Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight: Methane emissions

Meaningful progress toward tackling methane emissions

Most people tend to associate carbon dioxide with greenhouse gases and climate change. However, carbon dioxide is just one of the gases that can lead to the warming of the planet. Methane is also a greenhouse gas and is more than 28 times as potent as carbon dioxide at trapping heat in the atmosphere. Some methane emissions come from natural sources, but many are a product of human activities, such as operations to extract oil and gas, and agriculture. Methane is estimated to be responsible for 30% of the current rise in global temperature since the industrial revolution, so addressing it is vital to the global effort to avoid the most substantial impacts of climate change.

Oil and Gas Methane Partnership 2.0

The Oil and Gas Methane Partnership 2.0 is a United Nations-led program focused on the measurement, reporting and mitigation of methane emissions. Methane emission reduction is one of the most economically viable and immediate means to slow climate change. We are steadfastly engaging companies to join OGMP 2.0 as we believe that effective management of climate risks, including methane emissions, is important to the long-term sustainability of a company. So far, more than 120 companies, with assets in more than 70 countries on five continents, representing more than 38% of the world’s oil and gas production, have joined OGMP 2.0. We conducted heightened engagements this year focused on OGMP 2.0 adoption, including:

• Co-hosting a workshop in conjunction with Nordea Asset Management, New York State Teachers’ Retirement System, Environmental Defense Fund and the United Nations Environment Programme. The workshop took place in Calgary, Alberta, Canada, and was attended by representatives from some of Canada’s largest oil and gas companies. Investors spoke directly to companies to educate them on OGMP 2.0 and share why we believe participation in the partnership is important to risk management.
• We wrote letters to 38 companies across the natural gas value chain asking them to join OGMP 2.0.

OGMP 2.0 adoption saw notable progress in 2023. Some companies that joined the partnership include:

• ExxonMobil: America’s largest multinational oil and gas company
• Williams Companies: Oklahoma-based natural gas company
• Romgaz: largest gas producer in Romania
• INPEX Corporation: largest oil and gas exploration company in Japan
• Bapco: Bahrain state-owned oil and gas company
• KazMunayGas: Kazakhstan state-owned oil and gas company
• Petrobras: Brazil state-owned oil and gas company

While large, publicly held oil and gas companies, such as ExxonMobil, are more recognizable household names, less familiar state-owned companies like Petrobras produce most of the world’s oil and gas. Therefore, it’s critical to persuade these state-owned companies to commit to initiatives such as OGMP 2.0, which are focused on best practices in emission mitigation.

New Environmental Protection Agency rules address methane

The U.S. Environmental Protection Agency announced new rules in December 2023 meant to drastically slash methane emissions. The rules would achieve a nearly 80% reduction from expected future methane emissions. We provided feedback to the EPA during an open comment period and sent letters to 46 oil and gas companies that the rules would apply to urging them to also submit clear, specific and constructive comments to the EPA as well.

Stewardship priorities update

Corporate and market accountability 

Protecting the rights of shareholders at Masimo and beyond

In 2022, investor Politan Capital Management sought to nominate directors to the board of Masimo, a publicly held medical devices company. In response, Masimo adopted measures intended to block Politan’s ability to nominate directors. Politan filed a lawsuit against Masimo over the measures adopted. Additionally, Masimo’s CEO had an employment contract that would have rewarded him an exorbitant payout at the expense of shareholders if certain changes occurred on the board, such as Politan’s directors being elected. The measures adopted by Masimo along with the CEO’s employment contract made it almost impossible for shareholders to elect independent representatives to the board. The ability for shareholders to choose directors, including nominating their own, is a fundamental shareholder right.

In 2023, we joined Politan in its lawsuit against Masimo. For us, litigation is generally a last resort option and only used when other engagement options have been exhausted or are not viable. The rationale to join was both to remedy the poor corporate governance practices and erosion of shareholder rights at Masimo and deter setting a precedent that other companies may try to follow. The company ultimately rolled back the adopted measures, and the CEO agreed to forgo the payout stipulated in their employment contract. The judge presiding over the case ordered Masimo to reimburse Politan nearly $18 million in legal fees and stated: “This court recognizes the obvious fundamental benefit of preserving stockholders’ right to vote and elect directors of their choosing.”

Board effectiveness 

Continued focus on improving board diversity

We believe the boards of companies we invest in should use a director nomination process that considers a diverse mix of skills, background, experience, age, gender, sexual orientation and identification, cultural, racial and ethnic compositions that are most appropriate to the company’s long-term business needs. We often engage companies to consider improving the diversity of the board. Two oil and gas companies that we recently engaged on board diversity, ExxonMobil and SilverBow Resources, each announced the appointment of a new woman director. Both companies now have greater than 30% women representation on their boards. Thirty percent representation has long been viewed as an important threshold to ensure a minority has a sufficient voice in decision-making.

Net zero transition 

A look back at the success of Climate Action 100+

When investors across the globe gathered for the Principles for Responsible Investment Conference in Tokyo in 2023, the theme ”moving from commitments to action” highlighted the work of Phase 2 of the Climate Action 100+ initiative. The PRI is one of five investor networks that guide the largest global investor engagement initiative on climate change. We led engagements with 10 of the 170 CA100+ focus companies and shared lessons learned from a successful year engaging high-emitting companies. Below are some highlights from the last quarter of 2023:

• The Asia Investor Group on Climate Change, a CA100+ sponsor network, hosted an in-person forum in Tokyo entitled “Transformation of the Steel Sector in Asia.” Us and other global investors and steel companies from Japan, China and South Korea attended. The meeting resulted in a set of recommendations from investors and companies aimed at increasing progress in decarbonizing the steel industry. Eighty percent of the steel manufactured globally comes from Asian markets.
• ENEOS, a Japan-based oil and gas company, met with us and Sompo Asset Management to describe the company’s plans to achieve carbon neutrality by 2050. The company discussed details of a carbon capture and sequestration operation planned in western Japan. The project is a collaboration between several business groups and has the backing of the Japanese government.
• Duke Energy, a Charlotte, North Carolina, based utility company, is detailing how it is working to create a just transition in its move away from coal-fired power. “Just transition” refers to minimizing negative impacts on workers and communities during the global transition toward using cleaner energy. Led by CalSTRS, CA100+ investors met with Duke executives to better understand the company’s timeline to wind down coal burning power plants. Duke Energy plans to retire 15,000 megawatts of coalfired power by 2035.

Responsible firearms 

Continuing the pursuit of a firearms merchant category code

Merchant category codes are used by credit card companies to identify types of goods or services being sold. At the start of 2023, the path for the major credit card networks, Visa, MasterCard, American Express and Discover, to implement a new merchant category code for firearms retailers was clear. The companies were preparing directions detailing how retailers and financial institutions would be affected by the new firearm retailer code. Firearms safety advocates felt the new merchant category code could help the credit card companies and retailers better manage risks. For example, identifying the purchasing activity of firearms traffickers and unusual purchasing activity by individuals that could potentially be involved in mass shooting events could lead to actionable steps to make communities safer.

In March 2023, the credit card networks suddenly put a pause on the implementation, citing legislation in various states that would significantly impact their ability to make the changes. Since that time, Texas, Florida, Idaho, North Dakota, West Virginia, Montana and Mississippi have all implemented laws to restrict the use of the merchant category code for firearms retailers. The laws have slight differences, but all aim to prevent the collection of any data regarding purchases at firearms retailers.

California went in the opposite direction, passing legislation to require the use of the merchant category code for firearms retailers. The California law will require the use of this new merchant category code by May 1, 2025.

We are meeting with the credit card companies mentioned earlier to better understand how these laws will affect their businesses. Most of the companies acknowledge the difficulties this presents from an operations perspective, but all are committed to following the laws in each state.

None of the companies have decided the next steps for implementing the firearms retailer merchant category code in states where there are no laws regarding a merchant code for firearms, but they believe there will be additional legislation in other states regarding this issue.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

Highlights from the 2023 proxy season

Each year, CalSTRS casts approximately 100,000 proxy votes at more than 10,000 company shareholder meetings. As part of our mission, we influence the companies we invest in by actively casting our proxy votes at annual board meetings, supporting corporate board members and resolutions that align with our interests—to manage risk in the CalSTRS Investment Portfolio to achieve returns and pay California educators’ hard-earned benefits. Leading up to the 2023 proxy season, we announced our intent to increase the scrutiny of our votes against boards that are not appropriately managing and addressing sustainable business practices.

We carried through with this commitment by voting against:

• The boards of directors at a record 2,035 global companies because they did not provide necessary climate risk disclosures. Disclosure is important for investors to appropriately assess the financial risk climate change poses to a company’s long-term profitability.
• Certain directors at 3,401 companies that either lacked board diversity or failed to disclose key information about the diversity characteristics of their board. Research shows the financial performance of an organization improves when teams are diverse.
• 31.5% of executive compensation plans. We scrutinize the compensation plans of executives, ensuring proper pay-for-performance alignment, which in turn encourages executives to focus on long-term performance of their company.

In addition to voting on issues that companies put up for a vote, investors can also raise issues for all investors to vote upon. These are known as shareholder proposals and often address important environmental and social factors. We carefully consider and vote each shareholder proposal based on its merit and alignment with our mission of sustaining the trust and securing the financial future of our members—California’s public educators. In the 2023 proxy season, there were more than 1,200 proposals at our portfolio companies. We supported 42% of those proposals.

When we decide to vote against a shareholder proposal, it’s due to one or more of these reasons:

• There are structural issues with how the proposal is written.
• The proposal may be overly prescriptive, and we prefer companies to determine their own best strategies.
• The company may already provide the information the proposal asks for, which means another report would not be a good use of company resources.

This was the first year universal proxy cards were used for contested board elections, in which both the company and an investor put up nominees for the board of directors. We have long supported the implementation of universal proxy cards to ensure investors can elect the most qualified boards possible.

In the past, at contested board elections, investors were forced to choose between the entire slate of directors nominated by the company or the slate nominated by the investor. Universal proxy cards allow proxy voters to mix and match directors nominated by both the company and investor. The result is the ability of voters to choose the best possible mix of board members from all available nominees. While still preliminary, our observation is that companies are more likely to work with investors to resolve disputes before they escalate to a contested director election.

You can view our voting record at all public companies.

Stewardship priorities update

Corporate and market accountability

CalSTRS establishes priorities for future standard-setting to enhance sustainability disclosures

The International Sustainability Standards Board is developing a comprehensive global baseline of sustainability disclosures focused on the needs of investors and the financial markets. In May 2023, the ISSB opened a consultation period requesting comments from companies, investors and other interested stakeholders. The purpose of the consultation was to establish strategic direction of the ISSB during the next two-year period, including input on how the ISSB should prioritize its workload and what new standard-setting projects it should explore.

CalSTRS responded by emphasizing the importance of the ISSB focusing on ensuring a smooth implementation of our first two disclosure standards [known as S1 (general disclosures) and S2 (climate disclosures)] that were released in June 2023. Additionally, we identified human capital management, which broadly refers to an organization’s workforce practices, as a project for future standard-setting, including emphasis on topics such as workforce composition and costs; diversity, equity and inclusion; and investment in employee development.

