The Virtue of CalPERS' Emerging Equity Markets Principles

Journal of Sustainable Finance and Investment, Vol. 1, No.1, pp. 62-76, 2011

15 Pages Posted: 9 Dec 2011

See all articles by Gabriel A. Huppé

Gabriel A. Huppé

Carleton University - Carleton Centre for Community Innovation

Tessa Hebb

Carleton Centre for Community Innovation

Date Written: February 2011

Abstract

This article argues that CalPERS' new principles-based approach to investing in emerging markets stands at the midpoint between its previous alpha-generation policy of complete country-level divestment and its beta enhancement associated with universal investing in its domestic and developed markets. Although CalPERS' previous policy addressed macro-level standards at a country level by negatively screening out companies in restricted countries, it precluded CalPERS' normal practice of corporate engagement to raise environmental, social and governance (ESG) standards at the company level in these markets. We argue that the new policy brings CalPERS' emerging market portfolio more closely in line with its policies of engagement. We describe this policy as `enhanced alpha generation'. We use CalPERS' emerging market portfolio holdings data and cross-reference these company holdings with KLD data to contract extra-financial merits of the new policy. We further examine the share prices of these firms against standard industry benchmarks to determine the policy's material impact on CalPERS' portfolio. We conduct interviews with CalPERS' investment managers - both internal and external - to determine how the new emerging market investment principles are incorporated in investment processes. This allows us to identify two approaches to the implementation of the Principles: a `hard-fast' screening approach, and a `value tradeoff' approach. One of which entailed significant opportunity costs. These findings, when assessed in the context of various trends in the investment environment, and issues brought fourth in our interviews - with related investment practitioners, CalPERS' trustees, and leading ESG experts at KLD and Verité - sheds light on the future state of ESG investing in emerging markets.

Keywords: CalPERS, corporate engagement, corporate social responsibility, economic development, emerging markets, pension funds

JEL Classification: G23, F21, F30, O19

Suggested Citation

Huppé, Gabriel A. and Hebb, Tessa M., The Virtue of CalPERS' Emerging Equity Markets Principles (February 2011). Journal of Sustainable Finance and Investment, Vol. 1, No.1, pp. 62-76, 2011, Available at SSRN: https://ssrn.com/abstract=1969615

Gabriel A. Huppé (Contact Author)

Carleton University - Carleton Centre for Community Innovation ( email )

2103 Dunton Tower
1125 Colonel By Drive
Ottawa, Ontario K1S 5B6
Canada

Tessa M. Hebb

Carleton Centre for Community Innovation ( email )

1125 Colonel By Drive
DT 2125
Ottawa, Ontario K1S0R2
Canada

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