Organisation: Los Angeles City Employees’ Retirement System (LACERS)
Signatory type: Asset owner
HQ country: United States of America
Los Angeles City Employees’ Retirement System (LACERS) has developed an innovative ESG Risk Framework (Framework), which provides the public with a comprehensive overview of LACERS efforts to manage ESG risk factors. The Framework is structured around five focal points:
- Investment Policy and ESG Governance – comprehensive integration of ESG considerations within the LACERS portfolio.
- Integration of the Principles for Responsible Investment (PRI) – demonstration of LACERS’ commitment to the six PRI principles.
- ESG Risk Exposures – development of a process to identify, monitor, and mitigate ESG risks.
- ESG-Focused Investing – identification and assessment of new investment approaches that align with LACERS’ ESG goals.
- ESG Risk Framework Action Plan – implementation of time-bound initiatives to formalise LACERS’ ESG risk management programme.
LACERS believes the wide perspective and inclusive approach of this Framework accurately reflects the LACERS Board’s understanding of its fiduciary responsibility to its members and beneficiaries. This is an innovative approach; it is LACERS’ first policy-related document that is geared toward addressing the public’s concerns about ESG issues.
To build on the aims of the framework, LACERS hosted three successful emerging manager (EM) symposiums. These helped educate the EM community on how to compete for LACERS’ capital.
Why this approach?
There is a strong interest by various stakeholders, including the Mayor, City Council Members, LACERS’ Board, LACERS’ retiree members and beneficiaries, and the general public, in ensuring that LACERS utilises its voice within the investment community and exercises its rights as an asset owner to drive positive change across a range of ESG issues, including climate change, diversity, equity, and inclusion, and labour rights.
While all ESG issues raised by stakeholders may be important, not all may present a material risk to LACERS’ investments. To address these concerns in a holistic manner, LACERS’ Board adopted the Framework on 27 April 2021, to provide the public with a general understanding of LACERS’ approach to ESG issues. LACERS’ Board further adopted a Responsible Investment (RI) Policy on 11 January 2022, that details four broad levels of action that LACERS may take to address material ESG risks:
- Relationship Initiatives – undertaking activities that foster engagement, collaboration, outreach, and education.
- Policy/Contract Revisions – amending investment policies and contractual provisions.
- Strategic Investment Approaches – considering ESG-focused investment strategies.
- Portfolio Restructurings – selling portfolio holdings and terminating investment managers.
The ESG Risk Framework, along with the RI Policy, provides a roadmap for LACERS’ ESG engagement efforts and offers clarity on which ESG risks are deemed material and how they are addressed.
The approach in practice
On 5 October 2021, the Los Angeles City Council passed a motion directing LACERS and the Los Angeles Fire and Police Pensions (LAFPP) to divest from Meta Platforms, Inc. (Meta). The motion expressed the Council’s concerns over media allegations that Instagram, a social media application owned by Meta, negatively impacts the mental health of young women and girls and that Meta’s applications in general create other negative externalities.
LACERS evaluated the motion within the context of the ESG Risk Framework. The Boards of LACERS and LAFPP jointly agreed that engagement with Meta would be a more appropriate action to address the media allegations rather than divest from Meta’s securities.
Consistent with the Framework, LACERS initiated an engagement campaign with Meta and authored a letter on behalf of LACERS and LAFPP to express concerns about the allegations and urge Meta to commit to protecting the privacy and safety of its users. LACERS also solicited interest from peer public pension plans to collaborate with LACERS and LAFPP on the campaign and join as a signatory to the letter. On 15 April 2022, LACERS and LAFPP sent a jointly signed letter of engagement to Meta’s Board.
LACERS also connected with The Shareholder Commons to learn about their shareholder proposal on Meta’s 2022 proxy ballot. This proposal (Proposal 7: Shareholder Proposal Regarding Report on External Costs of Misinformation) addressed the issues raised by the City Council. On 26 April 2022, LACERS updated its Proxy Voting Policy (Policy) to include voting positions on the most current and common ESG issues that shareholders are proposing public companies take action on.
While this update did not specifically address negative externality issues such as those raised with Meta, it did incorporate a provision to allow for delegation of authority to vote on substantive, time sensitive ESG issues not addressed by the Policy to LACERS’ Proxy Committee via unanimous vote. Such issues unaddressed by the Policy would otherwise default to LACERS’ proxy voting agent’s recommended vote.
The proxy voting agent did not recommend support for Proposal 7 as it was deemed to be overly broad in scope, and such disclosure was not a standard industry practice. However, due to LACERS’ Board engagement on this topic, the Proxy Committee reviewed Proposal 7 and unanimously agreed to vote for this shareholder proposal.
To continue to drive home the importance of being public facing and to ensure that the public is well aware of LACERS’ ESG engagement efforts, LACERS announced its voting position on Proposal 7 on LACERS’ website and on LACERS’ LinkedIn page.
Outcomes of the development of the ESG Risk Framework include a heightened awareness of ESG risk and a better-defined engagement process. Other benefits include:
- Providing LACERS more insight into what ESG risk factors matter the most to its Board.
- Increasing flexibility for LACERS to respond to proxy voting and engagement letter requests.
As LACERS’ ESG programme and reputation as a responsible investor grows, LACERS anticipates receiving increased requests from peers and advocacy groups to join letter writing engagement campaigns; typically, such requests have short deadlines and do not provide adequate time for LACERS staff to bring forth these engagement opportunities to the Board for consideration.
To address such situations, LACERS has included a provision in its recently adopted RI Policy to delegate the decision to join letter writing campaigns from the LACERS’ Board to LACERS’ General Manager, Chief Investment Officer, and Board President, when time is of the essence and subject to a consensus being reached.
While LACERS embraces collaboration with like-minded investors, with limited staff resources, it is difficult for LACERS to be responsive to all engagement requests in a timely manner. From this perspective, LACERS anticipates updating the ESG Programme policies to include a stewardship initiative. This will provide clear guidelines on where LACERS’ ESG engagement efforts will be focused, which will be determined by LACERS’ Board. Factors that will be considered include:
- Increased interest from LACERS’ Board on the ESG risk factor.
- Materiality of the investment for LACERS.
- LACERS’ ability and capacity to influence change with the engagement.
- Increased political and/or regulatory support of ESG integration in investment selection and shareholder rights.
By streamlining its ESG engagement efforts, LACERS can focus on efforts to drive measurable solutions.