just wondering in what way will it affect returns? Why is it a threat to those returns in a a hundred year timeframe?
Anne Simpson: Well, it's affecting returns now. I mean, you'll have seen PG&E's bankruptcy. You'll have seen Peabody Coal collapse. So, as I said, we're both short term and long term, short term, because we have to pay pensions now every year, and we're longterm because we will have pensioners for the next hundred years. So the approach that we're taking on climate change, I'll just explain. So the first is the lead rules of the game.
We want carbon pricing subsidies for fossil fuels removed, and we also want mandatory risk reporting because right now the market's getting a lot of false positives. So that's the advocacy track. The second is engagement, and that's where we can use our ability as an owner of companies to team up with others and, using that role as a shareowner, call on these companies to get their strategies in line with the Paris goals.
Why does it matter to us? Because we read the science and pay attention to it. The science tells us that there will be tremendous disruption, transition risk as it gets called, where companies can't adapt as the economy and society changes around them, but also physical risks, which is where companies as well as communities and wider-society will be affected by what's happening through, for example, wildfires, drought, rising sea levels, and it's already now quite evident that these changing weather patterns are already costing money by through insurance, through the physical impact on buildings, efforts to retrofit assets.
You can add all that up already see with us an enormous amount of financial impact. Nevermind the human suffering. We've got a third track in our strategy, which is called integration. And that's where we take what we understand through the science and we use that to look at our portfolio and particularly when the assets, so one of the things we've done is what's known as carbon footprinting. I don't know my footprint of it came from, but anyway, it's essentially working out how much carbon or greenhouse gas emissions, carbon equivalents as well, like methane and so forth. How much is actually coming out of the investments that you hold in your portfolio?
And we've done a carbon footprint for about 90% of our portfolio so far, which I think puts us ahead of many. But what we've found out of that process is, although this is the source of the emissions, which makes sense of us calling for the regulation, it makes sense of us doing the worker engagement. It doesn't tell us where our assets that we hold are going to get hit hard by the physical risks.
So another project that we have, we've cleaned up with Woods Hole by one of our external managers, Wellington. Well, what we're doing there is plotting zip code risk, as we're calling it, because everything going on in climate change happens ultimately to people, but it actually happens in a place. So place is everything.
So what we're looking at is the probabilities of severe impacts from climate change on a zip code that's connected to our assets. So if we will be able to plot, what the science tells us is the probability of sea level rise, the severe weather impact, wildfires, drought, and so forth. And we've started with the U S but obviously the science is global, so ultimately we should be able to plot this.
Now, what that means is you may not know precisely when one of these events is going to hit you, but the risk, and that's what risk is all about, is looking at what you estimate the future probability and impact of something that hasn't yet happened. So it's an imperfect science because it's the future hasn't happened yet, and I'm sure Yogi Berra must've said that's at some point, but because the future hasn't happened yet, and as every regulator tells you on every investment you might have a buy, the past is no guide to the future.
We are in the world of estimates and guesstimates, and the fancy word for that is scenarios and in the climate risk reporting that we support and that we think should become mandatory. You look at possible versions of events in the future and think about what the impact of that might be, and also then about how you can protect your assets or protect your investments in the event that those things do hit.
But I think the science is compelling on all of this. The urgency that we feel at the moment is that we don't have a hundred years to get this sorted out. The temperature rise accomplished so far since the industrial revolution puts us on the brink of some tipping points in the physical systems and from which many things, there's no return.
So between now and 2050 we've committed to our portfolio being net zero but we can only do that because we're so big if the wider economy's at net zero. So that explains why we have this sense of urgency on regulations and reporting, but also why we've helped to set up initiatives like climate action 100 plus to make engagement more effective.
And then addressing zip code risk in our own portfolio is how we can, we hope, protect assets that ultimately I needed to pay pensions.
Jason Jacobs: The lever is then is that as a very large institutional investor in these companies, that if they don't get on the path of Paris or the path that you believe that they need to be, that you'll divest your ownership from those companies?
Anne Simpson: I think they would absolutely love that. If we did. Because when you divest, you walk away. I'll tell you a story. We sold our shares in a company some years ago for a completely different reason, and the chairman wrote me a personal letter to say, it's our policy not to communicate with shareholders, but I feel on this occasion I must do so.
And to let you know that when you had sold your shares, it was a cause for celebration. And in the boardroom, we all raised a glass. Sort of good riddance basically. The idea that divestment punishes a company or changes them, I think is very hard to sustain these days because if CalPERS divest, what that basically means is we will sell to another investor.
And like it is not an investor who may or may not care about climate change. So very little money these days is raised for companies through the secondary markets, the secondary markets where one shareholder buys or sell shares for another, but all of that can take place merrily on a daily basis as it does.
