2019 Sustainability Report

Ronda Lenci is Corporate Sustainability Manager; Lisa E. Williams is Designer; and Jan Spano is Director, Enterprise Strategy Management at the California State Teachers’ Retirement System (CalSTRS). This post is based on a recent CalSTRS publication by Ms. Lenci, Ms. Spano, Ms. Williams, Noelle Ploof, Ellen Maurizio, and Renee Evarts. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

This CalSTRS Sustainability Report provides an overview of the relative data and assessment of the material topics covering July 1, 2018, through June 30, 2019, and later into calendar year 2019, where noted. This report has been prepared in accordance with the Global Reporting Initiative Standards: Core option.

Stakeholder Engagement & Material Topic Identification

We believe it is essential to include the voices of our members and other stakeholders in conversations related to fund sustainability.

CalSTRS staff has developed a comprehensive strategy to communicate with our stakeholders, including financial entities, groups representing our members, the California Governor’s administration, legislators, employers, members, labor representatives, our employees, suppliers, contractors and the media.

Staff regularly engages and solicits feedback from our stakeholder groups through board meetings, hosted events, email, online surveys, public meetings and web-based communications. Additionally, we have dedicated stakeholder engagement staff for member benefits and services, public and investor relations, and governance.

CalSTRS conducts an anonymous materiality survey every two years. Our 2018 materiality survey asked stakeholders to prioritize 11 topics based on their importance to CalSTRS in meeting our mission. Those groups surveyed included members, employees and external stakeholders. Select stakeholders were invited to participate based on their commitment to California’s public educators, their principles of sustainability related to financial markets, or the direct impact that CalSTRS’ actions have on their livelihood and financial future.

The survey was made available through social media, email and on CalSTRS.com. It was open for one month in spring 2018. Almost 600 stakeholders participated in the materiality survey.

Highest-ranked topics by stakeholder groups

Feedback from employees, members and other stakeholders is summarized in the table below. Each topic is addressed in this report.

For 2018–19, our three material topics are Path to Full Funding, Member Retirement Preparedness and Information Security. Ethics and Compliance (pages 54–56) and Stakeholder Engagement (see above) are addressed as part of our General Disclosures.

Rank Employees Members Other Stakeholders
1 Path to Full Funding Information Security Member Retirement Preparedness
2 Member Retirement Preparedness Path to Full Funding Stakeholder Engagement
3 Information Security Member Retirement Preparedness Ethics and Compliance

Our sustainable values

“As shareholders, we are engaging with companies about their emissions and how their boards and their business plans are preparing them for a carbon-constrained future. We need the governments of the world to implement the Paris Agreement and regulate emissions on a clear timeline so businesses know what the interim targets are and the timeline for their action.”

—CEO Jack Ehnes

Guiding Beliefs

CalSTRS Guiding Beliefs shape our organization’s environmental, social and governance actions and interactions with our stakeholders.

  1. CalSTRS supports sustainability programs that build environmental, social and governance principles into our core business and investment practices.
  2. CalSTRS responsibly manages risk for the long-term financial strength of CalSTRS, to the benefit of our members, stakeholders and the environment.
  3. CalSTRS engages with our stakeholders, business partners and our community on environmental, social and governance issues and principles to understand their insights and perspectives.
  4. CalSTRS considers the global impact of our business practices in the use of natural resources within our facilities and through the procurement of goods and services.
  5. All CalSTRS investments should seek to responsibly manage and disclose economic, social and environmental criteria in order to deliver sustainable and profitable, risk-adjusted returns.
  6. CalSTRS encourages procurement of goods and services with contractors and supply chain vendors who incorporate sustainability and environmental, social and governance criteria into their business practices.
  7. CalSTRS believes in providing a supportive work environment where employees are encouraged to develop and achieve their full career potential.
  8. CalSTRS recognizes plan assets will contribute to and be affected by climate change and that appropriate risk mitigation must occur in order to deliver profitable, risk-adjusted returns.
  9. CalSTRS discloses material sustainability issues and sustainable performance data.

Sustainable investing and stewardship strategies

The financial security of our members depends on well-managed, long-term financial performance. As the trusted fiduciary of the fund, CalSTRS must derive the most value from the investments we make.