The ISSB is expected to deliberate comments received through the end of 2023 and publish its two-year work plan early in 2024. We remain committed to working closely with the ISSB both to push for broad adoption of the general and climate disclosures by companies and in the development of new global standards.

Board effectiveness

California investor coalition continues to make progress on board diversity

California-based investors, including CalSTRS, California Public Employees’ Retirement System, Los Angeles County Employees Retirement Association and San Francisco Employees’ Retirement System, wrapped up another year of diversity-related engagement at the end of June 2023. The group has been building success since its inception in 2015 with an initial focus on increasing the board diversity of California companies.

In 2022, the same California-based investors expanded their focus to 60 companies in the MSCI USA Investable Market Index (a stock market index that covers the U.S. broadly and is not California-specific). The focus of the engagement with these companies was to increase diverse director representation and implement governance practices that would ensure future board refreshment and expanded recruitment practices. The California group’s efforts resulted in 29 companies appointing 35 diverse directors. Additional engagement successes include:

• Twenty-four companies updated their definition of diversity to include gender and race/ethnicity in either their proxy or governance documents.
• Twenty-two companies included a skills matrix in their proxy statements.
• Fifteen companies included a diversity matrix in their proxy, often combined with the skills matrix.
• Seven companies adopted a diverse director recruitment policy that requires candidates from underrepresented groups be included in the initial search pool of candidates.

For the fiscal year 2023–24 engagement season, the group will engage 52 companies in the Russell 3000 index (an index that covers more companies than the MSCI USA Investable Market Index). These engagements will encourage companies to enhance their board diversity disclosures, address board diversity in board refreshment and recruitment practices, and increase diverse director representation.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

Global sustainability reporting standards arrive

In June 2023, the International Sustainability Standards Board announced its first two disclosure standards for capital markets worldwide. These standards are requirements that will bring needed consistency to sustainability reporting by companies. The standards are intended to serve as a global baseline that will allow investors to better assess company sustainability risks and opportunities and make more informed decisions, as these risks and opportunities can have a material impact on a company’s financial performance.

The ISSB was established in 2021 by the International Financial Reporting Standards Foundation and its creation was announced at the United Nations Climate Change Conference, better known as COP26. Even before ISSB was founded, CalSTRS has strongly advocated for the establishment of global sustainability standards to inform investment decision-making.

ISSB developed its standards after years of consulting with numerous stakeholders, including investors, companies, governments and nonprofit organizations. Throughout this period, CalSTRS provided feedback and gave detailed recommendations on how to develop these standards to be most decision-useful for investors.

The ISSB itself is built upon years of sustainability-related standard setting development and progress. For example, the ISSB integrates the reporting schemes of the Task Force on Climate-Related Financial Disclosures and the Sustainability Accounting Standards Board. TCFD provides a framework for company reporting on governance, risk management, and measurement and disclosure of climate risks. SASB developed disclosure standards on material and industry-specific sustainability risks and encourages companies to report based on these standards. CalSTRS was integral in helping to develop both reporting frameworks.

The ISSB focused on ‘interoperability’ when developing its standards. Interoperability means the standards work in a complementary manner with existing local and regional reporting requirements. This is important as some jurisdictions are more advanced in their reporting requirements, or have stricter requirements, than others. Many companies also operate in multiple countries; thus, a single global baseline reporting standard alleviates some of the administrative burden for these companies and supports how global investors, like CalSTRS, invest.

The ISSB standards require companies to disclose scope 1, 2 and 3 greenhouse gas emissions. Scope 1 emissions come from a company’s direct operations; scope 2 emissions are associated with the electricity the company purchases; and scope 3 are indirect emissions from the company’s supply chain and emissions from the use of the company’s products. In the global shift toward a low-carbon economy and in advancing CalSTRS’ net zero pledge, emissions measurements and disclosures are valuable tools for assessing a company’s risks and opportunities.

The ISSB standards go into effect in January 2024, with the first company reports available for investors in 2025. Meanwhile, CalSTRS will continue to support the ISSB by playing an active leadership role in the Investor Advisory Group and by encouraging companies to adopt the new reporting standards.

Stewardship priorities update

Corporate and market accountability

New rules ensure appropriate use of share buybacks

Last May, the Securities and Exchange Commission strengthened disclosure rules for public companies that utilize share buybacks. Share buybacks refer to the practice of companies purchasing their own stock back from shareholders, thus decreasing the amount of their stock available in the public market.

Sometimes these buybacks can be used for reasons not in the best interests of shareholders. One example is when share buybacks are used to manipulate stock prices, which can benefit executives with compensation packages linked to the company’s stock price. The newly enhanced disclosure rules will provide better insight into the amount and timing of share buybacks and will help reveal a company’s rationale for conducting the buybacks. CalSTRS believes better disclosure will deter companies from using buybacks for reasons that may negatively impact shareholders like CalSTRS.

Share buybacks have long been a focal point for the Council of Institutional Investors, an organization that promotes best practices in corporate governance. CalSTRS has a long-standing relationship with CII, including serving in leadership roles. CalSTRS staff currently serves as the board chair of CII.

Board effectiveness

2023 peak proxy season closes

Proxy voting is when shareholders like CalSTRS vote on matters related to the management of a company, such as who to put on the Board of Directors or to approve the compensation of the company’s executives. While CalSTRS votes proxies at nearly 10,000 annual general meetings each year, more than 6,000 of these votes took place during peak proxy season, from April through June.

Going into this proxy season, CalSTRS announced our intent to increase the scrutiny of our votes against boards that are not appropriately managing and addressing sustainable business practices. This includes companies who are not doing enough to address climate risk or who are moving too slowly to improve the diversity of their boards. During the fiscal year, CalSTRS voted against more than 10,000 directors for climate-related purposes and more than 14,000 related to board diversity. A detailed summary of the 2023 proxy season will be included in the next edition of Engagements in Action.

Net zero transition

Climate Action 100+ launches second phase

Climate Action 100+ recently launched the second phase of the world’s largest investor-led initiative to reduce greenhouse gas emissions. Phase 2 builds on the success of the initiative’s first five years, which included hitting a major milestone: 75% of Climate Action 100+ focus companies have committed to a net zero emissions strategy.

In phase 2, CA100+ investors will continue to encourage companies to align their businesses with the global goal of reducing greenhouse gas emissions by 50% by 2030 and delivering net zero emissions by 2050. These goals are in line with CalSTRS’ net zero strategy and are consistent with the target set by the world’s governments at the Paris Agreement to limit global warming to 1.5° Celsius above preindustrial levels.

Phase 2 will last through 2030 and shift the initiative’s focus from corporate climate-related disclosure to the implementation of climate transition plans. After a year-long consultation with member organizations, CA100+ evolved its core goals and asked companies to demonstrate climate action in three ways:

1. Implement a strong governance framework that clearly articulates the board’s accountability and oversight of climate-change risk. 
2. Reduce greenhouse gas emissions across all business activities, including engagement with stakeholders, such as policymakers, to address barriers to decarbonization in sectors where the technology solutions have not been developed or are not financially feasible.
3. Provide enhanced corporate disclosure and implement transition plans to deliver on robust targets.

As a lead investor in CA100+, CalSTRS plans and leads engagements with nine companies: Dominion Energy, Duke Energy, Phillips 66 and Southern Company in the United States; and Daikin, ENEOS, Nippon Steel, Toray and Mitsubishi Heavy Industries in Japan.

CalSTRS was one of the first investors to join CA100+, and the coalition now has more than 700 signatories representing a combined $68 trillion in assets

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

2023 proxy voting season kicks off

Proxy voting enables investors like CalSTRS to vote at company Annual General Meetings (AGMs) on certain matters around the management of a company. Voting proxies is an important tool that helps us shape corporate behavior to promote the long-term performance of the companies we invest in. As peak proxy voting season (when most AGMs take place) kicks off, we are taking stronger action against corporate boards that fail to demonstrate their commitment to appropriately managing and addressing sustainable business practices. With many global companies holding their proxy votes in the weeks ahead, a key priority for CalSTRS is escalating our strategy to address the risks climate change poses to our global portfolio.

Our focus is on the boards of directors of the largest companies around the world and paying particular attention to the companies emitting the highest levels of greenhouse gases.

We expect the companies we invest in to provide climate-related disclosures, including financial reports that align with the recommendations of the Task Force on Climate-Related Financial Disclosures and include, at a minimum, the company’s direct emissions (scope 1) and indirect emissions (scope 2). We will vote against directors at the largest global companies that do not provide this minimum level of disclosure.

While the risk of climate change impacts the CalSTRS Investment Portfolio broadly, we have found that 250 companies are responsible for approximately 75% of emissions in our Public Equity Portfolio. This set of high-emitting companies represents an opportunity for strategic engagement to efficiently target the most significant sources of emissions.

Our voting activity is guided by our Corporate Governance Principles and our commitment to a net zero emissions investment portfolio by 2050 or sooner.

Beyond advancing our net zero portfolio emissions pledge, we will continue our longstanding practice of evaluating the diversity of corporate boards of directors. We believe companies with diverse leadership have better decision-making processes because people from different backgrounds bring varied perspectives and insights, which often results in positive economic outcomes.

To that end, we will vote against an entire board of directors that does not include at least one woman and against a board’s nominating and governance committee if at least 30% of its board members are not women. Furthermore, we will vote against the nominating and governance committees of U.S. companies that do not disclose information about the diversity of their board members.

Companies in the Russell 1000 Index—the largest publicly traded U.S. companies—will be held to a higher standard this proxy season. We will vote against nominating and governance committee members on boards who do not have at least one director from a typically underrepresented population.

While strategy and engagement methods vary with each company, the goal is always the same: to influence long-term value creation and sustainable business practices for generations to come, which in return will help ensure California’s public educators have a secure retirement.

Stewardship priorities update

Corporate and market accountability

Long-awaited global sustainability disclosure standards are imminent

The International Sustainability Standards Board (ISSB) was created in 2021 with the bold goal of establishing a global baseline for sustainability-related disclosures. CalSTRS has been advocating for global sustainability disclosure standards for many years as inconsistent reporting of sustainability-related financial risks at companies deprives investors of critical information needed to accurately assess risks and appropriately value companies.

The ISSB incorporates and builds on years of work by predecessors such as the Task Force on Climate-Related Financial Disclosures (TCFD) and the Sustainability Accounting Standards Board (SASB). CalSTRS has been highly involved in the development and wide spread adoption of both initiatives. We immediately supported the TCFD after its 2017 launch, including committing to engage 100 companies in the adoption of its framework. CalSTRS CIO Christopher Ailman, also served as the inaugural chair of the SASB Investor Advisory Group, representing leading asset owners and asset managers in improving the quality and comparability of sustainability-related financial disclosures. The establishment of the ISSB and its consolidation of many reporting frameworks marked a key milestone that CalSTRS has been working toward a truly global standard.