A very remote is known as liquidity. That's how easily can you buy and sell shares. So our strategy is different, is that we team up with the other shareholders in a company. And as the owners, we have a responsibility to make sure that that company is one, not causing or contributing to a systemic risk that's going to cause damage to our pension fund;
secondly, to hold those back to that governance thing, I hold that board of directors accountable.
Jason Jacobs: Got it. So through voting and through pulling the interests of a wide percentage of the eligible voters?
Anne Simpson: Yeah. So what we've done on climate change, it sets up this initiative called Climate Action 100 Plus.
And the reason these hundred companies were identified came out of the carbon footprinting, which we undertook just before the Paris agreement and credit to a brilliant investment manager here at CalPERS, Divia Mankikar who led this work. We found that in the 11,000 companies that we held shares in less than a hundred produced the majority of the emissions, which is shocking.
I mean, who knew? Well, certainly until we looked at the data, we didn't, but what that gave us. Was an insight into the fact that the production of greenhouse gases is very, very concentrated in a relatively small number of companies worldwide. So we had a series of meetings behind closed doors, hosted generously by the French mission to the UN.
Basically to share this analysis with other big investors and say, look, if this is true for us, it could well be true for you because we're all similarly invested in these global markets. So the idea was we then rejiggered the analysis a little bit. And when we did it for ourselves, we looked at what known as scope one and scope two emissions.
So imagine there's an oil companies scope one is, well, what kind of emissions are produced when you're drilling for oil? And then scope two. Well, when you're refining the oil, you're using loads of electricty and other energy sources to do that. Scope two is when you're refining that product, what are the emissions associated with that. Scope three is what then happens when people or utilities or businesses use that refined oil and put it into their cars or airplanes or gas burners or oil burners. What about those emissions? And that's known as scope three. So what we did out in this project was say agree with quite a big group of other investors and invest in networks like series PRI and their equivalents in Europe, Australia, and Asia.
While we were putting this together, I said, well, we can't miss out scope three. Now, we appreciate, that's quite tricky to count, but what we did by including scope three in the analysis, we boosted our capture of relevant emissions from just over half to nearly two thirds. So this hundred companies is responsible for about two thirds of estimated industrial emissions globally.
Now there's government emissions. The stuff we can't invest in, that's another thing. But taking all that into account on the back of an envelope, we think this is about a third of global emissions. So question then is what can you do about it? So we've identified three things that all of these companies need to do.
The first is to make climate change transition a responsibility of the board of directors, and that essentially, so we can hold them accountable. The most important job of a shareholder ultimately is to make sure that the board of directors is competent and independent, diverse, and on this occasion, climate competent, and also wrapped into that we want to make sure the company overseen by the board is not engaged in political lobbying. That undermines the goals of the Paris agreement and also isn't giving people financial rewards for doing other things. We want the bonus system, the compensation as a cause of remuneration in the UK. We want that to include reducing emissions in line with Paris.
The second thing we're asking, so number one is a governance goal. Number two is targets. So we are saying for these companies, and remember, these are the biggest global emitters. So this is not an easy thing to ask. We're saying we've got to have you at net zero by 2050. And then the third is tell us all about it.
We want disclosure in line with the framework though, goes by its acronym TCFD, but the task force on climate related financial disclosure, which Mark Carney, governor of the bank of England brought into life from, which currently sits as a voluntary reporting framework, but we hope is going to be recommended as a mandatory reporting framework coming out to cop 26.
So where have we got to? So in terms of investors signing up, we're just under the $40 trillion mark for investors signed up for climate action 100 plus. That makes it the biggest ever shareholder engagement effort that's ever been tried. That's also put a huge challenge in place, which is how to get organized everywhere from Japan to Jakarta to the U.S. and Canada and Europe and back again.
But anyway, we welcome that challenge. And the second thing to report is on results. And we've got more than a dozen of those companies now, which have committed themselves to net zero by 2050 most recently, you will have seen BP, the new chief executive coming in, and we've also got companies like BP reviewing and also pulling out of trade associations, which are not aligned with the Paris goals and revamping all of their compensation plan. So the top 14,000 executives in BP will be rewarded for achieving the target reduction. But it's not just oil companies. We've got big commitments from oil companies, particularly in Europe, but we've also got , the world's biggest private cement company, Heidelberg cement onboard Nestle, much known for its chocolate milk and other sweeties, but has a very long agricultural supply chain. One of our plus list companies. They've agreed and a growing number of utilities in the U S including Duke energy, which was always viewed as a very tough nut to crack and others. We gave ourselves a five year cycle for getting this work done with climate action 100 plus.
We've made some terrific progress, but one of the things on our mind is how are we going to have real impact in markets where shareholders are very weak because of state ownership of companies or stay influence. So that's opening up the fact that alongside this, we can't abandon the focus on the regulatory and the legislative side.
We need to be advocates on the rules as well as effective engagers. There's a website that you can go to to find out more from our progress report, who the signatories are, what the companies are, and how we're generally organized around that work.
Jason Jacobs: Are there specific policy initiatives that you're putting your weight behind as an organization?
Anne Simpson: Yes. On the policy front, what parts of something called the investor agenda, which is a parallel initiative to kind of actually 100 plus and at the top of our list of things that needs to be done are carbon pricing. And removal of subsidies for fossil fuels, which run that's about a $250 billion a year.
And both of those, the lack of a price on carbon and the subsidies to the fossil fuel industry together mean that you've got skewed incentives for the transition. These are both putting a big drag on the progress towards meeting the Paris goals for sure.
Jason Jacobs: And what about kind of, I don't know if it's fair to call it a sister effort, but some of the employee shareholder activism that you're seeing at Amazon and some other larger organizations.
Do you think that's a good thing? Is it a distraction? Can it be effective?
Anne Simpson: I think any shareholder that's awake and paying attention and asking questions and holding companies accountable, that's a good thing for every other investor in the market. So whether it's an employee investor, a small shareholder, somebody going to that mutual fund, the investor 401K or a pension fund, like CalPERS, we all need this financial system to work.
Nobody's investing just to give money away. I think that if they are, they're very small number of them. Most investors have got some serious purpose in mind, whether it's to pay pension or pay off a mortgage or save for their retirement or save for a rainy day. There is in a book that we've just published with two professors at Columbia, the final chapter, we call it the common wealth.
In other words, the Commonwealth is, the wealth has been created by working communities around the world. And we need the financial system to serve that broader purpose. Financial services was always envisaged, as the name suggests, to be in service to the real economy. And the real economy is full of real people who live in real places.
So this idea of the common wheel, which is a very old fashioned word, but it's at the root of the concept of the Commonwealth. We want the common good to be the ultimate purpose of the financial system. For us, it's very specific because we need to pay pensions. We have a social purpose, absolutely embedded in what CalPERS is here to do in the financial markets, but we can only.
Achieve that purpose of paying pensions. If we make the 7% and if we make the cash to pay pensions every year, and if we're still going to be here in a hundred years, so paying pensions for the future members, those whose not yet joined the system.
Jason Jacobs: I know relative to these big companies that we've been talking about, the alternative assets are quite a small percentage of your holdings, but how do you think about innovation as it relates to helping address the problems of climate change and what areas of innovation and what stages of innovation and what types, whether it be deployment or breakthrough technologies, do you feel can be most impactful?
Anne Simpson: Well, innovation is essential, and it's not just in the alternative asset classes, which for us are real assets and private equity. We actually have about 18% of all our private assets are in what gets called climate solutions: water storage, renewable energy, certified sustainable buildings, and so forth.
So we've actually got some very significant exposure in the new industries and the new opportunities that the climate change transition is bringing. Innovation is also a very big part of what's going on in big companies. So you look at even a great oil bruiser like Exxon, they've got $7 billion decked on carbon capture and storage.
Now that's a topic in its own right about what carbon capture and storage could or would or might contribute to the net zero by 2050 but that is not to be sneezed at. And if you look at the innovation and renewables portfolio of some of the other big oil and gas majors, they've got very big portfolios relative to what's going on with small companies outside.
So I think both of these are needed. Certainly for the rapid take-up and scaling up you need the big companies. You're going to need those big companies to deploy at scale, but also you can't, especially being in California, you can't avoid the fact that innovation is going to make a huge contribution to saving the day.
If we don't get that innovation, veggie burgers and bicycles aren't going to do it for us.
Jason Jacobs: I've heard one school of thought is that in order for the markets to wake up to the problem, that essentially they need to feel pain. So for example, if there's real estate that's mispriced due to climate risk, a hedge fund that shorts that those real estate holdings, for example, might accelerate the transition.
So while there might be profit, it would actually help the cause. How do you think about that? I mean, how do you balance kind of profiting on doom versus speeding up the natural course of the markets.
Anne Simpson: Well powerful forces in the markets and to get those markets working with us. We need the reporting. We need the data.
We don't invest in hedge funds at CalPERS. They were shut down some years ago. I would say that the market purpose of shorting is price discovery. And there are bruising and brutal episodes for companies when that's going on, but it needs to be properly regulated so that hedge funds are not profiting from doom they've helped create. That the price discovery point to me makes complete sense because if an investor has got an insight into a risk or a mispricing of assets, then they're doing the rest of the market a service if they're exposing that. This is really something under discussion at the moment in relation to things like stranded assets.
