Big money is moving to socially responsible investing

Mega-sized endowments, pension funds and hedge funds have the ability to move the markets and change investing trends. So when two of the largest begin moving into a style or sector, it can be fruitful for investors to pay attention.

In this case, two of California’s largest pension funds (CalPERs & CalSTRs) have made environmental, social and governance (ESG) issues a major theme of their investment process. While ESG investing has been generally disappointing in the returns department over the last decade or so, the pension fund’s shift into the portfolio style certainly could bring better prospects in the years ahead. Overall, California’s decision could be the catalyst to make ESG investing more mainstream and profitable.

Billions of Social Dollars

Combined, the California Public Employees’ Retirement System (CalPERs) and the California State Teachers’ Retirement System (CalSTRs) have over $502 billion under management as of 2017; so when they throw their combined weight around an idea, it can often turn out to be a good one. This time the initiative is to incorporate environmental, social and governance ideas into their investment processes.

ESG or socially responsible investing basically adds a “filter” to stock selection by only choosing firms that meet certain social or environmental standards. These ESG screens can include everything from resource management and pollution prevention to labor and human rights issues. The basic idea is to only engage in firms that have desirable social or ethical practices. By applying these screens to their research, the two pension plans hope to achieve added returns for their investors as well as change the world for the better.

CalPERs requires that all managers receiving capital allocations employ ESG principles into their investment process. CalSTRs has a similar approach. Odds are the average retail investor doesn’t have enough capital to directly influence the board of a large corporation. However, there are ways to add a dose of ESG investing to any portfolio.

The Bottom Line

With two of the US’s largest pension funds moving now firmly committed to ESG investing, regular retail investors may want to get in on the act. While regular investors lack the size and scope of CalPERs and CalSTRs, there are plenty of ways to add social and environment values to their portfolio.