CalSTRS has well-established, thoroughly vetted investment strategies grounded in the board’s investment beliefs. ESG risks, as articulated in the CalSTRS ESG Risk Policy, are taken into consideration to the extent that such factors influence the financial advisability of the investment, are a material risk to the fund or weaken the trust of a significant portion of our members.

All CalSTRS internal and external investment managers use the ESG Risk Policy to identify and assess the risks associated with an investment and to define areas of focus as they manage the portfolio and engage to affect change. All external active managers agree to adhere to the CalSTRS ESG Risk Policy and annually certify their adherence to the policy as they buy and sell securities for CalSTRS.

In January 2019, CalSTRS rebranded the Corporate Governance unit to Sustainable Investment and Stewardship Strategies. This reflects the expanded scope of CalSTRS’ ESG-related investment and stewardship activities supporting long-term value creation.

CalSTRS recognizes plan assets will contribute to and be affected by climate change and that appropriate risk mitigation must occur in order to deliver profitable, risk-adjusted returns.
—Guiding Belief No. 8

As part of CalSTRS’ stewardship activities, the SISS team continues to engage portfolio companies to promote greater diversity on corporate boards. These engagements concentrated on companies—in both the S&P 500 and Russell 3000—with either no women or only one woman on their board. In collaboration with other investors, we engaged companies regarding their board diversity. In fiscal year 2018–19, 131 companies appointed 154 new women to their boards.

In 2018–19, CalSTRS took additional steps to update and expand ESG-related activities.

Principles for a Responsible Civilian Firearms Industry November 2018

What: Engaged with 12 other institutional investors with combined assets of more than $4.83 trillion to create the Principles for a Responsible Civilian Firearms Industry.

Objective: Provides a framework for institutional investors seeking to improve engagement with public and private companies globally to address gun safety issues and reduce investment risk.

ESG integration in the investment process June 2019

What: Selected three new global equity partners to manage $750 million through intensive ESG integration in the investment process.

Objective: Leverages partner expertise in understanding how sustainability-related trends, like the low-carbon transition and resource efficiency, create investment risks and opportunities.

CalSTRS firmly believes that active and direct engagement is the best way to understand and mitigate ESG risks in the investment portfolio. If engagement fails to resolve ESG risks sufficiently, the CalSTRS chief investment officer will bring the issue before the board Investment Committee for consideration and extensive analysis relating to divestment.

In July 2018, CalSTRS staff initiated engagement with two U.S. publicly-held companies that operate private prisons. This resulted in productive dialogue surrounding their business practices, including visits to various detention facilities and face-to-face meetings with senior management concerning operational processes and risk management efforts.

Staff subsequently presented their research, and the board consulted with expert investment advisers. In November 2018, the board voted to direct investment staff to remove the fund’s holdings in the two companies that operate private prisons. The exclusion of the securities was completed in the 2018 calendar year.

Transition to a low-carbon economy

The links between climate change, business and investment are increasingly evident. Climate change presents both:

  • Physical risks that arise from the physical impacts of a changing climate.
  • Transition risks that arise from the transition to a low-carbon economy, such as policy shifts and technological transformations.
  • Significant investment opportunities also exist in helping the global economy mitigate and adapt to a changing climate.

Climate policy engagement

CalSTRS is committed to influencing public policies, engaging with companies in our portfolio and investing to promote an orderly transition to a low-carbon economy that benefits all.

In May 2019, the CalSTRS Investment Committee took action to approve new policy language related to the low-carbon transition within the Corporate Governance Principles:

CalSTRS believes that how the world responds to the risks associated with climate change, as detailed by peer reviewed scientific reports, including those from the Intergovernmental Panel on Climate Change, will materially impact the value of our investment portfolio. CalSTRS recognizes that public policies, technological advances and physical impacts associated with concerns about climate change are already driving the transition to a lower-carbon economy. As a diversified global investor, we need to understand the transition’s potential impacts and consider actions we can take to mitigate risk and identify related investment opportunities. How we engage companies and vote our proxies will also reflect our understanding of the low-carbon economic transition.

