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UV8337
Rev. Aug. 18, 2021
Divestment as an ESG Tool: CalPERS and Tobacco Stocks (A)
As he prepared for the December 2016 Investment Committee meeting, Ted Eliopoulos was conflicted.
As the chief investment officer (CIO) of the California Public Employees’ Retirement System (CalPERS), he
oversaw an investment office of over 300 employees and was responsible for investment policies, risk
management, corporate governance standards, and environmental, social, and governance (ESG) strategies for
the public pension fund. At a time when some worried that the rising numbers of California retirees put
significant burdens on pension funds, Eliopoulos was under pressure to shore up long-term retirement security
while also staying true to the state’s ESG principles. He knew this would require some difficult decisions.
California’s promise to pay pension benefits in future decades entailed a fiduciary obligation to ensure that
as market conditions changed, the balance between risk and return on CalPERS’s investments was appropriate.
In 2014, CalPERS had initiated an investment strategy review under the Policy Revision Project, and by the
spring of 2016, this had led the investment committee to revisit the organization’s restrictions around tobacco
investments. Over 15 years earlier, tobacco stocks and bonds had been divested from the internally managed
portion of the CalPERS portfolio, though they were still permitted in externally managed portfolios. The belief
at the time was that the tobacco industry would not survive the heavy regulation headed its way, nor would it
recover from the immense litigation against tobacco companies. Despite these threats, by 2016 the tobacco
industry had outperformed the broader market substantially, with significant cumulative returns.
Outside observers had wondered if the tobacco divestment had been a breach of CalPERS’s fiduciary duty.
While the divestment had seemed to have no downside 15 years before, it had resulted in a lower return than
if CalPERS had not divested. At the end of the day, wouldn’t a higher return have been better for California’s
future retirees than the satisfaction that their pension fund was not promoting smoking? Despite all the positive
qualitative factors that favored ESG investing, Eliopoulos wondered if it might not have been worth the
forgone gains.
While conducting due diligence, the CalPERS investment committee consulted with investors and other
stakeholders for their perspectives on reinstating tobacco stocks and bonds and asked stakeholders to submit
their views on the topic. There were three clear options available: remove all tobacco investment restrictions,
maintain the status quo, or broaden restrictions by requiring externally managed portfolios to divest. What role
should tobacco play in the investment portfolio of a public pension plan? How should Eliopoulos balance the
values of CalPERS with the necessity to drive sufficient returns to pay pension obligations far into the future?
What exactly was his fiduciary duty?
This public-sourced case was prepared by Richard Evans, Associate Professor of Business Administration, Gerry Yemen, Senior Researcher, and Michael
Kellett, Research Assistant. The protagonist’s thoughts were created for pedagogical purposes. The case was written as a basis for class discussion rather
than to illustrate effective or ineffective handling of an administrative situation. Copyright 2020 by the University of Virginia Darden School
Foundation, Charlottesville, VA. All rights reserved. To order copies, send an email to [email protected]. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without
the permission of the Darden School Foundation. Our goal is to publish materials of the highest quality, so please submit any errata to
[email protected].
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CalPERS: Background
Launched during the Great Depression, CalPERS had grown to be the largest public defined pension fund
in the United States by 2016. As a state agency, CalPERS was governed by California state government laws
and regulations (including rules, for example, on staff salary structure and contractor hiring), all laid out in a
document over 1,200 pages long. Like most organizations and businesses, CalPERS had explicitly defined in
its mission statement what it would and would not do. Its mission included responsible stewardship to produce
retirement and health benefits, in addition to providing retirement security and promoting wellness.1 CalPERS
held 1,212,645 active and inactive members and 650,943 retirees and beneficiaries.2 It offered a pension fund,
long-term-care plans, and deferred-compensation retirement plans. The organization administered health and
retirement benefits to state agencies (31%), schools (38%), and local public agencies (31%), which included
physicians, police, and firefighters, among others.3
Overseeing CalPERS was a 13-member administrative board that provided guidance to Eliopoulos’s team.
