CalPERS Must Focus on Fiduciary Responsibility, Not Social Issues

Christopher Burnham
Founder and president of the Institute for Pension Fund Integrity which fights to keep politics out of public pension fund management. He served as the CFO and chief operating officer of the Department of State, and the COO of the United Nations, and Connecticut State Treasurer

Recently California Public Employees’ Retirement System (CalPERS) – whose former board president, Priya Mathur, was discarded as a board member by a landslide vote of 57% to 43% – signed a letter asking the Securities and Exchange Commission (SEC) to develop metrics for requiring listed companies to report on their compliance with environmental, social, and governance (ESG) standards that presumably would be set by the SEC.

What a stick in the eye of the more than one-million beneficiaries of the almost $400 billion pension system, as she unceremoniously departs, after leading an organization that left billions of dollars in out-performance on the table due to pervious political investing.

The role and responsibility of a fiduciary is not to invest with a personal political agenda, nor is it to impose their personal vision on what types of companies to invest in or not, including tobacco, alcohol, gambling, energy, private prisons, and others. For almost 1000 years, fiduciary duty has meant one thing: investing other people’s money for their (retirement) benefit and security.

In fact, Ms. Mathur was tossed out earlier this month because she tried to strip out from the CalPERS portfolio, investments in energy stocks and retailers who sell firearms, which made Corona, CA career Police Officer Jason Perez, angry. As he said during his campaign to replace Mathur, “I am selfish I want to retire.” The trouble is, the CalPERS retirement system has unfunded liabilities of over $1 trillion, and board members with political investment agendas have only added to that debt.

In his campaign questionnaire, Officer Perez said,

“All legal investments must be considered. Sometimes we make an investment decision to invest in socially unacceptable companies such as firearms and tobacco. We invest in these companies for the expected returns, (not) as a moral judgment. Divesting from the tobacco industry has cost our retirement fund dearly, $8 billion lost. Recently there was a motion made by a board member to divest from any company manufacturing or selling firearms or accessories. The motion included any firearm accessory, ammunition, magazines, etc. If the motion had been successful, CalPERS would have divested from not only the manufacturers, but also large retail stores such as Walmart, Big 5 Sporting Goods, Cabela’s, and Outdoorsman….This example clearly shows how CalPERS is being used as a Political Action Committee as opposed to a retirement fund.”

Congratulations new board member Perez, as the former sole fiduciary of the multi-billion dollar State of Connecticut pension system and President of the Institute for Pension Fund Integrity, I am thrilled to see you bring sanity to the CalPERS board.

However, because employees and beneficiaries of our public pension systems are rejecting fiduciaries and trustees using our retirement money as a “political action committee,” political activists are now trying to get the SEC to end run beneficiaries through the SEC by getting the SEC to impose legal requirements for ESG consideration. In a recent editorial, former SEC Commissioner, Paul Atkins wrote, “Requiring companies to account for an ever-changing list of hard-to-quantify social issues distracts from disclosure’s real, statutory purpose: giving the reasonable investor material information he needs to make investing decisions.”

Commissioner Atkins has captured perfectly what the SEC was established to do in 1935: protect the investor. It is not to perpetrate personal political agendas on investment decisions.

I am not against ESG. Good governance is a critical part of investing and is particularly important as we look to risk factors in investing in developing countries. The International Finance Corporation of the World Bank does an exceptional job in advocating for the adoption of good governance in these countries as a way to attract foreign direct investment. However, a fiduciary has one mission and one mission only, and that is to manage the funds to which they have been entrusted with the highest return at a reasonable risk.

If there is an investment strategy that adds out-performance, meaning making money above a benchmark, then it must be considered. The incentive should never be a political one or one based on political activism, and instead must only be protecting the secure retirement for the men and women who every day, go to our schools, police departments, fire departments, and motor vehicle departments, and try and make our lives better.

As Officer Perez went on to say in his campaign questionnaire, “In short, ESG issues need to be viewed through an investment and risk mitigation and not through a political lens. The focus needs to be on investment decisions and investment returns.”

Finally, someone at CalPERS gets it.

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