CalPERS’ water, climate and tech research to guide future ag investment

The $356bn California pension's director for sustainable investments discusses how its efforts to centralize ESG factors could shape its agriculture strategy.

Future agriculture investments by the California Public Employees Retirement System will be guided by the conclusions of ongoing internal studies of water, disruptive technologies and climate, according to the executive leading the research effort.

Beth Richtman, who assumed her position as CalPERS’ managing investment director for sustainable investments in April, told Agri Investor that the studies are to be completed by March. The research is part of the effort she leads to integrate environmental, social and governance (ESG) considerations across the $356.8 billion pension’s entire portfolio.

In June, CalPERS’ board of administration adopted a change to the Environmental Management Practice section of its Governance and Sustainability Principles policy to inform companies how it suggests they incorporate environmental considerations into their long-term strategies.

Specifically, the update encourages companies to consider the role that change, volatility or deterioration in the environment will have on their business operations; any regulatory, reputational or licensing risks presented by the company’s environmental actions that result in pollution, waste or deforestation; and any risks derived from the transition of a company’s customers or industry toward more sustainable products, services and practices.

“We really want to see our companies identifying and managing the material environmental risks and opportunities that are relevant to their short- and long-term success,” Richtman said. “For an agriculture company, the risk could be run-off and pollution and how it gets into the water system, and how pricing or penalties related to that might change – especially as water becomes more scarce.”

Considerations for agriculture resulting from that approach could also include whether companies are positioned to benefit from increasing consumer demand for organic produce, or if they can withstand ecosystem degradation challenges – such as those that have recently forced some US farmers to import pollinators from Europe, Richtman said.

“We want to make sure that an agricultural manager or investment vehicle is thinking through: what are the assumptions about the natural capital availability? How might degradation of those systems be an issue?” Richtman added. “Some models might actually benefit from, or help prevent, ecosystem degradation.”

Measuring impact

As more LPs and managers increase their focus on ESG considerations, Richtman said she does expect competition to increase for investments that offer potential for both market-rate returns and legitimate social impact. She noted there is already significant pressure to develop methodologies for measuring the social impact of investments, and her effort at CalPERS is designed to encourage what she calls “why wouldn’t you moments,” when such data can prove an ESG-minded investment does not sacrifice returns.

“We’re not an impact investor,” Richtman explained. “But in places where we are making an investment in a fund where we are trying to achieve a market rate of return and there’s an impact component, we do want to understand how they are assessing their impact. Across a lot of industries, you are going to see more investors – when they have that data – having that ‘why wouldn’t you’ moment.”

While many managers have highlighted the UN’s Sustainable Development Goals as part of their efforts to measure the social impact of their investments, Richtman said that CalPERS is still assessing how it will utilize those broad societal goals.

“They weren’t developed as an investment framework, but they are useful because people consider them the world’s playbook or the world’s strategy,” Richtman said. “As an investor, investing globally, you kind of want to understand the world’s strategy, but we’re a little early for me to say too much about how we would measure investment against it.”