In 2014, the board had implemented 10 Investment Beliefs that governed staff decisions on strategic
management and priorities of the CalPERS investment portfolio (see Exhibit 1 for Investment Beliefs). The
Investment Beliefs were intended not as a checklist for every decision, but as a guide that would, from time to
time, require a balance between factors.4 CalPERS operated under five-year strategic plans and had set three
goals for its 2012–17 strategic plan. Those goals were to improve “long-term pension and health benefit
sustainability,” “cultivate a high-performing, risk-intelligent, and innovative organization,” and “engage in state
and national policy development to enhance the long-term sustainability and effectiveness of programs.”5
Historically, CalPERS was funded primarily through employer contributions from public agencies such as
water districts, cities, schools, and fire departments. By 1999, 137% of CalPERS was funded, and contributions
from public agency members dropped close to zero.6 That environment changed, however, when a state law
(SB 400) lowered the retirement age for certain civil servants to 55 years and increased pensions, some to a
lifetime benefit as high as 90% of an employee’s highest pay level.7 Shortly after that, the dotcom bubble and
Great Recession further reduced the CalPERS funding level to an average of 60%.8 By 2016, two-thirds of
CalPERS’s income was from its investments. In fact, for every dollar going into CalPERS, employees paid
$0.13, CalPERS employers paid $0.25, and investment earnings contributed $0.62.9 Although it was earning
money, since 2013 CalPERS paid out more than it gained in contributions, and future projections suggested
that trend would continue.
Coming up on the end of the 2012–17 strategic plan, the pension fund held over $290 billion in total assets
and had paid out $20.3 billion to almost 650,000 members in benefits by end of fiscal year 2016.10 Given the
increasing dependence of CalPERS payouts on investment earnings, the return on the portfolio was of
paramount importance, and as CalPERS’s Investment Belief 6 made clear, asset allocation was the dominant
1 “Review of Tobacco Investment Restrictions, October 18, 2016,” YouTube video, 18:37, posted by “CalPERS,” October 19, 2016,
https://www.youtube.com/watch?v=ygJg5xcoNFU (accessed Apr. 7, 2020).
2 CalPERS annual financial report, June 30, 2016.
3 CalPERS, “Pension & Retirement: Facts at a Glance for Fiscal Year 2018–19,” https://www.calpers.ca.gov/docs/forms-publications/factspension-retirement.pdf (accessed May 11, 2020).
4 https://www.youtube.com/watch?v=ygJg5xcoNFU.
5 CalPERS annual financial report, June 30, 2016.
6
La
Palma
City
Council,
“CalPERS
Update
&
Additional
Payment
Discussion,”
February
20,
2018,
https://www.cityoflapalma.org/ArchiveCenter/ViewFile/Item/2374 (accessed Apr. 7, 2020).
7 Jack Dolan, “The Pension Gap,” Los Angeles Times, September 18, 2016, https://www.latimes.com/projects/la-me-pension-crisis-davis-deal/
(accessed Apr. 7, 2020).
8 “Historical Factors Impact Funded Status,” Calpensions.com, https://calpensions.com/2020/01/08/calpensions-wrap-up-a-look-back-at-thecrisis/#jp-carousel-12964 (accessed Apr. 7, 2020).
9 Carolyn Coleman, “Stopping the Runaway Pension Train,” Western City, October 1, 2017, http://www.westerncity.com/Western-City/October2017/Stopping-the-Runaway-Pension-Train/ (accessed Apr. 7, 2020).
10 CalPERS annual financial report, June 30, 2016.
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determinant of that return. The asset allocation of CalPERS’s investment portfolio as of June 30, 2016, is shown
in Exhibit 2. Each asset class represented a relatively homogeneous group of securities with similar returns,
risks, and correlation. By holding a diversified portfolio across these different asset classes, CalPERS could earn
the portfolio weighted average return, but with less than portfolio weighted risk. Excluding an asset class, or
even a subset of an asset class, such as a divestment policy would require, would entail missing out on both the
return and the potential diversification from that investment. Since the pension fund was increasingly reliant
on investment returns to fund benefits, investment strategy was critical. Eliopoulos and the investment team
had a duty under the California constitution to diversify investments, minimize loss, and maximize returns. It
was imperative that they strike a balance between risk and return.