 

In June 2019, CalSTRS supported several significant investor initiatives related to climate change and the low-carbon transition including:

Global Investor Statement to Governments on Climate Change

This statement was signed by 477 global investors managing over $34 trillion in assets. The statement calls on world governments to:

  • Achieve the Paris Agreement’s goals
  • Accelerate private sector investment into the low-carbon transition
  • Commit to improve climate-related financial reporting

Vatican climate action statements

CalSTRS joined leading global investors and oil and gas industry executives in a collective commitment to accelerate action to avoid the worst consequences of climate change. Teachers’ Retirement Board members Harry M. Keiley and State Controller Betty Yee signed the statements.

“As the largest educator-only pension fund and a global investor, we have a role to play in promoting the global economy’s transition to a low carbon future. The Teachers’ Retirement Board recognizes that climate change poses existential and financial risks, and we are committed to addressing them.”

—Harry M. Keiley, vice chair CalSTRS Teacher’ Board and chair Investment Committee

CalSTRS Green Team Initiative Task Force

The CalSTRS Green Initiative Task Force, known as the Green Team, creates an annual report detailing Investments Branch activities relating to broader environmental risk management and investment opportunities. This report reflects CalSTRS’ recognition that environmental issues affect the performance of the CalSTRS Investment Portfolio across companies, sectors, regions and asset classes.

Information security & responsible business practices

CalSTRS demonstrates our commitment to securing our members’ retirement futures and organizational sustainability by modeling best practices in corporate governance and employing risk-mitigation policies, including defending against information security risks that can threaten the sustainability of any organization.

Information Security at CALSTRS

Information security risks can threaten the sustainability of any organization. We remain vigilant in detecting threats, proactively mitigating identified risks and adapting to the rapidly evolving nature of the information security landscape. These responsible business practices demonstrate our commitment to sustaining high standards in the protection of member and information assets that support business objectives.

Staff reports to executives and the board on CalSTRS’ information security posture, including awareness, prevention and detection. Data security and confidentiality is a responsibility shared equally by members and staff. CalSTRS has intricate internal controls in place for staff, including annual training, ongoing system and network monitoring, robust password protection procedures, and secure destruction of confidential documents. Member-focused messaging encourages protection of passwords and other confidential data.

CalSTRS recognizes the changing and ever-growing threat that information security presents to data contained within the CalSTRS organization. Staff continually reviews threats by breaking them down into component parts to address those areas where we have a lower maturity and potential vulnerability.

We inform members of our security processes in our communications with them. We also advise members to take an active role in keeping their information private and secure.

Information Security Office staff responsibilities

  • Develop and update information security policies
  • Educate employees and CalSTRS members
  • Ensure compliance with policies, standards, strategies and industry best practices
  • Perform ongoing monitoring and vulnerability assessments
  • Maintain high-level expertise in the discipline of computer and network security, virus detection, vulnerability assessment and hacking methodologies
  • Respond to actual threats and prepare for anticipated threats
  • Advise the board on information security mitigation strategies

Security is a shared responsibility

At CalSTRS, we understand that every employee is our first line of defense and shares responsibility to protect the confidentiality, integrity and availability of CalSTRS’ information assets. One of the most important lines of information security defense is arming employees with tools and the knowledge necessary to detect suspicious activities and minimize the chance for security incidents.

Employee awareness and education

  • Mandatory onboarding and annual training
  • Dedicated intranet site security resources
  • National Cybersecurity Awareness month participation

Employee compliance

  • Clear expectations
  • Strong internal controls
  • Signed Confidentiality, Non-Disclosure and Acceptable Use Agreement
  • Annual ISO audits of security policies, systems and accesses

Assessing information security

CalSTRS partners with an outside information security firm to assess the security infrastructure, identify gaps and make recommendations to remediate them. Annual third-party assessments are part of our measurements to test and validate the effectiveness of current security measures. The primary goal of performing assessments is to ensure we have a robust security program designed to protect the confidentiality of member data as well as protect assets.

