CalPERS' Huge ESG Data Convergence Project in Private Equity

Anna Gordon of Chief Investment Officer reports on how CalPERS’ project to measure ESG in private equity has 100 organizations managing $8 trillion participating:

Three months ago, the California Public Employees’ Retirement System (CalPERS) launched the ESG Data Convergence Project, an attempt to measure environmental, social, and governance (ESG) milestones within private equity. The pension has partnered with The Carlyle Group, the international private equity asset management group, on the project.

At yesterday’s CalPERS board meeting, Julia Jaskolska, associate investment manager of private equity at CalPERS, told the board that the project has now reached more than 100 organizations and $8 trillion assets under management (AUM). More updates regarding the project are expected to come in the upcoming months.

ESG has traditionally been difficult to measure in private equity since private equity companies are not beholden to the same levels of transparency as public companies.

CalPERS and The Carlyle Group are hoping to collect data and measure company performance on six different factors: greenhouse gas emissions, renewable energy, diversity of board members, work-related injuries, net new hires, and employee engagement.

“We’re doing this work in order to support CalPERS’ fiduciary duty to generate sustainable risk-adjusted returns to pay benefits,” said Managing Investment Director Anne Simpson at the board meeting, in a reference to the pension fund’s efforts at increasing sustainability.

This story caught my attention because earlier today, I had a great chat with Joy Williams who previously worked at Ontario Teachers' Pension Plan and then Mantle314 which is now called Manifest Climate

Joy now works at the Glasgow Financial Alliance for Net Zero (GFANZ):

The Glasgow Financial Alliance for Net Zero (GFANZ) was launched in April 2021 by Mark Carney, UN Special Envoy for Climate Action and Finance and UK Prime Minister Johnson’s Finance Adviser for COP26, and the COP26 Private Finance Hub in partnership with the UNFCCC Climate Action Champions, the Race to Zero campaign and the COP26 Presidency.

Bringing together existing and new net-zero finance initiatives in one sector-wide coalition, GFANZ provides a forum for leading financial institutions to accelerate the transition to a net-zero global economy. Our members currently include over 450 financial firms across 45 countries responsible for assets of over $130 trillion.

We’re focused on broadening, deepening and raising net-zero ambitions across the financial system and demonstrating firms’ collective commitments to supporting companies and countries to achieve the goals of the Paris Agreement. We also support collaboration on steps firms need to take to align with a net-zero future.

GFANZ membership is predicated on science-based commitments to net zero

Race to Zero is the UN-backed global campaign rallying non-state actors – including companies, cities, regions, financial and educational institutions – to take rigorous and immediate action to halve global emissions by 2030. All members are committed to the same overarching goal: reducing emissions across all scopes swiftly and fairly in line with the Paris Agreement, with transparent action plans and robust near-term targets. All actors must meet stringent criteria.

Access to GFANZ is anchored in the Race to Zero campaign to ensure credibility and consistency. This means GFANZ firms’ net-zero commitments must use science-based guidelines to reach net-zero emissions by 2050, cover all emission scopes, include 2030 interim target settings and commit to transparent reporting and accounting in line with Race to Zero criteria.

GFANZ’s workstreams are about turning commitment into action

GFANZ is focused on moving the needle on 7 key areas critical to the net zero transition; these include:

  • Sectoral pathways: catalysing alignment between financial institutions and major global industries on sector-specific pathways to reach net-zero emissions
  • Real economy transition plans: accelerating decarbonisation in the real economy by describing financial sector expectations of transition plans from the companies the sector engages with and finances
  • Financial institution transition plans: driving convergence around sector-wide best practices for financial institutions in designing and implementing credible net-zero transition plans
  • Portfolio alignment measurement: supporting the development and effective implementation of portfolio alignment metrics for financial institutions and driving convergence in the way portfolio alignment is measured and disclosed
  • Mobilising private capital: supporting the mobilisation of private capital to emerging markets and developing countries through private sector investments and public-private collaboration
  • Policy: advocating for the public policy needed to accelerate investment in net-zero aligned activities and organizations
  • Building commitment: broadening the nature and number of financial firms that are credibly working towards net-zero

GFANZ Principals Group

GFANZ is led by a Principals Group comprising leads from finance industry net-zero coalitions that join Race to Zero and GFANZ. The Principals Group sets the strategic direction and priorities of GFANZ and monitors progress against them. They have launched an ambitious program of technical work to generate the commitment, engagement, investment and net-zero alignment required to drive forward the global economy’s transition to net zero.