CalPERS Divestment
Activism was hardly a new or surprising activity at CalPERS. As one of the first pension funds to lead the
crusade to improve corporate governance,11 CalPERS voted against hundreds of pricey executive pay packages
and pressured big oil companies over climate change. When on October 16, 2000, CalPERS’s Investment
Committee informed staff that tobacco stocks and bonds would be divested from internal and external passive
public equity portfolios and internal public debt portfolios, few were surprised. Although external active
investment managers were exempt from divesting tobacco stocks, they were required to adopt tobacco-free
benchmarks. In all, 22 tobacco-related firms were prohibited from CalPERS’s investment portfolio,
representing 0.66% of the benchmark ($1.0 billion of a $156.8 billion global equity portfolio).12
At the time CalPERS made the divestment, public opinion was decidedly against tobacco firms. There was
a belief that the tobacco industry would not survive increased regulation and litigation.13 That risk gave pause
to many investors, and other states and counties joined CalPERS in divesting tobacco stocks. There was also
growing interest in corporate social responsibility (CSR), and multinational companies in particular were
questioned and regularly criticized over their activities globally. Agencies were created to rate and evaluate
companies on CSR efforts, and industry felt the pressure as CSR issues were starting to influence their markets.
Analysts, the media, and the public formed opinions around whether producing products such as tobacco or
weapons was irresponsible. For those who believed it was, divestment became a tool that investors could use
to create an impact of “denormalization” on the industry long-term.
Review of Divestment
The review of CalPERS’s divestment initiatives was part of its 2014 Policy Revision Project, and one of its
2016 strategic plan goals was to improve long-term pension and health benefit sustainability by 2022. In light
of this goal, the investment committee reviewed all investments with three objectives: to provide retirement
benefits to participants and beneficiaries, to minimize employer contributions, and to defray administrative
expenses. It was the investment committee’s fiduciary duty to ensure that when market conditions shifted, the
portfolio did as well. Eliopoulos’s team was duty bound to reexamine divestment and decide the extent to
which CalPERS’s Investment Beliefs supported the divestment. To balance the search for high returns with
the ideals of sustainability was sometimes messy. Two of CalPERS’s 10 Investment Beliefs were particularly
relevant to reconsidering the tobacco divestment. Investment Belief 3 held that “CalPERS investment decisions
11 In 1986, CalPERS issued its first shareowner proposal on bringing accountability to the executive suite and boards of large US publicly traded
companies.
12 Investment Committee Agenda Item 5b, Attachment 8, CalPERS, December 19, 2016, https://www.calpers.ca.gov/docs/boardagendas/201612/invest/item05b-08.pdf (accessed Nov. 25, 2019).
13 Moody’s Investor Service Press Release, “Moody’s Reports: Litigation and Legislation Risks Still Significant for Tobacco Companies over Medium
Term,” Moody’s, November 6, 2000, (accessed via Factiva Jan. 18, 2018).
