CalaAPRS Trustees Take a Deep Dive into Impact Investing
The California Association of Public Retirement Systems (CalAPRS) hosted its Trustee Roundtable in San Jose with the topic of Impact Investing. Lauryn Agnew, a trustee on San Mateo County’s Employees’ Retirement plan (www.SamCERA.org) moderated the day-long conference with expert speakers from the impact investing industry. She led the deep dive into the various dimensions of impact investing that institutional, public fund trustees must consider: fiduciary duty, mission alignment, ESG (Environmental, Social, governance) integration, shareholder activism, community development, financial expectations and risks, measurable impact, and portfolio due diligence and implementation.
The starting point for many fiduciaries is to look broadly at fiduciary duty and its interpretation in the U.S. as compared to other developed countries: is it compatible with our fiduciary duty to include impact (or ESG) in addition to financial returns? We heard evidence that integrating environmental, social and governance criteria is common outside of the US and it does not necessarily lead to lower returns. In fact, it is showing premium returns in many studies. In Europe and Australia, plan fiduciaries consider their stakeholders to be their community, their employees and the environment as well as shareholders. U. S. investors typically consider their fiduciary duty to be solely tied to shareholder value and maximizing (risk-adjusted) returns, usually to meet a target rate of return, but without any consideration to non-financial factors.
Without debating the mechanics of benchmarking, most fiduciaries can be assured that we are following prudent standards if we track institutional, commonly-accepted benchmark performance. ESG factors can add value, reduce risk and provide for a more sustainable, longer term, inter-generationally balanced portfolio. We also sought to understand the data behind the ESG factors – what risks they are intended to mitigate, and how to embed those into the analysis and construction of portfolios. This background is key for trustees so they can discuss it with their boards, staff and consultants, and add it to policies and manager mandates.
Other asset classes can also provide an intentional impact when designed with both a financial return and a social impact in mind. We can create public private partnerships for building infrastructure like transit-oriented affordable housing, or retrofitting schools and public buildings with solar. This can make financial as well as community and environmental sense. Public retirement plans currently have to take money out of the employer/taxpayer (county). It seems reasonable to consider, if the financial expectations are “economically indistinguishable”, that we could recycle some of those pension contributions back into our local economy. We would seek a strong financial returns and provide additional liquidity and scale to investing in our own backyard. Even allocating just a small portion of our assets to impact investments could benefit our communities, our employees, our retirees and their beneficiaries.