You only have to go now, not to some, environmental activists, but to go and read the Lex column in the financial times to find a number, an eye popping number of $900 billion, which they estimate on the back of the pink ft envelope to be at risk of being stranded. In other words, if we're going to hit the budget.
On global warming, those assets cannot be burned, cannot be sold, and that therefore implies a re-valuation of those balance sheets. Now, certainly helping the market with pricing, with price discovery is something everybody benefits from.
Jason Jacobs: So normally I ask people if they had 100 billion and they could allocate it towards anything to maximize its impact in the climate fight, where would they put it in how they allocate it?
You actually have around $400 billion, so it's maybe a moot point, but if you had those funds separate and distinct from the investment activities of CalPERS, where would you put it?
Anne Simpson: The first thing I have to say is that $100 billion could go into the CalPERS pension fund and get it back to full funding.
Just about the right amount of money. And I think what that would mean is that if CalPERS is not chasing a 7% target, it would be able to play a different role in terms of the longterm obligations of the fund but, until we get back to full-funding, we are constrained in a way that if you are having this conversation with GPIF or say one of our sister funds in Europe.
As a discount rate of 3% your investment objectives are very different. So if you could repeat that hundred billion dollar top-up to the other pension funds that's around the funded, following the financial crisis, you'd sort of build a very committed financial sector that on the long term, and that would be powerful in terms of meeting climate change goals.
Jason Jacobs: Yeah, and it sounds like, since I have one final question to ask, we don't have time to cover it now, but you could spend a good amount of time, probably a whole episode just talking about what would be the differences in your behavior with the smaller discount rate versus the bigger discount rate, but maybe we'll save that for chapter two.
My last question is just a lot of the people listening to this podcast are people that are committed to working on this problem at the systems level, but they are coming in fresh and they don't necessarily understand it, nor do they know how their skills are most transferable. So speak to them for a moment.
What advice do you have as they're trying to figure out how to have the biggest impact personally as they seek to reorient the next phase of their careers in this area?
Anne Simpson: Everybody is a consumer. We'll eat, we'll pay rent or mortgages. So I think working out you're going to do as a consumer is important.
So whether you want to move towards more plant-based diet, whether you've got the financial ability, I mean, I should just say that meat is more expensive than vegetables. It doesn't something that favors people with a big salary. But I think what we do as consumers is really important. So I feel buying shampoo or scrubbing off thick layers of makeup with plastic microbeads or whatever you might be doing. I think my three kids absolutely on this "get woke old folk," as they say to me when they're being cheeky, so I think the consumer power on this is huge. What that means is you need to get informed, and that's why your podcast, Jason, is important.
But I don't think we're short of places you can go to find out what's going on. There are apps these days, which can tell you what's going on, what's good on climate change or human rights or what's happening with everyday products. Do not underestimate the power of the customer. And the second thing, in most markets around the world, people are citizens.
And they have a vote and they have an ability to hold their own representatives accountable in the political system. So we need to make sure that people are using the political process to get the policies in place that are going to make it possible to meet the Paris goals. Along that, I do want on the consumer side, to just come back to the question of finance, because many people have investments that they don't know very much about. They might have a pension fund, they might have a savings account, and they may be using one of the big wall street names or one of the big high street names, but it's very important as a customer in the financial system. To make sure that you know where your money's going and how those fund managers are exercising their votes at these companies on your behalf.
And I think therefore the name of the game is transparency and accountability. And one reason a lot of these problems don't get solved is because what's happening is going on. Behind closed doors when people don't understand. But you know, I'm an optimist. I have great faith in the ability of people to make change and to look at what's happened in human society over the last few hundred years.
It's pretty incredible. Wow. This is just the latest challenge in human civilization, and we need to get it sorted. So that's where I see tremendous potential. Nothing will change without ordinary people getting involved.
Jason Jacobs: Well, I think that's a great point to end on. And we covered a lot in this episode and I thank you so much for making the time and coming on the show.
Anne Simpson: It's my pleasure, Jason. Thank you.
Jason Jacobs: Hey, everyone. Jason here. Thanks again for joining me on My Climate Journey. If you'd like to learn more about the journey, you can visit us at my climate journey dot C O. Note that is dot C O not dot com. Someday we'll get the.com, but right now dot C. O. You can also find me on Twitter @jjacobs22, where I would encourage you to share your feedback on the episode or suggestions for future guests you'd like to hear. And before I let you go, if you enjoyed the show, please share an episode with a friend or consider leaving a review on iTunes. The lawyers made me say that. Thank you.