‘There's a letter missing in ESG’

The $393bn California Public Employees’ Retirement System (Calpers) is the US’ largest public pension fund.

It bases its risk and return valuations on the interactions between financial capital, human capital (employees and the community) and physical capital (natural resources and physical assets), says Anne Simpson, Calpers' managing investment director of board governance and sustainability. Unless all those forms of capital are well understood and incorporated into corporate reporting, not much will change, she says.

Q: Will the next US administration under president-elect Joe Biden make a difference?

Money talks. Politics may have the microphone right now, after the US presidential elections, but the economic logic behind sustainability is what's driving investors in this direction. Look at the S&P 500 index – 30 years ago, 85 per cent of the balance sheet was tangible; 85 per cent of the balance sheet now is formed by intangible assets.

What's happened in the economy is that human capital is a huge part of value creation. At the US Securities and Exchange Commission Investor Advisory Committee [from which I am now stepping down] we were able to build a framework for how companies in the US should start reporting. [This year] there was a three to two vote in support of [looking further into] the principles of reporting on human capital management. It didn’t adopt the more detailed-line items though, so view this as work in progress.

Q: How do you make environmental, social and governance (ESG) factors more urgent?

My conclusion, at this stage, is that there's a letter missing. We have environmental, the E; social, the S; governance, the G – but there's no F for finance.

In some markets like the US, ESG is viewed as something that nice people do. It's something for family offices, it's imbued with do-goodery. That missing F, for a pension fund, has meant that it was really quite hard to get moving on ESG. If we can add F to ESG, the knock-on effect on accounting and financial markets would be transformative.

Q: An even busier sustainability alphabet? Isn’t your ultimate goal that ESG (or ESGF) becomes redundant because those factors will automatically be included in investment decisions?

Yes, a measure of success is that we would just talk about investment. We are fiduciaries, this is how we take care of other people's money. Anyone who is not thinking about climate change or impact on workers or worrying about health and safety, any investment strategy that doesn’t consider those factors will be flawed.

For the big asset managers in the world like Calpers, success means that those letters will not feel needed, a little flag over what we're doing; those factors will just be thoroughly well-integrated in managing risk, and also in seeking out the returns that we need to pay pensions over the long term.