Case study by CalPERS
The California Public Employees’ Retirement System, better known as CalPERS, provides retirement and health benefits to more than 1.6 million public employees, retirees, and their families on behalf of 3,000 public employers across the state of California. Its total investment portfolio is valued at US$230 billion. CalPERS views sustainability, in its simplest form, as the ability to continue. For a long-term investor like CalPERS, sustainability considerations underpin investment decisions in order to achieve long-term risk adjusted returns consistent with fiduciary duty.Obviam was established with an objective to mobilise private investments for development. SIFEM’s capital remains the largest share of Obviam’s mandate, but its goal is to attract other clients that seek to invest responsibly in emerging markets within an established, sustainable structure. Obviam is a fund-offunds manager: it invests in private equity fund managers operating on the ground in developing countries.
CalPERS has approximately US$1.2 billion invested in the alternative energy sector through its Alternative Investment Management (AIM) program. These investments are made in private equity, usually venture capital, and are spread across hundreds of companies. The majority of these companies are in the biofuels and solar sector (22% and 21% respectively). The rest is invested in wind, building and energy efficiency, biomass and waste.
There are several promising companies in the solar and biofuels sectors, which are targeting an initial public offering (IPO) soon, but the portfolio is still maturing and thus far, only has a small number of significant winners. Market adoption has been slower than anticipated, and there is a tendency to underestimate capital intensity in product manufacturing and deployment.
For a large pension fund like CalPERS, these investments represent a relatively small share of their total AUM. However, in absolute terms these investments are significant. By trialling the diversification and performance benefits of these investments, CalPERS hopes that they are sending a signal to the market. For example, their capital commitments to the AIM Environmental Technology Program helped catalyse an additional US$4 billion of capital commitments into the alternative energy sector. Over time as track records and scalability improves, the size of their allocation is likely to reflect those of more established alternative asset class sub-sectors.
In public equities CalPERS identifies investment opportunities in those companies that have been forward-thinking on climate change. In 2010, US$500 million was allocated to an internally managed public stocks environmental index fund. This strategy is modelled on the HSBC Global Climate Change Benchmark Index and invests in approximately 380 securities around the world that derive a material portion of their revenues from environmentally friendly sectors such as lowcarbon energy production, energy efficiency management and carbon-trading.
CalPERS has a long-standing investment in forestlands. The investment target is 1% of the total investment fund representing approximately US$2.3 billion. Investments are made both in the US market and internationally and are managed by external managers. They are primarily plantations which can reduce CO2 emissions through carbon sequestration. For a long-term investor like CalPERS, forestry is a robust investment as it has proven attractive risk-adjusted returns, low correlation with other investments and diversification benefits.