Craig Metrick, Cornerstone Capital’s Director of Manager Due Diligence, was quoted in an article in Fundfire, discussing the latest development in ESG investing from CalPERS, the $300 billion California pension plan. CalPERS issued a public request for information seeking “public equity-based investment strategies that systematically incorporate ESG-related investment considerations capable of delivering superior performance compared to benchmarks. CalPERS has clarified that the RFI does not represent a manager search or an AUM target. It is an exercise to gather information on different ways that investors are “systematically” incorporating ESG data to improve performance. Despite the absence of an asset target, when an investor of this size announces an initiative like this, it is sure to incite activity in the industry.
At Cornerstone we continually come across new ways of looking at ESG data in the public markets, both quantitatively and qualitatively. We believe many are promising and recommend some of these new strategies to clients where appropriate. However, we also believe there is room for significant innovation in the industry, as data increases and track records extend. Large investors such as CalPERS often have an investing strategy that stays fairly close to the benchmark. While they may take risk in other places in the portfolio, core asset classes such as global equity may be managed internally with relatively little tracking error. In the RFI, CalPERS does not apply a limit to tracking error except to say “the proposed solution represents a broad equity index with acceptable predicted tracking error.” CalPERS also offers some flexibility around the length of track record and performance. We are confident that CalPERS will receive many interesting responses. Perhaps there is not a single solution that meets the requirements but a combination of approaches. Or perhaps the optimal approach to ESG integration has not been conceived yet. We would also add that approaches to investing and investing objectives differ greatly. Investors should be open to looking for their own optimal approach based on their values, objectives and expectations.