In March 2022, the ISSB released its first two drafts on both climate and general sustainability-related financial disclosures. We supported both drafts. The ISSB plans to launch these standards by the end of June 2023, with companies being required to report against them beginning January 1, 2024. We look forward to the release of the finalized standards and will closely observe their adoption. A more in-depth summary of the final standards will be included in a future edition of Engagements in Action.

Board effectiveness

ExxonMobil contested election, two years later

In 2021, we successfully teamed with activist investor Engine No.1 to help replace three directors on the ExxonMobil board. Our support was crucial to establishing the credibility of the three new directors and building support among other global investors. Each director that joined the board in 2021 has the experience and skills needed to help prepare the company for the global energy transition. While changing corporate behavior does not occur overnight, we have seen positive signals from ExxonMobil in that past year that indicate that the new directors are starting to have an influence on long-term strategy. The company has reported progress in four specific areas:

• Emissions reductions goals: The company has several business segments, the biggest of which is oil and gas production. It has set more aggressive targets to reduce its operated upstream (oil and gas production) emissions intensity by 40% to 50% by 2030 (versus 2016 levels) and expanded its reduction targets to include production managed by its partners.
• Methane: Methane is a greenhouse gas that is more than 25 times as potent as carbon dioxide at trapping heat in the atmosphere over 100 years. The company has increased and expanded its corporate-wide methane intensity reduction target to 70% to 80% by 2030 (versus 2016 levels).
• Flaring: Flaring is the practice of burning off excess natural gas due to a range of issues from safety to infrastructure constraints to economics. The company has increased and expanded its corporate-wide flaring intensity reduction target to 60% to 70% by 2030 (versus 2016 levels).
• Investing in low-carbon solutions: The company has committed to spending $17 billion through 2027 on lower-emissions alternatives. It expects about 60% of this investment to go toward reducing emissions in its own operations and 40% to focus on profitably growing its low-carbon business that funds projects intended to help others reduce their emissions. ExxonMobil also recently shared that it believes the global market for low-carbon solutions may reach $14 trillion by 2050 and that its low-carbon business may grow larger than its base oil and gas business within a decade.

We will continue to monitor the progress of ExxonMobil’s efforts, but we believe the new board members elected in 2021 are having meaningful influence.

Net zero transition

Curbing methane, a potent source of emissions

Addressing methane emissions is one of the fastest, most cost-effective means of reducing emissions. While methane exists in the atmosphere for a much shorter time than carbon dioxide, it has significantly greater heat trapping potential. The relatively short life but strong effect of methane emissions means that any reduction in these emissions has a significant effect in the near term. The International Energy Agency (IEA) estimates that 75% of methane emissions relating to fossil fuel production can be reduced in an economical manner through currently existing technology.

In November 2022, the U.S. Environmental Protection Agency (EPA) released proposed rules to reduce methane emissions from fossil fuel operations. The EPA estimates that the proposed rules could reduce methane emissions, at operations subject to the rules, by as much as 87% by 2030 compared to 2005 levels.

In February 2023, CalSTRS wrote a comment letter to the EPA in response to the proposed rules advocating for strong methane emission performance standards that:

• Require regular monitoring of methane leaks at all sites with leak-prone equipment.
• Phase out polluting equipment in favor of zero-emissions alternatives.
• Ensure flaring only occurs when necessary for safety or maintenance reasons.
• Improve the accuracy and credibility of methane emission reporting.

We went beyond submitting our own comments to the EPA and contacted 46 oil and gas companies with assets in the U.S. subject to the proposed regulations urging them to also submit clear, specific and constructive comments to the EPA. More than half of the 46 companies responded, many saying they generally support efforts to reduce methane emissions. Additionally, several companies indicated they responded to the EPA open comment period independently or through trade associations. We are conducting follow-up engagements with the companies to better understand their operations and encourage them to measure, monitor, mitigate and report methane emissions.

We believe these changes will increase energy security in the U.S., lower global emissions and create additional opportunities for U.S. producers in international markets, such as the European Union, where efficiency standards currently exceed U.S. standards. The EPA is expected to finalize the rule this year.

Responsible firearms

New ATF rule to address most lethal firearms

To reduce violence associated with the misuse of firearms, CalSTRS submitted a comment letter to the Federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) in support of proposed regulations for additional safeguards for short-barreled rifles and modified pistols. The decision to support the proposed regulations is based on both existing CalSTRS policy and lengthy engagements with firearms retailers. We saw progress in January 2023 when ATF Director Stephen Dettelbach issued new regulations requiring additional oversight to own, sell or purchase certain weapons.

Our letter and efforts to engage with companies are based on the belief that some firearms have no practical sporting purpose and are so dangerous they are unreasonable and unnecessary for civilian use. Short-barreled rifles and modified pistols are compact and more easily concealable than traditional rifles, and when modified with a stabilizing brace, more accurate and lethal in close quarters than an unmodified handgun. The proposed rules were a direct response to several high-profile mass shootings involving these lethal weapons.

Our research indicates some retailers are pulling away from more controversial types of firearms. For example, Walmart and Dick’s Sporting Goods chose to end sales of modern sporting rifles and raised the minimum age to purchase firearms and ammunition in their stores to 21 years. In 2019, following deadly shootings at retail locations in Mississippi and Texas, Walmart also stopped selling handguns, ammunition for handguns and short-barreled rifles.

These actions by retailers draw clear lines regarding weapons that require additional oversight to own, sell or purchase. Under the new ATF rule, owners of the controversial weapons must register the firearm with the ATF, pay a fee and complete a background check. These requirements include the transfer of firearms, such as sales between private individuals.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

CalSTRS continues to wield influence in the global investment industry 

CalSTRS can trigger change by building strategic relationships with investors, policymakers, business leaders and other influential decision-makers. An effective way to develop these relationships is by participating in flagship industry events where we can exchange ideas about global solutions to pressing issues, such as climate change.

We played an active role during two notable events this quarter:

PRI in Person

The Principles for Responsible Investment is a United Nations-supported network of investors, representing more than $121 trillion in assets under management, that focuses on responsible investment, including understanding the implications of environmental, social and governance-related risks and opportunities. The PRI recently hosted its annual conference, which boasted more than 2,400 attendees from around the world. CalSTRS’ Teachers’ Retirement Board Vice Chair, Sharon Hendricks, other PRI board members, the UN secretary-general, and the UN special envoy for climate action and finance, participated in the conference’s opening panel, which set the tone for the event by focusing on the growing expectation of responsible investors.

Responsible Investor USA

This annual event focused on sustainable business and finance issues in North America. More than 400 top-level sustainable finance and ESG investment professionals gathered to learn, share and debate ESG opportunities and challenges. CalSTRS Portfolio Manager Aeisha Mastagni was among them. Mastagni spoke on a panel discussing new rules proposed by the Securities and Exchange Commission that outline mandatory climate-related disclosures for public companies. Better disclosure of climate-related issues has long been a part of CalSTRS’ broader strategy to reach a net zero portfolio by 2050 or sooner.

Stewardship priorities update

Corporate and market accountability 

Federal regulators strengthen rules against insider trading and improve market transparency

In December 2022, the SEC adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934. This rule, created more than 20 years ago, allows company executives and other insiders to set up stock trading plans. These plans establish the amount of stock insiders can sell and the timeframe in which they can sell them. The plans help combat insider trading, a federal crime in which someone trades a stock while possessing information not publicly available and that may impact a stock’s future price.

The amendments to Rule 10b5-1 are meant to strengthen disclosure rules and close loopholes that circumvent the intent of the rule. Disruptive and illegal practices such as insider trading can impact investor confidence in the stock market. Transparent and fair financial markets, where everyone plays by the same rules, is beneficial to all investors, including CalSTRS.

Net zero transition

Policy engagement on the road to a low-carbon economy 

A priority of CalSTRS’ stewardship efforts is using our influence as a significant global investor to promote long-term sustainable business practices and public policies. This priority was a highlight of 2022 with the passage of the Inflation Reduction Act—the largest package of climate investments in the United States.

This law includes $370 billion of new energy-related tax credits designed to support companies on the path to net zero. Additionally, the support for net zero at the federal level is creating favorable conditions for sustainable transportation and power sector policies and regulations. This means there will be additional opportunities for the CalSTRS stewardship team to influence policy development.

How does CalSTRS, a fund managing over $300 billion, influence the public climate policy debate? Beginning in 2018 and as a lead investor in Climate Action 100+, we committed to urging companies in high-emitting sectors to publish a corporate policy that describes how the board of directors oversees the management of climate-related risks. This includes asking corporate boards to disclose a framework that will ensure direct lobbying and advocacy activities are aligned with the company’s stated climate goals. Public actions of the company should demonstrate commitment to these climate goals.

According to a report issued by the nonprofit group Ceres, 11 companies in the Climate Action 100+ Benchmark, including Duke Energy and Southern Company, two companies in which we lead engagement efforts, made public statements in support of the Inflation Reduction Act in the weeks between its introduction in the Senate and subsequent passage in August 2022. In the fourth quarter of 2022, at the request of CalSTRS and other investors, Dominion Energy, Duke Energy and Southern Company published climate lobbying and trade association reports describing their activities.

With the Inflation Reduction Act in place, now the work begins to influence the development of policy and regulatory infrastructure to guide its key provisions. In 2023, we will engage with companies and federal regulators to support the establishment of rules and policies aligned with the transition to a low-carbon economy.

Nations of the world convene on climate change, CalSTRS’ net zero strategy recognized 

The 2022 United Nations Climate Change Conference, known as COP 27, was held for two weeks in November. About 35,000 representatives from 190 countries attended the annual event, which allows government representatives to discuss climate change policies. This year, a significant focus was on the concept of “loss and damage,” or the negative consequences of climate change that go beyond what people can adapt to. The event established the first loss-and-damage fund, where high-carbon-emitting developed nations most responsible for climate change agreed to provide financial support to developing nations who are most vulnerable to climate change.

Before COP 27, CalSTRS signed the 2022 Global Investor Statement to Governments on the Climate Crisis. Coordinated by The Investor Agenda, a coalition of sustainability-focused organizations, the statement called on world governments to take bold action to help avert the worst effects of climate change by limiting global temperature rise to 1.5 degrees Celsius above preindustrial levels, which aligns with the goals of the Paris Climate Agreement on climate change.

The Investor Agenda also published a case study of our net zero strategy. These case studies are meant to inspire other institutional investors to adapt similar policies that will help address climate change risks.

Responsible firearms

Merchant Category Codes could provide vital insight on firearms transactions 

When the International Organization for Standardization announced earlier in 2022 the creation of a Merchant Category Code for retailers of standalone firearms, safety advocates recognized it as an opportunity to better understand how data can be used to reduce firearms-related violence.

The four-digit merchant codes identify retailers individually or by the type of products sold. These merchant codes are primarily used for tax reporting purposes, to determine credit card point eligibility for specific purchases, or to track consumer spending habits. While the codes do not provide a detailed account of the items purchased, safety advocates say the data could be used to help identify suspicious activity associated with gun trafficking and mass shootings.

To determine which companies to engage on this topic, we worked with other investors and compiled data on the number of credit card customers and transactions served by individual companies. A list of the 10 most influential banks and financial institutions to engage on this topic was developed, and conversations with these companies are scheduled to start in January 2023.