2018–19 statistics

100% Employees reviewed and signed Confidentiality, Non-Disclosure and Acceptable Use Agreement

100% Employees completed annual mandatory training

100% High-risk findings addressed within the approved timeframe

0 Substantiated complaints concerning breaches of customer privacy

A culture of ethics and integrity

CalSTRS employees are subject to various policies, statutes and regulations that relate to ethical conduct, with the responsibility to understand and abide by them all. Statutes dictate:

  • Public servants are required to serve the public’s interest and may not use their employment to serve private or political
  • Public officials who conduct themselves according to a standard that exceeds the minimum requirements set in the ethics laws help to maintain the public’s faith in

CalSTRS’ goal is not to simply comply with the laws, regulations, policies and standards that apply to our business—we want all our employees to act with the highest standards of business ethics in service to the public and our members.

The CalSTRS Compliance Program serves as a foundation of good corporate governance, providing each staff member with a clear, consistent set of practices and expectations for appropriate personal and professional conduct.

The Code of Ethics and Business Conduct serves as the cornerstone of the enterprise compliance program. The code applies to our employees, contractors and board. The principles contained in this code serve as guidelines for making sound decisions and conducting business ethically, sustaining CalSTRS over the long term.

All staff are encouraged to report to their managers, executive staff or Human Resources any activity that may harm CalSTRS’ reputation. Allowing confidential and anonymous avenues for our staff to report suspicious activities increases the chance of uncovering allegations that may go otherwise unreported and potentially affect our reputation. Complaints submitted to the Ethics Hotline are investigated by the CalSTRS Office of the General Counsel and Human Resources.

Maintaining and extending trust

CalSTRS has an excellent reputation, protected by vigilant attention to ethical practices. Members of the CalSTRS executive team take their role seriously in modeling ethical behavior and supporting the ethics and compliance program.

Responsibility for ethical, compliant practices creates organization sustainability, maintaining and extending trust within CalSTRS and with the members we serve.

Ethics and Compliance Policies and Training

To ensure full understanding and accountability, CalSTRS requires new hires to review specific policies on the date of hire, and all employees are subject to a mandatory policy recertification process each year.

CalSTRS employees in certain designated positions listed in the conflict of interest code are required to file the Statement of Economic Interests (Form 700) upon assuming their position, annually thereafter and when leaving office.

In addition, certain policies, statutes and regulations require disclosure filings and acknowledgments described in the following table.

Subject Summary/Action
Gift Policy Employees review the Gift Policy and sign an attestation stating compliance with the policy annually.
Policy Prohibiting Insider Trading Employees review the Policy Prohibiting Insider Trading and sign an attestation stating compliance with the policy annually.
Incompatible Activities Agreement Employees review and sign the Incompatible Activities Agreement annually.
Confidentiality, Non-Disclosure and Acceptable Use Agreement Employees review and sign the Confidentiality, Non-Disclosure and Acceptable Use Agreement annually.
Internet Access Policy Employees review and sign the Internet Access Policy and Acknowledgment annually.
Statement of Economic Interests (Form 700) CalSTRS employees in designated positions file a Statement of Economic Interests
(Form 700) annually and upon assuming and leaving office.
 

State Ethics Training

CalSTRS employees and contractors in designated positions participate in ethics training biennially.

Responsible Contractors and Suppliers

CalSTRS is committed to socially and environmentally responsible business practices. We acquire goods and services in the best interest of CalSTRS, our members and their beneficiaries. We seek opportunities to understand the environmental, social and governance positions of our contractors and suppliers to ensure alignment with CalSTRS’ principles.

Our competitive purchasing process follows California state law. We provide our contractors with a set of environmental and social standards for all contracted business services which includes anti-discrimination clauses, human rights regulations, and fair labor and environmental compliances. These social and environmental mandates were established by the State of California, and CalSTRS has the responsibility to ensure that we do business only with contractors that are in compliance.

The CalSTRS Responsible Contractor Policy seeks to monitor the use of labor in the development and management of real estate investments. The goal is to ensure that pension fund capital is funding projects that pay a fair wage and benefit for all work and services related to the construction and management of the assets. The CalSTRS Real Estate Investment Office has overseen this policy since its inception in the 1990s and has been successful in reaching goals with participation at almost 100% by respective real estate managers.

The California State Teachers’ Retirement System has a deep interest in the condition of workers employed by CalSTRS and our advisers.

* * *

The complete report is available here.

Trackbacks are closed, but you can post a comment.

Post a Comment

Your email is never published nor shared. Required fields are marked *

*
*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows