By Jon Coupal – August 2, 2023
Over the years, the California Public Employee Retirement System (CalPERS) has had its share of problems, including a few episodes of corruption. In 2016, its former CEO was sentenced to 54 months in prison for corruption and fraud charges stemming from a conspiracy to trade official acts for cash and benefits. In 2020, CalPERS’ Chief Investment Officer resigned over what was perceived to be an excessively “cozy” relationship with the Chinese Communist Party.
Speaking of the Chinese Communist Party, CalPERS took a massive $69 billion hit in market losses when the Covid virus caused a worldwide recession. Fortunately, those losses have since recovered and CalPERS earned a respectable 5.8% rate of return for the fiscal year ending June 30th.
California taxpayers are ultimately responsible for guaranteeing that the retirement benefit promises made to public employees are kept. Any policy change that potentially reduces the investment returns of state pension funds or the value of their holdings puts taxpayers at risk of even higher taxes. In short, all Californians have “skin in the game” in the financial health of CalPERS and the other major fund, the State Teachers Retirement System (CalSTRS).
Something to watch is the extent to which California’s retirement funds place the “principles” of ESG (Environmental, Social and Governance) above their responsibility to safely earn investment returns adequate to meet pension obligations.
ESG has no fixed or accepted definition. “ESG investing” is a term that is often used interchangeably with “sustainable investing,” “socially responsible investing,” or “mission-related investing.” According to Investopedia, “Environmental, social, and governance (ESG) investing refers to a set of standards for a company’s behavior used by socially conscious investors to screen potential investments.” These standards may include a judgment of how a company’s policies address climate change, for example. Social criteria may refer to a company’s hiring and promotion policies, its relationships with certain suppliers and customers, and its interactions with communities where it operates. Governance standards are used to screen investments based on a company’s leadership, executive pay, audits, internal controls, and shareholder rights. Some of this may sound innocuous at worst or even beneficial.
But “ESG investing” can be a mask for left-leaning political agendas. It enables activists to use political leverage over government pension fund decisions to pressure companies to seek out or sever business relationships based on factors such as support for green energy projects or bias against gun ownership. But if investment decisions so influenced result in big losses, taxpayers are at risk of higher taxes to make up the difference. So taxpayers have reason to want public pension funds managed with a focus on earning good returns at low risk.
On its website, CalPERS represents that it supports ESG disclosures in order to understand how a company’s practices could impact future financial performance: “CalPERS uses an ESG framework to assess potential risks to our investments.” But it also acknowledges that maximizing returns is the primary goal: “ESG is all about the bottom line. As a prudent investor, we need to know all the risks companies face.”
Perhaps CalPERS uses “an ESG framework” in self-defense, to avoid investing in companies that may be targeted by activists for lawsuits or boycotts. It appears that CalPERS hasn’t signed off on some of the more radical elements of ESG. For example, Senate Bill 252, by state Sen. Lena Gonzalez, D-Long Beach, would prohibit the boards of CalPERS and CalSTRS “from making new investments or renewing existing investments of public employee retirement funds in a fossil fuel company” by July 1, 2030. By a vote of 7-1, the CalPERS board agreed with a staff recommendation to oppose the bill.
Unfortunately, SB 252 cleared the Senate and is currently pending in the Assembly. But even if approved by the Assembly, that may not be the end of the story.
Three pension funds in New York City have been sued over an identical issue in SB 252. The suit, by public employees, alleges that the funds breached their fiduciary duty by selling $4 billion of fossil-fuel assets, claiming that the retirement plans’ decision is “a misguided and ineffectual gesture to address climate change.” The legal attack turned out to be prophetic given that, the year after the divestment, oil and gas stocks exploded following Russia’s invasion of Ukraine, with the MSCI World Energy Index rising more than 40%.
If SB 252 becomes law, the political establishment which supported it – including Governor Newsom if he signs it – will have created new financial risks for CalPERS, current and future retirees, and taxpayers. The legislation ultimately could be struck down by a court, but no court order will reimburse us for bad investment decisions.
Jon Coupal is President of Howard Jarvis Taxpayers Association