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may reflect wider stakeholder views, provided they are consistent with its fiduciary duty to members and
beneficiaries,” and Investment Belief 7 that “CalPERS will take risk only where we have a strong belief we will
be rewarded for it.”14 In addition to the Belief policies, the state fund sought input from outside investment
consultants. For example, a 2015 report from Wilshire Associates (Wilshire), a consulting investment firm,
indicated that tobacco restrictions had reduced CalPERS’s portfolio returns by $3.68 billion (see Exhibit 3 for
the impact).15 In addition, Wilshire calculated that its exclusion of tobacco securities made CalPERS less diverse
than an unrestricted index.16 Wilshire also projected an annual tracking error of 0.056%.17 The cost of the
tobacco divestment was even more pronounced when CalPERS was compared to many other institutional
investors that had continued to invest in the tobacco industry. As it turned out, tobacco outperformed the
broader market (see Exhibit 4 for market leaders), becoming the second-highest-performing industry, with
over 900% in cumulative returns.18 Contrary to expectations, legal and regulatory issues did not cause the
industry to collapse. Furthermore, the rate of tobacco-related diseases did not lower as a result of divestment.19
Between February and April 2016, Eliopoulos’s team put together several revisions for a proposal around
CalPERS’s divestment policy and then decided to treat the tobacco divestment separately. The committee
sought viewpoints from external and internal sources. It asked numerous stakeholders—including 28 member
and beneficiary associations, 5 public health organizations, 89 employer organizations, and 32 private sector
organizations—to comment on the tobacco divestment.20
There were some complex long-term challenges around tobacco investment to consider. Setting aside
ethical concerns around investing in tobacco companies, there were several other investment-related reasons
why CalPERS might want to stay out of tobacco investments. First, tobacco use appeared to be in a clear secular
decline—at least in the United States and other developed markets. Statistics showed that fewer people (both
adults and children) were smoking, and that those who still smoked were smoking less (see Exhibit 5).
Additionally, regulatory pressures continued to mount—and not just in developed markets—as many
countries across the world had put in place at least some “smoke-free” legislation as well as bans to advertising
(see Exhibit 6). Other regulations to combat smoking included requirements that tobacco companies use plain
packaging—in effect taking away any power in their brand names. In addition to legal regulations, there was
litigation against tobacco companies, and many nations increased cigarette prices to very high levels, using
taxation as a tool to curb smoking (see Exhibit 7). Although tobacco demand tended to be inelastic due to the
addictive nature of the product, there was likely some limit to how expensive cigarettes could get before demand
would be significantly impacted.
Outside of tobacco’s direct health effects on smokers, there were some clear negative externalities that
governments were hoping to avoid. For example, secondhand smoke had serious consequences for both adults
(heart disease, lung cancer, strokes) and children (ear infections, asthma attacks, respiratory infections) who had
never smoked.21 There were also negative impacts on the environment. For example, the Ocean Conservancy’s
14
Investment Committee Agenda Item 5b, “Review of Tobacco Restrictions,” CalPERS, December 19, 2016,
https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf (accessed May 4, 2020).
15 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf.
16 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf.
17
Andrew Junkin, “Comprehensive Divestment Analysis Letter, Attachment 1,” Wilshire, September 25, 2015,
https://www.calpers.ca.gov/docs/board-agendas/201510/invest/item07a-01.pdf (accessed April 7, 2020).
18 Jamee V., “CalPERS Once Kicked the Tobacco Habit. Now It’s Reconsidering,” California State Retirees, December 17, 2016,
http://www.californiastateretirees.org/Home/News-Article/Article/1581/CalPERS-once-kicked-the-tobacco-habit-Now-it-s-reconsidering (accessed
May 4, 2020).
19 https://www.youtube.com/watch?v=ygJg5xcoNFU.
20 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf.
21
Centers
for
Disease
Control
and
Prevention
(CDC),
“Secondhand
Smoke
(SHS)
Facts,”
https://www.cdc.gov/tobacco/data_statistics/fact_sheets/secondhand_smoke/general_facts/index.htm (accessed Apr. 7, 2020).
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2016 International Coastal Cleanup report noted that its efforts collected over 2.1 million cigarette butts—by
far the most frequently collected item (number two was plastic beverage bottles, at under 1.1 million).22
Tobacco Investment Growth
Despite the negative effects of tobacco, there were also opposing reasons why the tobacco industry might
actually present an attractive investment opportunity. First, a simple Porter’s Five Forces analysis (i.e.,
competitive rivalry, supplier power, buyer power, threat of substitution, and threat of new entry) showed that
the internal industry dynamics were quite favorable for the incumbent players. Entrenched brands and strong
loyalty had kept away new entrants, and heavy consolidation allowed firms to be disciplined with pricing while
holding substantial pricing power over suppliers. The highly addictive nature of nicotine limited buyers’
negotiating power and the threat of substitutes. Despite overall industry headwinds from declining tobacco use,
estimates of the total addressable market still came in north of $600 billion, providing plenty of profitable
opportunities for tobacco companies.23 Additionally, tobacco companies had historically provided good
diversification characteristics to investment portfolios (in addition to robust historical returns). At the time of
the CalPERS meeting, tobacco companies were trading more or less in line with the overall market but at a
discount to other consumer staple stocks that provided similar benefits without the controversy (see Exhibit 8).