Advocates for the new Merchant Category Code say existing processes designed to identify potential fraud or money laundering could be adjusted to identify suspicious firearms-purchasing activity. One hurdle still to address is determining whether and how companies could use collected data to inform law enforcement of suspicious activity related to firearms transactions. While there is no requirement for businesses to use the new codes, the hope is that companies will use them, thereby providing a way to gather helpful data. Another hurdle is to determine whether and how companies could use such data to report to law enforcement suspicious activity related to firearms transactions.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

CalSTRS provides updates on net zero strategy; Teachers’ Retirement Board approves bold set of actions

At the August/September 2022 Teachers’ Retirement Board meeting, we presented a comprehensive progress update on our net zero strategy. This marks the one-year anniversary since the board first committed to achieving net zero greenhouse gas emissions across the investment portfolio by 2050 or sooner.

Throughout this first year, we focused on identifying methods to reduce carbon emissions in the portfolio, increasing exposure to low-carbon investments, and escalating engagement strategies with companies, regulators and policymakers. At the meeting, the board approved a package of investment actions to enhance its efforts to achieve a net zero investment portfolio, address climate change and support the retirement security of California’s public teachers:

• Interim science-based goal. Reduce greenhouse gas emissions across the CalSTRS Investment Portfolio by 50% by 2030, consistent with the latest findings of the United Nations’ Intergovernmental Panel on Climate Change.
• Systematic decision-making process. Adopt processes to incorporate greenhouse gas emissions into investment decisions as part of traditional risk-and-return analyses and their potential impacts on the CalSTRS Funding Plan.
• Reduce emissions: Target a 20% allocation of the Public Equity Portfolio to a low-carbon index to significantly reduce portfolio emissions while managing active risk. We estimate this allocation shift alone could reduce portfolio emissions by as much as 14%.
• Climate scenario integration: Incorporate future climate-related scenarios into CalSTRS’ asset-liability modeling framework to help guide investment allocations.

In addition to these actions, we continue to influence the market broadly through escalated engagement strategies. In 2022, we voted against directors at the 1,900 largest global companies who failed to disclose fundamental greenhouse gas emissions data. We will continue this practice in 2023 plus engage lawmakers and regulators, such as the Securities and Exchange Commission, to advocate for the adoption of policies that support the transition toward a net zero economy.

Stewardship priorities update

Corporate and market accountability

Long-term efforts yield results

Fundamental changes in the market sometimes require persistent effort over extended periods of time. Engagement does not happen overnight. Recently, we’ve seen multiple long-running engagements come to fruition with positive outcomes for investors.

International Sustainability Standards Board

The ISSB fills a long-lasting information gap by establishing global, sustainability-focused disclosure standards that CalSTRS and other investors have been seeking. Globally adopted sustainability standards, which are aligned with traditional accounting standards, will enable companies to provide investors with the necessary data to make fully informed decisions.

We’ve been involved with the development of these standards for many years. In July 2022, we provided comments on an initial draft of disclosures released by the ISSB. We will continue to work with the ISSB to ensure the final disclosure standards will enhance our ability to provide a secure retirement for California’s educators.

Universal proxy cards

In September 2022, a new SEC rule went into effect that mandates the use of universal proxy cards. Investors select the directors of a public company board through a process known as proxy voting. Directors are often nominated by the management of the company, although in some instances alternate directors are nominated by investors.

Under previous SEC rules, investors were forced to choose between the directors nominated by management and those nominated by investors. Universal proxy cards eliminate that scenario and instead allow investors to mix-and-match any combination of directors nominated from both sides. This means investors can vote for whom they believe is the strongest mix of directors. We first wrote to the SEC in 2018 to stress the importance of finalizing a universal proxy rule.

Pay for performance

Pay for performance refers to how company executives are compensated relative to performance measures. It’s important for executives to be appropriately incentivized and have their interests aligned with investors and the long-term performance of the company.

In August 2022, the SEC adopted rules requiring companies to report pay-for-performance data publicly and consistently. These rules are in response to the wide-ranging impacts of the 2010 Dodd-Frank Act, which was intended to improve the stability of the U.S. financial system after the global financial crisis of 2008. We’ve engaged the SEC on this issue for years, most recently with this March 2022 letter.

Board effectiveness

Leading the way on board diversity

The California Investors for Effective Board Diversity wrapped up their seventh successful year of engagement at the end of June. The group (CalSTRS, California Public Employees Retirement System, Los Angeles County Employees Retirement Association and San Francisco Employees’ Retirement System) continues to build on the success of the California Board Diversity Initiative, which began in 2015 with a focus on increasing the board diversity of California companies.

In 2021, the same California-based investors expanded their focus to 57 companies in the Russell 1000, advocating for the inclusion and diversity of gender, race, ethnicity and LGBTQ+ identity. The California group’s engagement resulted in 43 companies appointing 53 diverse directors. Additional engagement successes include:

• 32 companies updated their definition of diversity to include gender and race/ethnicity in either their proxy or governance documents.
• 29 companies included enhanced diversity disclosures in their proxy statements.
• 19 companies included a skills matrix in their proxy statements.
• 10 companies adopted the Rooney Rule, a policy that requires candidates from underrepresented groups be included in the initial search pool of candidates.

For the 2022–23 engagement season, the group will engage 60 companies in the MSCI USA Investable Market Index. The focus of the engagement will be to increase diverse director representation and encourage clear guidance in corporate governance policies, addressing board diversity in board refreshment and recruitment practices.

Net zero transition

Climate Action 100+ successes and next steps

Since launching in 2018, the world’s largest investor-led initiative on climate change, Climate Action 100+, has broadly met its original goals for its first phase of engagement with 166 carbon-intensive companies:

• Climate Governance: 148 companies now have oversight of the management of climate-change risks at the board level.
• Climate Action: 110 companies made a net zero commitment, while 134 companies set greenhouse gas emissions targets.
• Climate Disclosure: 110 companies now report emissions in line with the Task Force on Climate-Related Financial Disclosures.

While these initial successes are encouraging, investors are asking for even more action from companies by 2030. The focus of the next phase of Climate Action 100+ is for companies to increase the ambition of their short- and mid-term emissions reduction targets. This includes developing robust decarbonization plans to achieve a 50% reduction in greenhouse gas emissions by 2030 to stabilize the climate.

The enhanced goals are part of a strategy to accelerate decarbonization in sectors where current renewable technology exists, while other sectors continue to research and develop new low-carbon opportunities. Additionally, investors work with companies on thematic projects like achieving a just transition, climate lobbying alignment, accounting for stranded assets, and using emission offsets prudently.

As with the first phase of Climate Action 100+, we will be a lead investor in the initiative’s next phase, spearheading engagement efforts with eight companies.

Responsible firearms

Letter to Visa, Mastercard and American Express

With the support of investors and companies, the International Organization for Standardization decided to create a merchant classification code for firearm retailers. The codes are used by financial institutions to track transactions and determine the types of services or goods being sold to consumers.

Last year, the IOS rejected a request from New York-based Amalgamated Bank to establish the codes, even though many believe they could be useful for identifying irregularities in the purchase of firearms and ammunition. In a welcome change of circumstances, the bank announced in September 2022 that its most recent application had been approved by the IOS.

Earlier this year, CalSTRS and New York City’s three public retirement pension funds coauthored a letter urging credit card companies to support the IOS in the establishment of the unique code for firearms retailers. The letter opined that the establishment of a firearms code would allow banks to comply with their regulatory obligation to report suspicious purchasing activity, such as an unusually large number of firearms bought over a short time span. We are following up by engaging with the major credit card companies to determine how the new codes will be implemented and how the collected data will be used.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation.

Engagement spotlight

2022 proxy season: A record number of shareholder proposals and CalSTRS’ escalated voting tactics

The majority of U.S. corporations hold annual meetings from April through June to elect board members and make other key decisions, a time of year known as proxy season. CalSTRS casts our votes—also called proxy votes—at these meetings every year. Proxy voting represents one of our best tools to shape company behavior to drive long-term value creation. For this reason, we treat our votes with the same care as any other asset in the fund. Every year, we vote on nearly 100,000 items at more than 9,000 companies around the world.

This year, there were a record number of shareholder proposals (proposals introduced by investors rather than the company) on proxy voting ballots. As a significant global investor, we applied a consistent and thoughtful approach to voting on 1,033 shareholder proposals this year. Nearly 100 CalSTRS-supported shareholder proposals received more than 50% shareholder support, including successful proposals requesting companies align corporate activities with the goals of the Paris Agreement on climate change, enhance transparency and disclosures on racial equity, and strengthen governance practices. Majority support of these proposals indicates a growing understanding by shareholders that these issues are important when making investment decisions. They also send strong messages to companies about investor expectations. For the 2022 proxy season, we voted in favor of shareholder proposals that made measurable gains toward companies, including in the energy sector, achieving their net zero goals, such as setting appropriate science-driven targets to reduce emissions.

We expect corporations to appropriately manage climate change risks by publishing a report aligned with the internationally recognized Task Force on Climate-Related Financial Disclosures and disclosing, at a minimum, direct emissions (Scope 1) and indirect emissions (Scope 2). Additionally, this year we cast more votes against directors of companies acting too slowly on climate change and diversity.

CalSTRS voted against nearly 400 directors at companies that had not disclosed fundamental greenhouse gas emissions data and against more than 4,000 directors at companies with boards comprised of less than 30% women.

These voting tactics reflect an escalation in the engagement process. When progress is too slow, we will leverage all tools available to bring about change.

Stewardship priorities update

Net zero transition

Southern Company issues Just Transition Report

Southern Company, a CalSTRS-led Climate Action 100+ utility company and the second largest utility provider in the United States, released its first Just Transition Report. “Just transition” refers to securing the rights and livelihoods of workers as the economy makes fundamental shifts toward decarbonization. Southern Company’s report outlines a set of just transition principles that foster strong governance, effective stakeholder engagement and transparent communication by the company. The report also outlines support for employees whose jobs are affected by its decarbonization efforts.

During past engagements, Climate Action 100+ investors, including CalSTRS, have prioritized the need for companies to incorporate just transition and equity issues into long-term climate strategies. Southern Company is an industry leader with practices that can influence other energy companies.

Climate Action 100+ benchmark shows improvement toward net zero goals

In March 2022, Climate Action 100+, the world’s largest investor-engagement initiative on climate change, released the second round of its Net Zero Company Benchmark assessments. The benchmark primarily illustrates how companies are responding to CalSTRS’ and other investors’ requests to transition to net zero-emissions business models.

According to the data, 69% of focus companies have committed to achieve net zero emissions on some level by 2050 or sooner, and nearly 90% publicly report detailed emissions disclosures. As lead investor in Climate Action 100+, we use the information from the benchmark to develop engagement strategies and assess the alignment of company decarbonization plans with the goals of the Paris Agreement.

An advisory panel that includes the Transition Pathway Initiative, Carbon Tracker Initiative, InfluenceMap, and 2° Investing Initiative developed the Climate Action 100+ Net Zero Company Benchmark in 2020. The group works with companies to gather information on the benchmarks’ 10 disclosure indicators and releases the data to the public. The indicators assess how companies are transitioning to low-carbon business models and outlines the governance processes being put into place to help ensure companies’ climate goals are achieved.

