Institutional Investors Are Flexing Their ESG Muscles

People tend to associate environmental, social and governance investing with stock-picking, a way to sort through companies based on their ESG practices. But not every investor can be choosy about the companies they own. Big pension, endowment and sovereign wealth funds oversee tens of billions and even trillions of dollars, which means they have to own practically everything. If they avoid companies that fall short of their ESG standards, they quickly run out of places to park their money.

Instead, these so-called universal owners are trying to bolster companies’ ESG practices by supporting ESG-related proposals and removing directors who stand in the way. The California State Teachers’ Retirement System, the second-largest pension fund in the U.S. with more than $300 billion in assets, announced recently that beginning with the 2022 proxy season, it will oppose directors who are moving too slowly on diversity and climate change and support shareholder proposals that seek to reduce carbon emissions.

Specifically, Calstrs wants more women on corporate boards and more information about the diversity of board members, which goes to the social pillar, or the “S,” in ESG, and overlaps with the “G.” Calstrs also wants more climate-related disclosures along the lines the Securities and Exchange Commission recently proposed, as well as targets for reducing greenhouse gas emissions, which obviously falls under the “E.”

This ESG activism isn’t entirely new. Activist investors have long sought a say in how companies are run, often related to governance practices thought to affect companies’ performance, such as classified boards, independent directors and takeover defense tactics. What is new is that investors like Calstrs now want a say not just on “G” primarily but on “E” and “S” as well.

Some will accuse Calstrs of using ESG to push a political agenda better left to legislators. But Calstrs is adamant, as is every ESG investor I’ve encountered, that it is merely trying to manage risk and improve the performance of its portfolio. “This is about investment, not politics,” Aeisha Mastagni, a Calstrs portfolio manager, told me. “More diverse companies perform better. Companies that provide adequate disclosure on climate risk will be better prepared for the future. Those things mitigate risk and add value, which is better for Calstrs’s portfolio returns.”