Harvard Case - CalPERS' Emerging Equity in the Markets Principles
"CalPERS' Emerging Equity in the Markets Principles" Harvard business case study is written by Robert G. Eccles, Aldo Sesia. It deals with the challenges in the field of Organizational Behavior. The case study is 40 page(s) long and it was first published on : Mar 8, 2009
At Fern Fort University, we recommend that CalPERS continue to evolve its Emerging Equity in the Markets Principles, focusing on a multi-pronged approach that combines strategic investment, active engagement, and robust governance. This approach will allow CalPERS to effectively navigate the evolving landscape of emerging markets while remaining true to its core values of diversity, inclusion, and sustainability.
2. Background
The case study focuses on CalPERS, the largest public pension fund in the US, and its efforts to integrate Emerging Equity in the Markets Principles into its investment strategy. This initiative aims to promote diversity and inclusion within the investment portfolio, specifically targeting underrepresented groups in the investment landscape. This case study highlights the challenges CalPERS faces in balancing its fiduciary duty to maximize returns with its commitment to social responsibility.
The main protagonists are:
- Anne Sheehan, Chief Investment Officer (CIO) of CalPERS, who is tasked with leading the implementation of the Emerging Equity in the Markets Principles.
- The CalPERS Board, which oversees the investment strategy and faces pressure from stakeholders to balance financial performance with social impact.
- The investment community, which includes traditional and alternative investment managers, who are adapting to the growing demand for diverse and inclusive investment strategies.
3. Analysis of the Case Study
This case study can be analyzed using the framework of organizational change management. CalPERS is undergoing a significant shift in its investment strategy, moving from a purely financial focus to one that incorporates social and environmental considerations. This change requires careful planning and execution to ensure successful implementation.
Key factors to consider:
- Organizational culture: CalPERS has a long-standing culture of financial performance. Integrating social and environmental considerations requires a shift in mindset and a willingness to embrace new investment approaches.
- Leadership: Anne Sheehan's leadership role is crucial in driving the change. Her ability to communicate the vision, build consensus, and empower teams will be critical to success.
- Communication: Clear and consistent communication is essential to inform stakeholders about the rationale behind the new principles and to address concerns and resistance.
- Performance measurement: CalPERS needs to develop robust metrics to track the impact of its Emerging Equity investments, both financially and socially. This will help demonstrate the value of the initiative and build support for its continuation.
- Stakeholder engagement: CalPERS needs to engage with a wide range of stakeholders, including investors, asset managers, and advocacy groups, to ensure buy-in and collaboration.
4. Recommendations
To effectively implement the Emerging Equity in the Markets Principles, CalPERS should adopt the following recommendations:
1. Strategic Investment:
- Develop a targeted investment strategy: CalPERS should identify specific sectors and regions within emerging markets where they can make a significant impact through their investments. This could include focusing on companies with strong ESG (Environmental, Social, and Governance) practices, or those promoting economic development in underserved communities.
- Partner with diverse investment managers: CalPERS should actively seek out and partner with investment managers who have a proven track record of investing in emerging markets and promoting diversity and inclusion. This could include minority-owned firms, women-led firms, and those with expertise in impact investing.
- Utilize impact investment frameworks: CalPERS should leverage existing frameworks like the IRIS (Impact Reporting & Investment Standards) to measure the social and environmental impact of its investments. This will help ensure transparency and accountability in its investment decisions.
2. Active Engagement:
- Engage with portfolio companies: CalPERS should actively engage with the companies it invests in, promoting best practices in diversity, inclusion, and sustainability. This could include engaging in dialogues with management teams, advocating for board diversity, and supporting initiatives that address social and environmental challenges.
- Collaborate with other investors: CalPERS should collaborate with other investors, both public and private, to promote a more inclusive and sustainable investment landscape. This could include sharing best practices, advocating for policy changes, and supporting initiatives that advance the goals of Emerging Equity.
3. Robust Governance:
- Establish clear governance structures: CalPERS should establish clear governance structures to oversee the implementation of the Emerging Equity in the Markets Principles. This could include creating a dedicated committee within the board, or developing a specific set of policies and procedures.
- Develop a robust risk management framework: CalPERS should develop a robust risk management framework to assess and mitigate the risks associated with its Emerging Equity investments. This framework should consider both financial and non-financial risks, including reputational risk and social impact risk.