That discount could change, though, as tobacco companies built markets along two avenues—emerging
markets and next generation products (NGPs).
One growth opportunity included emerging nations that were bucking the trend of declining tobacco use.
People in low- and middle-income countries represented roughly 80% of smokers,24 although smoking in these
markets was largely concentrated among males (see Exhibit 9). Indeed, in Africa, a historically low-smoking
continent, the number of cigarettes smoked by year grew from 124 billion to 153 billion, a 23.2% increase, from
1999 to 2014 (see Exhibit 10). The largest of the increases, in both percentage and total, occurred in China,
where the number of cigarettes consumed annually grew from 1.64 trillion to 2.55 trillion, a growth rate of over
55%. Smoking in China was seen as socially acceptable—more so among men than women.25 In 2015, China
constituted 45% of global cigarette volume, making it by far the biggest consumer of cigarettes.26 Although
China was a huge area of global growth for cigarette sales, state-owned China National Tobacco (CNT) acted
as a monopoly. Any foreign brands sold in China were licensed by their parent companies but manufactured in
CNT facilities and distributed by CNT. In addition, CNT entered into joint ventures with other national brands
to produce and distribute Chinese cigarettes abroad.27 While China had enacted some smoking regulations,
enforcement was inconsistent.
As tobacco regulations still presented a risk, tobacco companies were proactive in lining up NGPs—which
didn’t exist when CalPERS divested tobacco stock—as a future avenue for growth. NGPs retained the addictive
characteristic of cigarettes, as they still contained nicotine, but provided smoking alternatives, such as e22 “30th Anniversary International Coastal Cleanup,” Ocean Conservancy annual report, 2016, https://oceanconservancy.org/wpcontent/uploads/2017/04/2016-Ocean-Conservancy-ICC-Report.pdf (accessed May 4, 2020).
23 Grand View Research, “Tobacco Market Size, Share & Trends Analysis Report by Type (Cigarettes, Smoking Tobacco, Smokeless Tobacco, Cigars
& Cigarillos), by Region (U.S., Canada, U.K., China), and Segment Forecasts, 2012–2021,” July 2018, https://www.grandviewresearch.com/industryanalysis/tobacco-market (accessed Apr. 7, 2020).
24 Anna Gilmore, “Big Tobacco Targets the Young in Poor Countries—With Deadly Consequences,” Guardian, December 1, 2015,
https://www.theguardian.com/global-development/2015/dec/01/big-tobacco-industry-targets-young-people-poor-countries-smoking (accessed Apr.
7, 2020).
25 Grace X. Ma, Steven E. Shive, Xiang S. Ma, Jamil I. Toubbeh, Yin Tan, Yajia J. Lan, Chengkai K. Zhai, and Xiaofang Pei, “Social Influences on
Cigarette Smoking among Mainland Chinese and Chinese Americans: A Comparative Study,” American Journal of Health Studies 28, no. 1 (January 2013):
12–20, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3914219/ (accessed Apr. 7, 2020).
26 Shane MacGuill, “What Is the New Tobacco Data Telling Us?” Euromonitor International Market Research Blog, June 20, 2016,
https://blog.euromonitor.com/what-is-the-new-tobacco-data-telling-us/ (accessed Apr. 7, 2020).
27 Jennifer Fang, Kelley Lee, and Nidhi Sejpal, “The China National Tobacco Corporation: From Domestic to Global Dragon?,” Global Public Health
12, no. 3 (March 2017): 315–34, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5553430/ (accessed May 4, 2020).
