TheCorporateCounsel.net

CalSTRS recently announced that its Investment Committee has approved changes to the pension fund’s Corporate Governance Principles and Stewardship Priorities – both of which will be in place for a three-year cycle. I blogged last week on CompensationStandards.com about the changes that affect executive compensation and compensation (and human capital) committees. In addition, the Corporate Governance Principles incorporate changes in these areas:

– Standardized global sustainability disclosure standards – CalSTRS endorses the International Sustainability Standards Board (ISSB) Standards.

– Boards of directors’ responsibilities – Including employee wellness factors, such as workforce diversity, pay, benefits, hiring, retention and business culture.

– ESG risks and opportunities – On this, CalSTRS says it believes responsible corporate governance, including the management of environmental, social, and governance factors, can benefit long-term investors like CalSTRS. It is important for companies to consider ESG issues to ensure they are long-term sustainable companies and have considered and addressed all risks and opportunities that could affect the livelihood of the business.

The Principles also explain why it makes sense for CalSTRS to look at whether portfolio companies are managing ESG issues – for engagements as well as investment decisions:

CalSTRS’ investment activities impact other facets of the economy and the globe. As a significant investor with a long-term investment horizon, the success of CalSTRS is linked to global economic growth and prosperity. Actions and activities that detract from the likelihood and potential of sustainable global growth are not in the long-term interests of the Fund. Consistent with its fiduciary responsibilities, CalSTRS adopted the Investment Policy for Mitigating Environmental, Social and Governance Risks to ensure that the corporations and entities in which CalSTRS invests strive for long-term sustainability in their operations.

The Investment Policy, in turn, says that to assist CalSTRS Staff and external investment managers in their investment analysis and decision-making, CalSTRS has developed a list of ESG risk factors that should be considered as part of the financial analysis of any active investment decision. For passive index strategies, CalSTRS uses the ESG risk factors to guide engagement activities. The topics that CalSTRS considers ESG risk factors are listed in an exhibit to the Investment Policy.

The 18-page Principles also address the pension fund’s expectations for risk oversight, political contribution policies, overboarding, evaluation & succession planning, auditor rotation, bylaw amendments, bundled proxy proposals, and more. If your company is one of the 9,000 in the CalSTRS’ portfolio – which you can check on this page – then you should know that these Principles will be used as a voting framework at your AGMs – and the Stewardship Priorities will guide engagements.

All that said, CalSTRS’ voting policies are pretty workable – at least on their face. Many of the policies – especially the ones on “ESG” – are phrased as expectations and do not expressly state that the fund will vote against directors if the company falls short. You’ll hear about it in engagements and may see escalation over time, but CalSTRS says it wants to work with portfolio companies to find reasonable outcomes that support long-term value.

– Liz Dunshee