- Promote transparency and accountability: CalPERS should be transparent about its Emerging Equity investments and the impact they are having. This could include publishing regular reports on its investment activities, engaging with stakeholders, and responding to inquiries.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: CalPERS' mission is to secure the financial well-being of its members. This requires a balanced approach that considers both financial returns and social impact. The recommendations promote this balance by encouraging investments that deliver both financial returns and positive social impact.
- External customers and internal clients: CalPERS' external customers are its members, who expect the fund to maximize their returns. The recommendations address this expectation by focusing on investment strategies that are both profitable and socially responsible. Internal clients, including staff and the Board, need to be informed and engaged in the change process. This requires clear communication and transparency.
- Competitors: Other large pension funds are increasingly incorporating ESG considerations into their investment strategies. CalPERS needs to be competitive in attracting talent and capital, which requires a strong track record of investing in Emerging Equity.
- Attractiveness: The recommendations are attractive because they offer a potential for both financial and social returns. This aligns with CalPERS' commitment to sustainability and its desire to make a positive impact on the world.
6. Conclusion
By adopting a multi-pronged approach that combines strategic investment, active engagement, and robust governance, CalPERS can effectively implement its Emerging Equity in the Markets Principles. This will allow CalPERS to achieve its financial goals while also promoting diversity, inclusion, and sustainability within its investment portfolio.
7. Discussion
Other alternatives not selected:
- Divesting from companies that do not meet the Emerging Equity criteria: This approach could be seen as too radical and could alienate some stakeholders.
- Investing only in companies that are explicitly focused on social impact: This approach could limit investment opportunities and potentially lead to lower returns.
Risks and key assumptions:
- Financial risk: There is a risk that Emerging Equity investments may not deliver the same financial returns as traditional investments.
- Reputational risk: There is a risk that CalPERS could face criticism from stakeholders if its Emerging Equity investments do not meet expectations.
- Implementation risk: There is a risk that CalPERS may not be able to effectively implement the Emerging Equity in the Markets Principles.
Options Grid:
| Option | Advantages | Disadvantages | Risk |
|---|---|---|---|
| Strategic Investment | Potential for high returns and positive social impact | May require more time and resources | Financial risk, implementation risk |
| Active Engagement | Can lead to positive change within portfolio companies | May be time-consuming and require significant resources | Reputational risk |
| Robust Governance | Ensures transparency and accountability | May be complex and require significant resources | Implementation risk |
8. Next Steps
- Develop a detailed implementation plan: This plan should outline the specific steps that CalPERS will take to implement the Emerging Equity in the Markets Principles.
- Build a dedicated team: CalPERS should assemble a team of experts with experience in Emerging Equity investing, social impact measurement, and stakeholder engagement.
- Communicate with stakeholders: CalPERS should communicate its plans to stakeholders, including investors, asset managers, and advocacy groups.
- Monitor progress and make adjustments: CalPERS should regularly monitor the progress of its Emerging Equity investments and make adjustments as needed.
Key milestones:
- Year 1: Develop a detailed implementation plan, build a dedicated team, and communicate with stakeholders.
- Year 2: Begin investing in Emerging Equity companies, engage with portfolio companies, and develop a robust risk management framework.
- Year 3: Evaluate the impact of Emerging Equity investments and make adjustments to the strategy as needed.
By taking these steps, CalPERS can effectively implement its Emerging Equity in the Markets Principles and become a leader in promoting diversity, inclusion, and sustainability within the investment landscape.
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Case Description
The California Public Employees' Retirement System (CaIPERS)-the largest public pension fund in the U.S.-had adopted a new principles-based approach to investing in emerging market equities in November 2007. Previously, CalPERS internal and external money managers were prohibited from investing in certain developing countries because the countries failed to meet certain standards for political stability, human rights, market regulation, etc. The new principles-based approach would allow CalPERS money managers to invest in companies that were financially attractive and competitively positioned provided their business practices were sound from an environmental, social, & governance (ESG) perspective regardless of where they were located. By allowing investment in these types of companies regardless of where they operated, CalPERS had hoped to improve its investment returns. The case is set in January 2009, a little more than a year from the time the principles-based approach had been adopted. It is a good time to review the implementation process and how the new principles-based approach changed CaIPERS' emerging market equities portfolios and their returns. The case focuses on one of CalPERS' external fund managers, Dimensional Fund Advisors, and a service provider to DFA and CalPERS, KLD Research & Analytics. One question facing CalPERS with this new approach is whether to invest in PetroChina, which had been off-limits previously due to the screening criteria that were used to identify which countries qualified for emerging markets investments. The case also raises the issue of the difference between "value" and "values" investing and the future importance of ESG investing.
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