This fall, Climate Action 100+ will release updated benchmark scores to show how companies have improved since the beginning of 2022. The 166 companies on the initiative’s focus list account for about 80% of the world’s corporate industrial greenhouse gas emissions.

Corporate and market accountability

Securities and Exchange Commission takes action on climate; CalSTRS pushes for robust corporate disclosures

In March 2022, the Securities and Exchange Commission took a major step toward requiring companies to report climate-related disclosures. The agency announced draft rules intended to help investors understand climate-related risks at public companies. CalSTRS committed to a net zero investment portfolio by 2050 or sooner and frequently communicated verbally and in writing with the SEC in pursuit of such rulemaking. These disclosures are crucial for investors like us to measure companies’ progress toward a net zero world.

We are supportive of the proposed rules and responded to the SEC’s request for feedback. We also asked the SEC to consider further enhancements to the proposed rules: Include Scope 3 (value chain) emissions disclosure requirements, require attestation of greenhouse gas emissions, and use the International Sustainability Standards Board’s Climate Standard as the basis for its rulemaking.

Responsible firearms

CalSTRS’ engagement strategy supports a crackdown on ghost guns

CalSTRS’ effort to encourage federal policymakers to change regulation on ghost guns is paying off. In April 2022, the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) issued a new rule requiring serial numbers on ghost guns. Last year, our stewardship team developed a strategy to reduce the violence associated with ghost guns, which included submitting a letter in support of a proposed ghost gun regulation.

When the regulation takes effect on August 24, 2022, the parts used to make ghost guns must be registered and sold by a federally licensed firearms dealer, which will include filing paperwork and requiring the purchaser to complete a background check.

Since 2016, ghost guns have become a growing problem in law enforcement investigations because they lack a serial number, making it extremely difficult to trace ownership when recovered at a crime scene. By 2021, more than 20,000 ghost guns were recovered from crime scenes across the country, according to ATF reports.

In addition to writing a letter of support of the new ATF regulation, CalSTRS staff engaged with the credit card industry to establish best practices that would help prevent the sale of ghost guns in states where they are illegal. Credit card companies say they are aware of the new regulations and will work with retailers to ensure firearms transactions comply with the new federal regulation.

Engagement spotlight

CalSTRS persuades two major utility companies to set more ambitious climate goals 

Persistence is paying off when it comes to engaging Duke Energy and Dominion Energy.

CalSTRS, as part of our commitment to the investor coalition Climate Action 100+, has led efforts to engage the two large utility companies since 2018. As lead engager, we continually encouraged both companies to address climate change and align their business models with a net zero emissions future.

In February, the two did just that.

Duke and Dominion separately announced they would strengthen their commitments to achieving net zero emissions across their operations by 2050 or sooner. Net zero means a company does not contribute additional greenhouse gases to existing global emissions. CalSTRS made our net zero portfolio emissions pledge in September 2021.

Duke and Dominion intend to achieve their goals by adding a portion of Scope 3 emissions—the emissions generated by their customers or suppliers—to the total greenhouse gas emissions covered by their commitments. Both companies are seeking to reduce emissions not only in how they produce electricity but also in how they provide electricity to their customers, which is very significant.

In addition, Duke agreed to accelerate the elimination of coal plants from its portfolio of power plants. By 2035, it will not operate any coal-fired power plants. Coal emits about twice as much carbon dioxide as natural gas, according to the U.S. Energy Information Administration.

Since we started engaging these companies, our staff sent a loud and clear message: Companies need to take climate change into account when developing business strategies. This is essential to create the long-term value that helps us ensure a secure retirement for CalSTRS members.

Staff wrote letters and talked to corporate management and leaders, building trust and understanding. In November 2021, we went a step further. Working with our fellow global investors, we drafted shareholder proposals that specifically called on each company to address risk related to climate change, including adding Scope 3 emissions to their net zero pledges. Ultimately, both proposals were withdrawn as engagement successfully led to both companies taking action and responding to investor requests.

Stewardship priorities update

Net zero transition 

ExxonMobil makes first net zero commitment, but there is still work to be done

In 2021, CalSTRS played an instrumental role by using our influence and proxy votes to elect three new directors with significant experience in the low-carbon transition to the ExxonMobil board. In January 2022, ExxonMobil announced its first pledge to achieve net zero greenhouse gas emissions by 2050.

While this was a significant step in the right direction, and a welcome change in direction, ExxonMobil’s initial pledge only covers greenhouse gas emissions from its own operations (known as Scope 1 and Scope 2). The pledge did not cover Scope 3 emissions—by far the largest category of emissions for an oil and gas company as they include emissions created using a product the company makes, such as drivers using gas produced by ExxonMobil.

Other U.S.-based oil and gas companies, including Phillips 66 and Chevron, have recently committed to reducing some of their Scope 3 emissions, following many of their European competitors. While the overall sector is accelerating its targets for reducing emissions, global investors, including CalSTRS, continue to push for additional progress.

Corporate and market accountability 

CalSTRS keeps up pressure for regulators to connect executive pay with corporate performance

In March, CalSTRS engaged with the U.S. Securities and Exchange Commission to support a proposed rule meant to improve transparency and comparability in executive compensation plans. We worked for years to support this idea, which was first proposed by the SEC in 2015 as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act. Aligning executive pay with corporate performance is imperative to ensure executives have the right incentives for managing a company in a way that promotes long-term value beneficial to shareholders like CalSTRS.

Board effectiveness 

California increases corporate board diversity, CalSTRS wants the rest of the world to follow

A new report released by the California Partners Project demonstrates increased gender diversity on the boards of publicly traded companies in California. CalSTRS supports this progress and is seeking similar improvement on the national and international stage.

We advocate for diversity in corporate leadership as part of our effort to ensure the companies we own maintain their long-term value. Companies with diverse leadership have better decision-making processes, documented in multiple academic studies, because people from different backgrounds bring fresh perspectives and new ideas.

A state law (SB 826) that requires California public companies to have more female directors led to some dramatic changes, according to the California Partners Project report:

• When SB 826 was passed in 2018, one-third of California’s public companies had no women directors. Now only 2% do not.
• In just three years, women have gained nearly 1,100 board seats. In 2018, there were 766 women on California’s public company boards, and as of September 2021, women held 1,844 seats.
• Today, women hold 29% of director seats, compared with only 11.5% in 2018.

A similar law (AB 979) that mandated companies to have members of underrepresented communities on their boards was struck down by a California judge in April. Despite this legal outcome, we remain steadfast in pushing for board diversity. During the upcoming proxy season, we will hold directors of laggard companies accountable for their inaction. For example, we will vote against the entire board of directors of companies that do not have at least one woman director.

Responsible firearms

CalSTRS aims to reduce ghost guns purchases

At first glance, credit card companies may not seem like they would play a role in the unregulated sale of firearms. Unfortunately, some do. Some are facilitating the purchase of “ghost guns,” a dangerous new type of weapon that has no serial number, no records and is readily available from online vendors without the purchaser requiring a background check. People who are not allowed to own guns—such as convicted felons and minors—can easily buy them.

At CalSTRS, promoting a safe and responsible civilian firearms industry is a stewardship priority because of the potential risks to society and the companies we own. We are zeroing in on ghost guns because financial, regulatory, reputational and legal risks are especially high.

Ghost guns clearly pose a threat. About 24,000 of these guns were found by law enforcement at crime scenes from 2016 and 2020, including 325 at homicides or attempted homicides, according to the federal bureau of Alcohol, Tobacco, Firearms and Explosives.

Ghost guns can be put together at home by people who buy separate parts from manufacturers or weapons’ parts kits. They are most often sold by small stores online and purchased through credit cards.

We are working on this issue with a coalition of investors that support the CalSTRS-led Principles for a Responsible Firearms Industry. As part of that effort, we asked the credit card companies we invest in to assess their policies related to transactions involving ghost guns and report to shareholders.

The Connecticut Treasury, a member of the Principles for a Responsible Civilian Firearms Industry coalition, shared our research with the Rhode Island Treasury and co-filed a shareholder proposal with MasterCard asking for similar disclosures.

The U.S. Securities and Exchange Commission is reviewing a challenge from MasterCard to determine whether the proposal will go to a vote of shareholders at the company’s annual meeting. But even if it does not go before shareholders, the proposal is shining a light on a critical problem for society and a large risk for companies that are involved.

Engagement spotlight

CalSTRS’ shareholder proposal prompts Phillips 66 to disclose climate policies

Information can be powerful. CalSTRS’ investment staff, as part of our engagement process, often seeks information from companies about environmental, social and governance issues so we can monitor their progress in implementing sustainable business practices. These practices drive long-term value.

We have been increasingly concerned about Phillips 66, an American energy company, because it had not disclosed information about its lobbying and climate change policies. Consequently, we were uncertain whether its lobbying activities aligned with the 2015 Paris Agreement. The agreement’s goal, which we believe is critical to stabilizing the world’s climate, is to limit global warming to well below 2 degrees Celsius from preindustrial levels.

We urged Phillips 66 to disclose its lobbying policy and activities. We met with company officials, wrote letters and even addressed its board of directors. Then, in 2021, we escalated the pressure by writing a shareholder proposal—to be voted on by the company’s investors at its annual general meeting—directing Phillips 66 to disclose lobbying and climate change information. Next, we launched a campaign to get those who owned a majority of shares to vote in favor of the resolution. Despite opposition from Phillips 66, we prevailed.

At the same time, a separate group of investors filed a proposal asking Phillips 66 to set and publish emissions reduction targets covering the greenhouse gas emissions of the company’s operations and energy products. That proposal, which we actively supported, also passed with the majority of investors supporting it.

In September 2021, Phillips 66 became the first U.S.-based oil refiner to commit to lowering emissions that come largely from burning oil, natural gas and other fuels it sells. Phillips 66 committed to reducing these emissions (known as scope 3 emissions) to 15% below 2019 levels by 2030.

In October 2021, Phillips 66 released a lobbying activity report that shows how the company’s policy goals align with the Paris Agreement and explains its emerging focus on renewable fuels, batteries, carbon capture and hydrogen.

The result of both shareholder proposals: a company that was not participating in activities to curb climate change has now set emissions targets, disclosed a transition strategy and published a statement and report.

Successful shareholder campaigns like these are occurring more frequently. They are driven by the rising awareness of the threat of climate change, the increased willingness of asset managers to confront it as part of their investment strategy, and the growing strength of groups such as Climate Action 100+, which focuses on influencing companies that release the most greenhouse gases. CalSTRS joined Climate Action 100+ in 2018 and the investor coalition now has 615 institutional investor members that manage $60 trillion in assets. One role of Climate Action 100+ is to publicize and gather support for shareholder proposals that effectively address climate change, such as the two proposals passed by shareholders of Phillips 66.

Over the past several years the world’s largest asset managers have been supporting a higher percentage of climate-related shareholder proposals, according to a study by Ceres, a nonprofit organization that supports investor activism. In 2021,15 climate-related shareholder proposals gained majority investor support, more than twice those approved in 2020.

