"ESG Investing Suffers a Setback in California" (CalPERS)

From Barron's Nov. 2:

A funny thing happened recently in the left-leaning Golden State. In a board election last month, members of the California Public Employees’ Retirement System, or Calpers, the biggest pension fund in the nation, threw out their president and gave ESG investing a bloody nose.

ESG is the increasingly popular asset-management style that applies environmental, social, and governance standards to screen potential investments. Following this approach, an investor might avoid certain stocks or push shareholder proposals to modify corporate behavior. Unfortunately, they often favor hard-to-define social objectives rather than the narrower goal of maximizing shareholder returns.

In the vote, Jason Perez, a sergeant in the Corona, Calif., police department, upset board member Priya Mathur, a 15-year Calpers veteran, who was also board president and a champion of Calpers’ focus on ESG investing. The pension fund runs $351 billion for its 1.9 million members. Because of its size and stature, Calpers is among the most influential institutional investors in the U.S., and its policies are often adopted by other state pension funds.

Perez, who received 57% of the vote to Mathur’s 43%, ran a campaign that criticized her support for Calpers’ use of ESG, which goes back to at least 2012. Perez’s victory didn’t come as a surprise to those who bothered to look at Calpers’ mediocre recent returns. And that’s exactly what members seemed to have done.

Over the past five and 10 years ended on June 30, the close of Calpers’ fiscal year, the fund returned 8.1% and 5.6%, respectively, in one of the strongest bull markets in history. In the same periods, the S&P 500 index returned 13.4% and 10.2%. In fairness, the fund’s portfolio slightly topped its benchmark over the five years ended on Dec. 31, but underperformed over 10 years.

In an interview with Barron’s, Perez credits his win to a growing belief among members that ESG wasn’t doing them any favors. “Calpers’ social investment focus and lack of returns received a lot of attention of labor up and down the state….Everyone noticed the performance and [Calpers’] desire to concentrate on social issues.”

Perez is straightforward about his plans: The mission of the fund is primarily to provide benefits to members and reduce the burden on contracting agencies like the municipalities that hire state workers, he says. “We have a fiduciary duty, and I intend to hold them [Calpers] to that.”...

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