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cigarettes and vapes. Sales of NGPs had grown considerably, increasing by over 132% between 2012 and 2016.28
In contrast to tobacco product sales, this growth came primarily from developed markets where tobacco use
was declining. The estimated global market size for NGPs was over $10 billion in 2015, with the United States
accounting for around 56%, and the United Kingdom, China, France, Germany, Italy, and Poland being the
next-largest contributors.29 That said, this rapid growth rate masked the fact that NGPs were still a small market,
as convenience-store sales of cigarettes outpaced those of e-cigarettes by a ratio of 64:1 (though these statistics
may have been masking online NGP sales, and traditional stores may have accounted for only one-third of the
$2.5 billion e-cigarette market in 2014).30 Most notably, while NGP use was increasing rapidly among adults,
use among high school and middle school students was quite promising for future sales for the industry (see
Exhibit 11). NGPs were still new in 2017 and not as regulated as traditional tobacco products. On the other
hand, the harmful effects of NGPs (though likely less serious than the effects of traditional tobacco products)
meant that governments were looking at the potential to regulate the NGP market.
The Team Makes a Recommendation
The CalPERS staff recommendation was to remove the ban on tobacco stocks, but that recommendation
did not sit well with some stakeholders. Those opposing the CalPERS investment committee’s
recommendation largely did so because of social issues, although some stakeholders considered the industry
financially risky. Among those who wrote letters opposing the recommendation were 14 state and federal
agencies and organizations, as well as one state senator. Of CalPERS members (active and retired) who wrote
letters, 156 people disagreed with reinvestment in tobacco, and 2 supported it. The ethical reasons cited in those
letters for keeping the divestment included the following: tobacco companies sold products known to harm
individuals and society (through cancer, heart disease, and death); the industry promoted tobacco products in
countries without regulation against it (promotions totaled $26 million annually according to one source); and
tobacco imposed significant costs to society—peoples’ lives were shortened for financial gain.31 The financial
reasons for speaking against the reinvestment centered on the risk that these stocks were already at peak and
likely to decline, the worldwide increase in regulation against tobacco companies, and the decline in tobacco
demand. It was also argued that economically, California’s program to reduce tobacco use had saved
$134 billion in medical costs between 1989 and 2008.32
The investment group’s analysis and position on tobacco divestment was driven by its role as a fiduciary
for retirement portfolios and not as an administrator of health insurance, the latter of which might have meant
a stronger consideration of the social- and health-related factors involved in investing in tobacco.33 “Our
fiduciary obligation is always to our beneficiaries,” Eliopoulos said.34 By the end of 2016, the group concluded
that divestment as an investment strategy was problematic as it “tied investment staff’s hands”35 in terms of the
ability to reevaluate an investment or make quick decisions based on market conditions. In addition, the tobacco
28 CDC, “Economic Trends in Tobacco,” https://www.cdc.gov/tobacco/data_statistics/fact_sheets/economics/econ_facts/index.htm (accessed
Apr. 7, 2020).
29 World Health Organization (WHO) Framework Convention on Tobacco Control, “Electronic Nicotine Delivery Systems and Electronic NonNicotine Delivery Systems (ENDS/ENNDS),” August 2016, https://www.who.int/fctc/cop/cop7/FCTC_COP_7_11_EN.pdf?ua=1&ua=1 (accessed
May 4, 2020).
30 Kristy L. Marykak, Doris G. Gammon, Brian A. King, Brett R. Loomis, Erika B. Fulmer, Teresa W. Wang, and Todd Rogers, “National and State
Trends in Sales of Cigarettes and E-Cigarettes, U.S., 2011–2015,” American Journal of Preventive Medicine 53, no. 1 (July 2017): 96–101,
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC5559880/ (accessed May 4, 2020).
31 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-08.pdf.
32 James Lightwood and Stanton A. Glantz, “The Effect of California Tobacco Control Program on Smoking Prevalence, Cigarette Consumption,
and Healthcare Costs: 1989–2008,” PLOS ONE 8, no. 2 (February 2013) http://journals.plos.org/plosone/article?id=10.1371/journal.pone.0047145
(accessed Jan. 25, 2018).