Shareholder proposals are a proven method of creating change as companies seek to respond to the signals they receive from the majority of their investors. Phillips 66 is an example of how stronger engagement tactics can encourage recalcitrant companies to address climate change.

Commitment to net zero

CalSTRS has pledged to achieve a net-zero emissions investment portfolio by 2050 or sooner. This commitment makes it even more important to engage with companies to ensure they’re reducing their greenhouse gas emissions and preparing for a low-carbon future.

The Teachers’ Retirement Board’s decision to commit to net zero is rooted in the promise of a secure retirement for California’s public educators and their families. Net zero means the amount of greenhouse gases emitted by humans is fully offset by the amount taken away, either by natural means, such as forests, or by technology, such as carbon capture and storage.

Stewardship priorities update

Corporate and market accountability

New agency aimed at informing investors about sustainable business practices

CalSTRS has long supported requiring companies to provide more complete information about how they incorporate sustainability into their business practices. This information helps investors make more informed decisions.

A decision by the International Financial Reporting Standards Foundation, which sets required accounting standards in143 world markets, including the European Union, could go a long way toward expanding sustainability-related disclosure requirements throughout the world. That, in turn, could transform how investors integrate this information into their investment decisions.

The foundation has created the International Sustainability Standards Board to develop and release guidelines that set a global baseline for corporate sustainability reporting. The ISSB will create a broad climate standard and then write standards for specific industries.

CalSTRS plays a leadership role in encouraging companies to use the existing sustainability guidelines developed by the Sustainability Accounting Standards Board. While these standards are voluntary, more than 50% of companies in the S&P Global 1200 use them. The ISSB will build on SASB’s standards and the hope is that these new sustainability reporting standards will be required in the same jurisdictions where the International Financial Reporting Standards Foundation’s accounting standards are required.

SEC approves a reform long sought by CalSTRS: Universal proxy ballots

In September 2021, Phillips 66 became the first U.S.-based oil refiner to commit to lowering emissions that come largely from burning oil, natural gas and other fuels it sells. Phillips 66 committed to reducing these emissions (known as scope 3 emissions) to 15% below 2019 levels by 2030.

New voting rules approved by the U.S. Securities and Exchange Commission in November 2021 will make elections for directors on company boards fairer, more flexible and less confusing. CalSTRS has advocated this change for years so all shareholders can choose the combination of directors they believe will best manage the company.

In the past, shareholders who voted electronically—the way the vast majority of shareholders vote—had to choose between the board-endorsed ballot or the challenger ballot; they could not mix and match the candidates on each ballot. By contrast, voters who came to the annual shareholders meeting in person could vote for any combination of directors they wanted.

The new rules, which are only relevant for contested board elections, require a universal ballot that contains the names of all the director candidates to be available to all shareholders. This allows all proxy voters, whether voting in person or electronically, to pick and choose between board-endorsed candidates and the challengers.

Contested elections often take place at companies where shareholders are dissatisfied with company management and performance, making it even more important to allow shareholders to carefully select directors from a wide range of candidates. Now they can.

Board effectiveness

Corporate compensation clawback approved by the SEC

Bonus and incentive pay for top corporate leaders is often based on the financial performance of a company. But what happens if a bonus is tied to a performance that is later revised downward?

CalSTRS and many other investors have an answer: a compensation clawback.

In October 2021, the SEC agreed. It proposed a new rule requiring stock exchanges to make companies adopt a compensation clawback policy. This would force company executives to return any part of a bonus or incentive pay based on performance information that is later revised downward.

Low-carbon transition

EPA regulations on the way for methane, a destructive greenhouse gas

Methane has caused about 25% of climate change in the past 20 years and has about 80 times the climate warming impact of carbon dioxide, though scientists estimate it exists in the atmosphere for far less time than carbon dioxide.

Generally, it has been lightly regulated. Until now. In fall 2021, the U.S. Environmental Protection Agency announced strict methane regulations as part of a proposed new Clean Air Act. CalSTRS has been advocating for this for years.

Methane has caused about 25% of climate change in the past 20 years and has about 80 times the climate warming impact of carbon dioxide. Generally, it has been lightly regulated. Untow now.

Methane is emitted from the extraction of oil and gas, the agricultural industry and landfills. The proposed rule targets oil and gas extraction and would eliminate 41 million tons of methane emissions from 2023 to 2035. That is more than the amount of carbon dioxide emitted from all passenger cars and commercial aircraft in the United States in 2019.

Financial regulators sharpen focus on climate risks

CalSTRS encourages regulators and policymakers to promote sustainable markets. A new report from the Financial Stability Oversight Council, a government group charged with identifying risks to the financial stability of the U.S. economy, marks significant progress toward this goal.

The FSOC is chaired by the Secretary of the Treasury, who brings federal financial regulators together to identify and manage excessive risk in the financial system. We supported recent legislation to elevate the importance of climate change by creating a climate-related Financial Risk Advisory Committee to advise the council.

In October 2021, the council issued a report on climate-related risks, which identified climate change as “an emerging and increasing threat to U.S. financial stability” and made several recommendations to agencies associated with the council, including the U.S. Treasury, the Federal Reserve System and the Securities and Exchange Commission.

Recommendations include:

• Collect climate risk data.
• Enhance public-disclosure requirements to include greenhouse gas emissions.
• Use scenario analysis to report on climate risk.

These recommendations will provide critical information that investors need, and will aid us in adjusting our portfolio to achieve net zero emissions by 2050 or sooner.

Engagement spotlight

CalSTRS pledges a net-zero portfolio by 2050 or sooner

At the September 2021 Teachers’ Retirement Board meeting, the board’s Investment Committee adopted a pledge for the CalSTRS Investment Portfolio to become net zero by the year 2050. A net-zero portfolio includes investments that do not increase overall greenhouse gas emissions in the atmosphere. Net zero can be accomplished by reducing human-caused emissions, removing existing emissions from the atmosphere, or a combination of both. This pledge is in alignment with the science-based targets of the 2015 Paris Agreement—a global accord between more than 190 countries that seeks to limit global warming to below 2 degrees Celsius to avoid the most severe impacts of climate change. Achieving net zero globally by the start of the second half of the 21st century is a key component of the Paris Agreement.

The CalSTRS net-zero pledge is the first step of a four-part implementation framework:

This framework is consistent with the United Nations’ Race to Zero campaign, the largest global effort to address climate change, and this pledge is the next step in navigating our portfolio through the shift to a low-carbon world.

CalSTRS sees positive diversity outcomes in the market

In the last year, CalSTRS and other long-term institutional investors continued to push for board and workforce diversity at companies within our portfolio. Diversity is critical to companies’ long-term financial success, which in turn strengthens the Teachers’ Retirement Fund on behalf of California’s public educators and their beneficiaries.

Studies repeatedly show that increasing board and workforce diversity is not only the right thing to do for an organization’s culture, but also leads to better business outcomes and smarter decision-making, plus powers innovation, among other benefits.

Collectively, CalSTRS and our peers have been driving board changes on a case-by-case basis through letter writing campaigns, company engagements and proxy voting activities. We co-chair the Thirty Percent Coalition and the Human Capital Management Coalition, which focus on board and workforce diversity, respectively. We are also a leading member of the California Investors Group, which includes the California Public Employees Retirement System, the Los Angeles County Employees Retirement Association and the San Francisco Employees Retirement System, and work closely together to encourage gender, racial, ethnic and LGBTQ diversity on corporate boards.

Specifically, we ask companies to:

1. Appoint diverse board members or disclose existing diverse board members.
2. Disclose a matrix of current board member skills and backgrounds, including diversity characteristics and how they align with the company’s forward-looking strategy to create and sustain value.
3. Embed a commitment to identifying qualified candidates of diverse gender, racial and ethnic backgrounds, and the LGBTQ community, in key governance policies, such as the nominating and governance committee charter. 
4. Incorporate procedures by which women, diverse racial and ethnic backgrounds, and the LGBTQ community are identified for consideration in every search for a board nominee (a practice commonly known as “the Rooney Rule,” after its use in the National Football League). 
5. Assure that searches for new directors will consider suitable nominees from corporate backgrounds beyond the executive suite, and noncorporate backgrounds (academia, government, nonprofit organizations, etc.) where additional diverse talent may be identified.

These collaborative efforts culminated in the following successes: 

Thirty Percent Coalition

After writing to 250 companies in the Russell 3000 Index, 127 companies appointed women to their boards. Of those, 65 companies with all-male boards appointed a woman for the first time and 62 companies appointed a second woman.

California Investors Group

After writing to 74 companies in the S&P 500, 52 companies appointed female and/or racially and ethnically diverse directors:

• Twenty women and 36 men of underrepresented groups were appointed. 
• Thirteen women not from underrepresented groups were appointed.
• Twenty companies adopted the Rooney Rule—which requires women and underrepresented groups be included among interviewed candidates.

CalSTRS diversity tour

CalSTRS is committed to enabling a diverse pool of external investment managers to establish a direct relationship with us. We do this partly by establishing collaborative relationships across a vast network of industry associations. In summer 2021, we embarked on a virtual tour with seven industry organizations: TOIGO Foundation, National Association of Securities Professionals, National Association of Investment Companies, The Investment Diversity Exchange, Hispanic Heritage Foundation, The Association of Asian American Investment Managers, and New America Alliance. The meetings allowed us and those organizations to engage openly, exchange diversity, equity and inclusion initiatives, and identify potential opportunities to collaborate.

Industry events

While the COVID-19 pandemic led to severe restrictions on travel and in-person events, CalSTRS continued our record of strong representation at industry events through virtual participation to share and build knowledge:

• Fixed Income Senior Delegate Roundtable – “ESG Investing—Easier Said Than Done” panel
• Environmental Finance Webinar – “The Shifting Focus of Pension Funds” panel
• CFA Institute: Americas Materiality Roundtable
• The Economist – “Climate Change Transition Risks” panel
• New Statesman – “Making Sense of Net Zero” panel
• Sustainability Accounting Standards Board (SASB) Meeting
• Securities and Exchange Commission – Meeting with SEC Chair on climate disclosure

Stewardship priorities update

Corporate and market accountability

2021 proxy season highlights

During the 2021 proxy season, CalSTRS voted nearly 100,000 proxies at more than 9,500 companies’ annual general meetings. Proxy voting is an important tool for shareholders to ensure their voices are heard on important issues related to the management of the company. Through proxy voting, shareholders elect directors to represent them in the boardroom. We view proxy voting as another asset to the fund, and a useful mechanism to open dialogue with companies. This year, like last, many annual general meetings were held virtually due to the COVID-19 pandemic. Despite the virtual environment, our staff met and engaged with more than 130 portfolio companies to discuss voting issues—a sizable increase from the 80 meetings held last season.

In addition to proxy voting, shareholder proposals can communicate a consensus of views that may be a catalyst for a company to change or adopt best practice governance principles. This was a historic proxy season for environmental and social-related shareholder proposals, and a total of 81 proposals received majority shareholder support. This easily bested last year’s record-breaking 21 proposals with majority support. Notable and emerging social proposals were related to racial equity audits, lobbying and political contributions, human rights and workforce diversity. Emerging environmental proposals included climate action plans, greenhouse gas emissions, nuclear power and renewable energy. We vote on shareholder proposals, and occasionally file our own, when we perceive changes are needed at a company.