You can learn more about GFANZ here as this organization is taking the lead to push global financial institutions to do their part in halving global emissions by 2030 and reaching net-zero emissions by 2050.

I told Joy that I was expecting more from COP26 and didn't see any major coverage from pensions or other financial institutions.

Joy explained to me that even though the conference takes place every year, major policy announcements are made every five years (last one being 2020) "but the big difference at COP26 was how present major financial institutions were."

She also told me that this year, members got to work fast on COP27 and didn't waste time following the last conference to get to work. 

We then got into data measurement issues and I told her flat out, it's really hard for me to keep track of evolving issues in ESG as the landscape is changing so fast but one thing I do know is we need better data and a uniform way to measure progress across sectors, industries and countries.

Joy agreed and told me she will keep me and my readers informed on the latest developments coming out of GFANZ.

Why am I sharing this with you?

Because I applaud these initiatives and want to keep track on what is going on.

I also applaud CalPERS' ESG Data Convergence Project in private equity which it is doing with The Carlyle Group:

CalPERS and The Carlyle Group are hoping to collect data and measure company performance on six different factors: greenhouse gas emissions, renewable energy, diversity of board members, work-related injuries, net new hires, and employee engagement.

Again, we need better data to measure all these factors and we need uniformity to measure the success across private equity portfolios from the world's pension funds, sovereign wealth funds and other institutional investors. 

In other words, ESG success critically depends on getting ESG data right and companies like Ortec Finance are playing a pivotal role here (there are others).

But what I like about the ESG Data Convergence Project is the focus on private equity:

Leading global GPs and LPs have partnered to align on a standardized set of ESG metrics and mechanism for comparative reporting.

The Project's objective is to streamline the private equity industry’s historically fragmented approach to collecting and reporting ESG data in order to create a critical mass of meaningful, performance-based, comparable ESG data from private companies. This allows GPs and portfolio companies to benchmark their current position and generate progress toward ESG improvements, while enabling greater transparency and more comparable portfolio information for LPs.

To create this convergence, the Project aligns on reporting a core set of six initial ESG metrics, drawn from existing frameworks. The metrics cover: Scopes 1 and 2 greenhouse gas emissions, renewable energy, board diversity, work-related injuries, net new hires, and employee engagement. For the 2021 calendar year, GPs will track and report these six metrics a standardized format for underlying portfolio companies. The data will be shared directly with invested LPs and aggregated into an anonymized benchmark by Boston Consulting Group (BCG), which supported this overall effort.

The group plans to meet annually to assess the prior year’s data, and to refine and build on these initial metrics, prioritizing materiality. This collaboration is intended to be a long-term mechanism to increase the quality, availability, and comparability of ESG data in private markets.

The partnership is open to any GPs and LPs that wish to join and agree to support the principles of the work. The effort encourages private equity industry stakeholders to work together to gather better, decision-useful ESG data in order to generate deeper insight into ESG factors and their relationship to financial outcomes, and, ultimately, to drive greater progress on critical ESG issues.

To learn more about this initiative please see the resources posted here.

Clearly this partnership requires collaboration among GPs and LPs but also among LPs to share best practices to gather better data and generate better outcomes.

At the end of the day, it's all about generating better outcomes and coming closer to the goal of attaining net-zero by 2050 or sooner.

And this requires massive collaboration, something which Nathalie Palladitcheff, President and Chief Executive Officer of Ivanhoé Cambridge shared with me late last year when I interviewed her and and Stéphane Villemain, Vice President, Corporate Social Responsibility.

