CalPERS pushes ESG in real estate

The country’s largest public pension system is rolling out an ESG benchmark system for the asset class this year.

The California Public Employees’ Retirement System is tackling environmental, social and governance themes across asset classes at its March 13 meeting, according to board documents posted Tuesday.

CalPERS is applying two principles in the ESG integration of its real assets portfolio: incorporating ESG issues into investment analysis and decision-making processes, and seeking “appropriate disclosure on ESG issues” from its managers.

To execute the first principle, CalPERS, which managed $27.9 billion in real estate as of December 31, is finalizing the real estate application of a proprietary metric system currently used for infrastructure called the ESG Consideration Matrix. The pension is incorporating sustainable investment practice guidelines into its real assets platform’s procedures manual, and is continuing to require separate account managers to comply with its responsible contractor program policy.

Additionally, CalPERS plans to continue research through its energy optimization initiative to study opportunities for “economically and environmentally optimized real estate energy use.”

The pension system also plans to roll out the Global Real Estate Sustainability Benchmark across real estate and infrastructure this year, which fulfills both principles. GRESB had more than 250 members – including 60 pension funds – as of November, according to its website. The organization covers management, policy and disclosure, risks and opportunities, monitoring and energy management systems, performance indicators, building certifications and stakeholder engagement. CalPERS plans to track managers’ adherence to ESG industry standards through the annual survey.

In its presentation materials, CalPERS highlighted a pair of buildings it acquired in 2013 as a real estate case study in ESG success. Along with external office real estate manager Commonwealth Partners, the pension system bought City National Plaza, two 51-story office buildings in Los Angeles, and implemented ESG strategies including updating the lighting system; using occupancy sensors and on/off controls for tenant equipment; retrofitting the cooling towers; and installing efficient water fixtures. These improvements, CalPERS said, reduced energy use by 38 percent annually and water use by 40 percent, saving $4.3 million annually.

CalPERS noted that it will have a greater ability to engage on ESG issues in its direct investments and separate accounts than for indirect investments.

The pension system adopted a five-year strategic plan in August to address six ESG initiatives: data and corporate reporting standards; company engagement with the UN Principles for Responsible Investing Montreal Pledge; diversity and inclusion; manager expectations; sustainable investment research; and private equity fee and profit sharing transparency.