Increase in failed say on pay votes for S&P 500 companies

Thus far in the 2021 proxy season, 18 S&P 500 companies failed their say-on-pay vote. That is up from the 12 that failed in 2020. Of the varied reasons why support failed, we consistently saw misalignment between pay and performance and one-time payments or other incentive plan adjustments that resulted in payouts that would have otherwise not happened due to the COVID-19 pandemic. 

Those companies that failed support for the reasons above typically had a track record of one-time awards and discretionary adjustments in the past. One-time payments and discretionary adjustments come with extra scrutiny because they could potentially undermine the principle of a company’s established incentive plans. Say on pay is important to investors because it’s a means to ensure the interest of company executives is aligned to that of shareholders.

Japan corporate governance: Engagement and progress

CalSTRS staff also engages with domestic and international regulatory entities to advocate for positive changes in corporate governance practices globally. A highlight of the 2021 proxy season is the continued engagement and progress seen with representatives from Japanese companies and regulatory and proxy advisory firms. 

As a significant investor in Japanese companies, we are keenly interested in corporate governance practices in Japan. In June 2021, the Tokyo Stock Exchange released a revision of Japanese Corporate Governance Code that focused on key issues of board independence, diversity and sustainability. This was a significant positive step toward modernizing corporate governance in Japan.

Enhanced diversity-focused voting

CalSTRS held companies accountable by increasing the number of votes against boards with zero women in the 2021 proxy season. Over time, CalSTRS, other institutional investors and proxy advisory firms have refined voting policies regarding board diversity. We will continue to review and revise our voting practices to further incentivize portfolio companies to increase gender, racial, ethnic and LGBTQ board diversity.

Board effectiveness

Pandemic Resilient-50

CalSTRS is part of the Pandemic Resilient-50 (PR-50) coalition, which is comprised of nine institutional investors with more than $3.8 trillion assets under management. The PR-50 is conducting a multiyear engagement initiative targeting 50 companies most affected by the pandemic. The PR-50 has corresponded with the target companies and met with 35 of them to understand how their response to the pandemic, to date, should inform the next phase of the engagement.

Members of Pandemic Resilient-50:

• Achmea Investment Management—Netherlands 
• APG Asset Management NV—Netherlands
• BNP Paribas Asset Management—France 
• British Columbia Investment Management Corporation (BCI) —Canada
• California State Teachers' Retirement System—United States of America
• Domini Impact Investments LLC—United States of America 
• Etica Funds (ETICA SGR S.p.A.)—Italy 
• Legal & General Investment Management—United Kingdom 
• Resona Asset Management Co. —Japan 

Low-carbon transition

Lobbying proposals

Publicly traded companies have been put on notice by shareholders asking them to “walk the talk” when it comes to transparency on political activities involving climate—a priority of our net-zero strategy.

In the 2021 proxy season, climate lobbying proposals gained shareholder approval at Phillips 66, Norfolk Southern, ExxonMobile, United Airlines and Delta Airlines—a record for votes getting majority support in a single year. This recent success has resulted in a number of companies voluntarily reaching out to our staff to discuss their willingness to produce a lobbying report, driven by their desire to avoid shareholders’ filing a proposal to request one. Climate lobbying reports are an opportunity for a company to reassure investors about how it uses its financial influence to support climate initiatives at federal, state and local levels and to avoid contradictory positions.

Having a company voluntarily produce a climate lobbying report saves our staff considerable time and resources normally required to file a shareholder proposal and allows staff to focus on other low-carbon transition engagements.

Responsible firearms

Through research and engagement with companies regarding the sale of ghost guns—privately assembled firearms lacking commercial serial numbers—CalSTRS identified legal, reputational and financial risks that contribute to violence in communities across the country. We developed a plan to influence the firearms industry through regulatory channels by supporting a proposal aimed at eliminating ghost guns. Since the purchases are considered legal and credit card companies do not receive data regarding the items being sold, they are incurring risk associated with this practice—a risk that is passed on to our portfolio.

Understanding that violence associated with ghost guns creates additional health and safety risks to society at large, and negatively impacts the financial condition and operating performance of businesses, we submitted a letter to the Bureau of Alcohol, Tobacco, Firearms and Explosives. The letter supported an ATF proposal to require identifying markings, background checks and transaction records for the sale of key firearms parts. We support regulations requiring all sales of ghost guns be processed through federally licensed retailers following established best practices, including conducting background checks and keeping accurate records of transactions to ensure children and prohibited individuals do not have access to firearms.

Engagement spotlight

Historic win at ExxonMobil

On May 26, 2021, shareholders delivered a resounding message to the management of ExxonMobil when they elected three directors to the board who had been nominated by activist investment manager Engine No. 1. This marks the first time in the company’s history that directors they did not support were elected to their board. CalSTRS was the first investor to announce support of Engine No. 1’s slate of alternate directors when it was introduced in December 2020. The backing of a significant investor such as CalSTRS brought immediate legitimacy to the board candidates nominated by Engine No. 1, and our support contributed to the successful campaign. This action by shareholders reinforces the message that ExxonMobil and other publicly traded companies can no longer continue with the status quo. Change is necessary for long-term success.

We recognized the need for a shakeup in the boardroom and supported director nominees who have the relevant skills and experience to strengthen long-term performance, resiliency and strategic positioning. This form of stewardship is in alignment with CalSTRS’ Stewardship Priorities of board effectiveness and low-carbon transition. Of the incumbent board members, only the chairman, who is also the CEO, has any experience in the oil and gas industry. At the same time, the company has undergone an extended period of financial underperformance. These new board members add desperately needed expertise in significant business transformation and experience at both renewable and traditional energy companies. Additionally, ExxonMobil has lagged many of its peers in preparing its business to undergo the strategic transition toward a low-carbon economy by focusing capital expenditures on carbon energy sources.

This victory is the outcome of a longer-running series of escalating engagement tactics at ExxonMobil. When traditional tactics of engagement such as meetings with the company failed to deliver meaningful results, we implemented our new strategy of activist stewardship—a heightened and more targeted approach to engagement. The ExxonMobil campaign sought to replace a significant portion of the board. Leading up to the company’s annual general shareholder meeting in May, we participated in a large array of media appearances and engagements with fellow investors and other market participants to build the case for change at ExxonMobil.

While every company is unique in its governance, strategy and operations, the campaign at ExxonMobil provides a useful blueprint for future engagements. We will continue to refine our stewardship activities to best remain an influential voice in the economy. This influence affords us the ability to prepare our investment portfolio for the global transition to a low-carbon economy, while maximizing returns for California’s educators.

Industry events

While the COVID-19 pandemic led to severe restrictions on travel and in-person events, CalSTRS continued our record of strong representation at industry events through virtual participation:

• CalPERS and CalSTRS 2021 Diversity Forum – We co-hosted a virtual diversity forum with more than 900 participants focused on promoting diversity, equity and inclusion in the investment industry.
• Pensions & Investments – Participated in the “Qualifying as ESG: How to spot a wolf in sheep’s clothing” panel discussion.
• Private Equity International – Participated in the “Structuring impact to go mainstream with institutional investors” panel discussion.
• Pension Bridge – Participated in the “Climate change: Impact, risks and opportunities” panel discussion.
• CFA Institute Brazil – Participated in the “Brave new world: Integrating ESG into portfolios” panel discussion.
• Fitch Ratings and CFA Institute – Participated in the “Climate change across portfolios, sectors and regions” panel discussion.
• CFA Institute – Participated in a roundtable focused on materiality.
• GreenFin 21 – Participated in the “Investment value chain live—Environmental” panel discussion.
• JP Morgan Global ESG Conference – Participated in the “ESG in the U.S.: A new dawn” panel discussion.
• SASB Standards Board – Participated at a board meeting on current research projects and standard setting.
• Reuters ESG Investment North America Conference 2021 – Participated in the “Financing the 1.5o pathway” panel discussion.
• Financial Times Investing for the Good: Europe event – Participated in the “In a fast-moving market, does active beat passive for sustainable investing?” panel discussion.
• Association of Investment Management Sales Executives 2021 Conference – Participated in the “ESG: It’s what’s for dinner” panel discussion.

Stewardship priorities update

Corporate and market accountability

CalSTRS supports mandatory climate disclosures to the SEC

In response to the U.S. Security and Exchange Commission’s request for comments on climate disclosures, CalSTRS submitted a letter registering our support for mandated universal and industry-specific climate disclosures. We asked the SEC to require registered companies of all sizes in all industries to disclose both direct and indirect emissions. We also asked for annual reporting on their governance, strategy, risk assessment, targets and metrics for managing the low-carbon transition. We also encouraged the SEC to require companies to disclose the broad set of material sustainability information investors need, including human capital metrics. The SEC is expected to move to rulemaking quickly following its review of public comments. We view climate disclosures as crucial to investors in understanding the climate risks faced by companies. This information allows investors to identify and consider in their decisions which companies can be resilient and contribute to a low-carbon future.

SEC rulemaking agenda prioritizes CalSTRS’ top issues

Looking at the SEC’s 2021 rulemaking agenda, we expect this year will offer more opportunities to support stronger ESG disclosure and market accountability through strengthened regulatory requirements and enforcement. This rulemaking agenda could culminate in positive action in the areas we have raised to the SEC through our letters and meetings with SEC staff and our collaborative engagement with investor coalitions. In the past three months alone, our staff has participated in six virtual meetings with SEC commissioners (five of them with the SEC Chair), advocating for our stewardship priorities.

Low-carbon transition

Progress with Climate Action 100+ at Toray Industries and Phillips 66

CalSTRS leads in shareholder engagement at eight companies as part of the Climate Action 100+ initiative. Seven of the companies have already announced carbon neutrality goals, including Toray Industries, an industrial chemical product company. At the company’s 2021 financial briefing presentation, Toray Industries announced its commitment to achieve carbon neutrality by 2050. The company aims to achieve the target through expanding carbon neutral technologies, including renewable energy, hydrogen and electrification, and cutting emissions through recycling and process innovation.

The remaining company is Phillips 66. At the Phillips 66 annual meeting in May, 62% of voting shareholders supported a CalSTRS proposal asking the oil and gas company to address concerns regarding corporate lobbying activities that are inconsistent with the Paris Agreement on climate change. In supporting the proposal, a majority of voting shareholders are recommending that Phillips 66’s board of directors conduct an evaluation and issue a report within the next year describing if, and how, the company’s lobbying activities align with the Paris Agreement’s goal of limiting average global warming to well below 2 degrees Celsius. Additionally, a second proposal passed asking the company to set and publish emission targets.

Other notable events in the oil and gas industry

A CalSTRS-supported shareholder resolution was passed at Chevron Corporation with 61% shareholder support. The resolution asks the company to substantially cut scope-three emissions (those produced by the use of the oil, gas and other products it sells). Furthermore, a Dutch court ruled that Royal Dutch Shell must cut its emissions by 45% (from 2019 levels) by the year 2030. We are seeing an increase in pressure from investors and governments on companies to make meaningful cuts to emissions and prepare for a low-carbon economy.

