CalPERS outlines ESG policy for PE manager selection

The pension giant will start digging in to fund managers’ ESG policies to help determine whether to move forward with further due diligence.

The California Public Employees’ Retirement System (CalPERS) will be more heavily scrutinising environmental, social and governance (ESG) issues for manager and investment selections across asset classes, according to materials for its 13 March meeting.

For private equity the Sacramento-based pension plans to screen general partners in consideration of the GP’s written ESG policy, which will help determine whether to conduct further diligence on that particular manager, Private Debt Investor's sister publication Private Equity International reported.

A lack of an ESG policy from a manager does not necessarily mean the GP will not move forward in the process, but it will be taken into account when CalPERS evaluates all investment factors, the materials said.

CalPERS will consider ESG issues that could materially affect its private equity portfolio investments with guidance from the United Nations Principles for Responsible Investments’ ESG Disclosure Framework, which the pension endorsed in March 2013, and the CalPERS Global Governance Principles, which it adopted in March 2015.

Specifically, CalPERS will look for how the manager identifies, monitors, and handles ESG issues, how ESG risks and opportunities have been previously identified and addressed, consider the GP’s approach to integrating ESG factors in an investment and ownership process and request disclosure on any ongoing litigation pertaining to ESG.

With co-investment and direct investment, CalPERS will conduct the same procedure as the one outlined for fund commitments above, but also add steps such as confirming that the GP’s ESG policy applies to the co-investment or direct investment opportunity and including ESG discussions in final diligence reviews and at the investment review committee before an investment approval is made.

CalPERS indicated it will discuss ESG-related issues at the annual limited partner advisory committee meetings for the top 10 private equity managers by asset value, and document those issues in periodic meeting notes for other managers, according to the materials.

Some of the ESG factors CalPERS considers include biodiversity, energy efficiency, labour standards, employee engagement, accounting standards and political contributions.

CalPERS initially adopted its first-ever ESG policy plan in August, naming six strategic initiatives to support the pension’s efforts in sustainable investing, as reported by PDI. Those initiatives include focusing on private equity fee and profit-sharing transparency through the industry adoption of the Institutional Limited Partners fee reporting template.