33 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf.
34
Mellissa Block, “CalPERS Pulls Public Employee Pensions out of Hedge Funds,” NPR, September 16, 2014,
https://www.npr.org/transcripts/349036336 (accessed Apr. 13, 2020).
35 https://www.calpers.ca.gov/docs/board-agendas/201612/invest/item05b-00.pdf.
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industry’s expected bankruptcy did not occur, and in fact it offered high returns to investors. A forecast by
investment bank analysts showed favorable returns for the industry going forward (see Exhibit 12).
Choices
There was no doubt that the decision around tobacco divestment was difficult. Years before, divestment
had seemed like the best solution, as the tobacco industry had looked like it would collapse shortly anyway. Not
so by 2016—there were profits to be made from investment. For CalPERS, a pension fund increasingly reliant
on investment profits instead of annual pension contributions, there was an obligation to its fiduciary
responsibility to ensure members could retire comfortably. CalPERS was entrusted with funds to provide
promised retirement benefits for members. Yet CSR considerations were important, and arguments against
reinvestment were compelling. As he continued to work on the divestment issue, Eliopoulos wondered if there
were any factors he had overlooked. Did supporting investment in tobacco firms conflict with CalPERS’s
member health and health care mission? Did supporting continued divestment mean CalPERS was putting its
own social priority and ideals ahead of its clients’ investment goals?
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Exhibit 1
Divestment as an ESG Tool: CalPERS and Tobacco Stocks (A)
CalPERS 10 Investment Beliefs
Investment Belief 1:
Liabilities must influence the asset structure.
Investment Belief 2:
A long-time investment horizon is a responsibility and an advantage.
Investment Belief 3:
CalPERS investment decisions may reflect wider stakeholder views, provided they are
consistent with its fiduciary duty to members and beneficiaries.
Investment Belief 4:
Long-term value creation requires effective management of three forms of capital:
financial, physical, and human.
Investment Belief 5:
CalPERS must articulate its investment goals and performance measures and ensure
clear accountability for their execution.
Investment Belief 6:
Strategic asset allocation is the dominant determinant of portfolio risk and return.
Investment Belief 7:
CalPERS will take risk only where we have a strong belief we will be rewarded for it.
Investment Belief 8:
Costs matter and need to be effectively managed.
Investment Belief 9:
Risk to CalPERS is multi-faceted and not fully captured through measures such as
volatility or tracking error.
Investment Belief 10: Strong processes and teamwork and deep resources are needed to achieve CalPERS
goals and objectives.
Source: CalPERS, “2016–17 Comprehensive Annual Financial Report, Fiscal Year Ended June 30, 2017: A Commitment to Financial Security,”
http://www.calpers.ca.gov/docs/forms-publications/cafr-2017.pdf (accessed May 4, 2020).
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Exhibit 2
Divestment as an ESG Tool: CalPERS and Tobacco Stocks (A)
Investment Portfolio as of June 30, 2016
Allocation and Market Value by Asset Class
Current
Allocation
(%)
Growth
Public equity
Private equity
Income
Real assets
Real estate
Forestland
Infrastructure
Liquidity
Inflation
Trust level
Total fund
60.8%
51.9%
8.9%
20.3%
10.8%
9.3%
0.7%
0.9%
1.5%
6.0%
0.5%
100%
Interim
Strategic
Target (%)
Actual
Investment
54.0% $
46.0% $
8.0% $
20.0% $
13.0% $
11.0% $
1.0% $
1.0% $
4.0% $
9.0% $
N/A $
100% $
(billions)
179.5
153.1
26.4
59.9
31.8
27.3
2.0
2.6
4.5
17.8
1.6
295.1
Data source: “Focused on the Future,” CalPERS comprehensive annual financial
report, 2015–16, https://www.calpers.ca.gov/docs/forms-publications/cafr2016.pdf (accessed June 1, 2020).
CalPERS Investment Allocations
Public equities
Real assets
Other (inflation assets, liquidity)
Fixed i