Nathalie shared this with me on aligning all the interest of the value chain: "We want not only ourselves but our partners -- asset managers, property managers, bankers, lenders -- on board to have the same targets and goals. We need this collaboration."

She added: "Our industry is very competitive, most of the time we are competing among ourselves but today we should compete for the world not among ourselves. Wherever the best ideas are, we should replicate them, make them best practices of the industry and not hide them for ourselves."

I couldn't agree more, when it comes to ESG, GPs and LPs need to have alignment of interests and make sure they're sharing best practices on everything from data to measuring outcomes to whatever is else is required to achieve the net-zero outcome across the world in a timely but realistic manner. 

This isn't easy. As Joy explained to me, some countries have taken the lead while others are stalling and this too impacts progress and outcomes.

A few other things to mention here. The article above states ESG has traditionally been difficult to measure in private equity since private equity companies are not beholden to the same levels of transparency as public companies.

That's true but LPs and private equity GPs can exert more influence on private companies so even though transparency isn't the same as in public markets, it doesn't mean the outcomes in private markets can't be just as good, if not better. 

There's definitely a lot of pressure being placed on all companies right now, including big oil producers which are jumping on the ESG bandwagon. Not surprisingly, the skeptics aren’t buying it:

I'm more optimistic that all companies, private and public will take the necessary steps to significantly reduce their greenhouse gas emissions by 2050.

In related private equity news, Anna Gordon of Chief Investment Officer recently reported on how CalPERS is considering selling up to $6 billion in private equity stakes:

The California Public Employees’ Retirement System (CalPERS) has engaged financial  services company Jefferies about the potential of selling up to $6 billion of its private equity stakes, according Buyouts magazine. This comes just after CalPERS announced it would be increasing the percentage of its portfolio allotted to private equity to 13% from 8% in November.  

CalPERS board member Margaret Brown told Secondaries Investor in November that the fund is considering investing in secondaries and divesting from some of its legacy private equity investments.

“We have some really old private equity that’s just sitting there and doing nothing,” she said.

Private equity has performed extremely well for public pensions this past year. Major funds such as the California State Teachers’ Retirement System (CalSTRS), the Maryland State Retirement and Pension System (MSRPS), and the Public Employees’ Retirement System of Mississippi all saw private equity returns of above 50% in fiscal year 2020-2021.

CalPERS saw 43.8% in private equity returns for the fiscal year ending in June. It was the fund’s best-performing asset class. CalPERS had a total net return of 21.3%.

Indeed, Private Equity helped CalPERS top $500 billion in assets for the first time but equity markets are volatile and it has an estimated funding shortfall of more than $120 billion.

CalPERS won't achieve fully funded status through Private Equity alone but this will remain a very important asset class to generate the long-term required returns.

And while much is being made of it selling up to $6 billion of its private equity stakes, I think that's a good move and they need to focus their attention now on investing with top partners and maybe with new partners that offer a more long-term perspective:

Anyway, I have full confidence in Greg Ruiz who leads the Private Equity program as well as Yup Kim, Investment Director and Head of Investments, Private Equity, which I interviewed late last year on co-investments and more. 

Yup posted this on Linkedin to celebrate the new year:

I congratulate the private equity teams at CalPERS, Kaiser Permanante, Alaska Permanent and PSP Investments for being nominated for Private Equity International's 2021 LP of the Year. 

You can still cast your vote here.

Alright, let me wrap it up there.

Below, “ESG priorities will be and should be different for each company,” says Julia Jaskólska, Lead of  Environmental, Social and Governance (ESG) and Co-Investments, Calpers Private Equity. “That’s what makes the world so diverse and beautiful, multiple people solving different parts of the same problem.”

And Marcie Frost, CEO, CalPERS, shares her thoughts on climate reporting, COP26 outcomes, and more at the Bloomberg Sustainable Business Summit: Focus on Finance with Bloomberg TV’s Sonali Basak (December 8, 2021).