Responsible firearms

The proliferation of ghost guns is a major concern of gun-control advocates. These untraceable weapons are increasingly recovered at crime scenes, many times in the hands of those who would not otherwise be able to lawfully purchase a firearm.

A ghost gun is a self-assembled firearm built from kits or individually purchased parts that do not have an identifying serial number. They can be made using common household tools allowing anyone, including convicted felons and other prohibited individuals, access to firearms and makes it difficult for law enforcement to understand the history of ghost guns recovered at crime scenes.

As part of our Stewardship Priorities, we have learned from firearm experts that the sale of ghost gun kits and parts is primarily conducted by small retailers, online retailers and at gun shows. We are directly engaging credit card companies that facilitate many firearms transactions to discuss the safety and risk concerns, particularly regarding transactions occurring online. No firearms retailers in the CalSTRS Investment Portfolio are involved in the sale of ghost gun kits or parts.

 According to the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, from January 1, 2016, through December 31, 2020, there were approximately 24,000 suspected ghost guns recovered by law enforcement, including 325 that were used in homicides or attempted homicides.

Our current and ongoing engagements to influence changes in public policies and corporate practices that support long-term value creation for the period of January 1 through March 31, 2021, are listed below.

Engagement spotlight

California Board Diversity Initiative expands geographic focus after six years of successful campaign

In 2015, CalSTRS and CalPERS launched the California Board Diversity Initiative to engage California-headquartered companies who lacked board diversity and had zero women on their corporate boards. This decision was driven by research showing that companies with diverse boards attain better financial results, on average, than those without diversity.

Over the next four years, CalSTRS collaborated with other California pension systems (CalPERS, LACERA and SFERS) to encourage companies to improve their corporate board diversity. The group sent letters to California-based companies in the Russell 3000 Index asking nominating and governance committees to include individuals with diverse backgrounds on their board, inclusive of gender, race, ethnicity, and LGBTQ+ identity.

The initiative’s efforts were bolstered by the California legislature passing, and the governor signing, Senate Bill 826 in 2018. This law required the corporate boards of California-based companies to have at least one woman director by the end of 2019.

By mid-2020, 150 companies in the Russell 3000 Index had appointed 186 women to their boards, and only five of the companies originally engaged by the coalition had failed to appoint any women directors. When private engagement with two of these companies failed to produce outcomes, CalSTRS escalated efforts by co-filing shareholder proposals. The three other companies agreed to appoint women to their boards.

Building on its success, the group has now shifted its focus toward companies headquartered outside of California. The re-named California Investors for Effective Board Diversity is now engaging 74 companies in the S&P 500 index and asking companies to improve board diversity inclusive of gender, race, ethnicity, and LGBTQ+ identity. As shown in the graphic above, there is still much work ahead to diversify corporate board rooms and reach gender parity in the United States. The coalition intends to leverage its techniques and prior engagement successes as a roadmap to push for ongoing change.

Industry events

While the COVID-19 pandemic led to severe restrictions on travel and in-person events, CalSTRS continued its record of strong representation at industry events through virtual participation:

• ALTSLA Conference Panel, ESG and Socially Responsible Investing – Implementing a Practical Approach in a Post-COVID World, a discussion on how capital allocators are working to establish ESG industry standards
• Carmo Mission and Impact Investing Conference
• Ceres 2021 Annual Conference: Transform Tomorrow Today
• Council of Institutional Investors (CII) and the Center for Audit Quality roundtable discussion on ESG reporting, frameworks, and the role of the auditor and audit committee
• London Stock Exchange Group/Principles for Responsible Investment: COP 26 Investor Action on Climate Action series
• NYC Strategic Human Resources meetup discussing human capital management disclosures and the importance to investors
• Pension Bridge ESG 2021 conference panel on how to benchmark ESG investments
• SOCAP, “Balancing Scale, Returns and Measurability in Impact Investing,” a conversation on how impact investors are balancing scale, returns and measurability
• Top 1000 Funds Conference Panel, “What’s Next for Investor Action,” discussing strategies and tools for investor engagement
• University of California Hastings School of Law Center for Innovation meeting to discuss human capital management data
• 2030 Investment Vision for Natural Climate Solutions convening to discuss investments in sustainable forestry, land use and agriculture

Stewardship priorities update

Responsible firearms

In January, investors with more than $2 trillion in assets under management met virtually with some of America’s largest firearms retailers to focus on best safety practices for the sale of civilian firearms. The meeting was initiated by the CalSTRS-led Principles for a Responsible Civilian Firearms Industry. This first of its kind meeting was significant, as 2020 marked a record year for firearms sales in the United States.

During the meeting, retailer representatives discussed their safety precautions for firearms purchases. The conversation focused on best practices in the areas of firearms transportation and storage, employee training, and customer education.

Retailers stressed the need to track each firearm individually as it enters the custody chain through distributions centers. Radio-frequency identification (RFID), which uses electromagnetic fields to identify and track merchandise, was cited as an example of how technology can be used to enhance safety. Retailers also rely on a two-person serial number match verify the accuracy of firearms inventory. The group also addressed safety concerns that led to the removal of firearms from display cases at some retail locations.

Investors learned that the companies have robust training and certification programs. This includes training on how to spot irregularities at the point of sale, specifically with regards to background checks and straw-buyers. The training is continuous and focuses on how to demonstrate and educate customers on safe firearms handling and storage. Additionally, the companies shared that their training continues throughout an associate’s career. One company shared that its compliance team conducts surprise drills which emulate safety inspections conducted by the Federal Bureau of Alcohol Tobacco and Firearms.

The companies agreed to continue to work with investors and meet regularly to discuss methods for reducing risk and improving safety in the sale of civilian firearms. Lessons learned will be used by CalSTRS to engage other entities throughout the firearms industry.

Corporate and market accountability

CalSTRS promotes best practices for virtual-only shareholder meetings

Due to the spread of COVID-19 in early 2020, restrictions on travel and in-person meetings accelerated the transition toward virtual-only shareholder meetings (VSMs). In 2016, there were just 187 VSMs and in 2020, there were 1,957 VSMs. Many companies indicated they will maintain the practice in the future. CalSTRS participated in a working group to develop best practices and protect shareholder rights at VSMs.

After engagement, U.S. Department of Labor suspends enforcement of final rule on ESG investments and proxy voting

In March, the U.S. Department of Labor (DOL) announced it will suspend enforcement and revisit a recently adopted rule regarding environmental, social and governance (ESG) investments and proxy voting. This rule would have applied to retirement plans subject to the Employee Retirement Income Security Act of 1974 (ERISA). The DOL heard from many stakeholders, including CalSTRS, on the proposed rule and its impacts. While CalSTRS is not subject to ERISA, CalSTRS urged the DOL to reject the proposal. CalSTRS opposed the rule because it would have created a perception that retirement plans need special justification to consider ESG factors when making investments. As a long-term investor, CalSTRS sees the integration of ESG risks into the investment decision-making process as an important part of our fiduciary responsibility to our members.

Investors representing a quarter of capital markets back SASB

CalSTRS was a founding member of the Sustainability Accounting Standards Board (SASB) Investor Advisory Group (IAG) in 2016. Originally 14 members, the IAG has grown to 57 members with combined assets under management of more than $47 trillion, representing a quarter of global capital markets. CalSTRS is pleased to contribute to this group of investors who recognize the need for comparable, consistent, and reliable disclosure of financially material, decision useful ESG information to investors. Most recently, CalSTRS contributed to SASB’s Human Capital Management Framework research project, which seeks to identify the financially material impacts of relevant human capital management issues.

CalSTRS supports development of global sustainability standards

In 2020, the International Financial Reporting Standards Foundation (IFRS) asked for feedback on whether the foundation should engage in the development of sustainability reporting standards. CalSTRS submitted a letter to encourage the IFRS to serve the needs of investors, who are the primary users of the reported data. CalSTRS also encouraged the IFRS to use existing standards and frameworks to build upon the well-established and well-supported work developed to date.

In February 2021, the IFRS announced it received enough support to take an active role in ESG disclosure. CalSTRS was encouraged to learn in March 2021 that the IFRS would maintain an investor focus and build on existing frameworks, in line with CalSTRS requests. CalSTRS will continue to advocate to the IFRS and other bodies that sustainability standards should encompass the full range of material sustainability risks and opportunities facing businesses.

CalSTRS discusses corporate governance trends with Japanese ministry

CalSTRS met virtually with Japan’s Ministry of Economy, Trade, and Industry (METI) to share views on corporate governance trends as a long-term institutional investor. CalSTRS shared our observation that many Japanese companies adopted long-term corporate governance frameworks but failed to set plans for short or medium time horizons. Our team also expressed support for majority independent directors on corporate boards and committees.

Board effectiveness: Human capital management

CalSTRS advocates for human capital management disclosures at SEC

In March 3, CalSTRS met virtually with the office of Allison Lee, the Acting Chair of the U.S. Securities and Exchange Commission (SEC). CalSTRS encouraged the SEC to require companies to report human capital management data as part of the material environmental, social and governance (ESG) disclosures already required by Regulation S-K. This meeting was a follow-up from a meeting with SEC staff in August 2020 and letter outlining our recommended metrics for disclosure. CalSTRS supports mandatory universal and specific disclosures consistent with the Human Capital Management Coalition. These disclosures would be in addition to industry-relevant metrics described by the Sustainability Accounting Standards Board.

Low-carbon transition

Update on CalSTRS-supported activist campaign with ExxonMobil

In December 2020, CalSTRS announced its support for an alternate slate of directors at ExxonMobil in an effort to prepare the company for the global low-carbon transition. CalSTRS joined the campaign because our prior engagement activities with the company had failed to produce meaningful results. CalSTRS issued a statement in February 2021 stating that ExxonMobil’s underperformance, declining returns on capital expenditures, and undisciplined capital allocation continued to erode shareholder confidence and value in the company.

Climate Action 100+ releases annual report, CalSTRS continues to play leadership role

Climate Action 100+, a global investor initiative representing $52 trillion in assets, released its annual progress report. Climate Action 100+ reports that half the companies targeted by the organizations have established commitments to reach net-zero carbon emissions by 2050 or sooner.

Alongside Climate Action 100+, CalSTRS is the engagement lead of eight companies, four located in Japan and four in the United States. Out of the eight companies, five companies (Duke Energy, Southern Company, Dominion Energy, Daikin Industries, and ENEOS) committed to net zero by 2050 or earlier, one company (Nippon Steel) committed to a 30% greenhouse gas emission reduction by 2030, and one other (Torray Industries) committed to a 30% greenhouse gas intensity reduction. CalSTRS continues to engage Phillips 66 to secure an emission reduction commitment. CalSTRS recently escalated engagement by filing a shareholder proposal asking Phillips 66 to prepare a report on how the company’s lobbying activities align with the Paris Climate Agreement. This proposal will be voted on at the company’s Annual General Meeting in May.