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March 25, 2005
Shareowner Activists on Sustainability Take Baby Steps Into Sustainability Screening
    by William Baue

Part one of this two-part article surveys the landscape of US public pension fund screening of corporate social and environmental sustainability.

Amongst the most vocal proponents of corporate social and environmental sustainability in the US are several public institutions with significant pension funds. Adopting socially responsible investing (SRI) tactics, these institutional investors use shareowner activism to encourage more responsible corporate behavior. One example is filing shareowner resolutions calling on companies to address climate change. However, very few public pension funds are employing the other primary defining SRI tools, namely positive screening that shows preference to more sustainable companies and negative screening that excludes less sustainable companies from portfolios.

Part one of this two-part article looks at current state of sustainability screening by US pension funds, and part two examines the structural implications of pension fund screening.

The California Public Employees Retirement System (CalPERS) is not only the nation's largest public pension fund at $183 billion, but also the most active in sustainability screening. The Green Wave initiative was formally launched last month with the implementation of the fourth and final prong of the program that was first proposed by California Treasurer Phil Angelides in January 2004. One prong of the program calls for applying environmental screens on a $500 million portfolio.

"The Green Wave is an excellent first step, and I really look forward to seeing how it works, but every state should be doing a Green Wave," said Glynn Washington, executive director of the Council for Responsible Public Investment (CRPI). CRPI has published a study entitled Beyond CalPERS that finds very little SRI practice such as screening in California's county pension funds.

"The support these institutional investors could provide for research on corporate sustainability represents the best way to maximize their investments while at the same time protecting and sustaining the environment from whence they came," Mr. Washington told "This work is certainly not being done with any alacrity."

At least two states have started to follow behind the crest of the Green Wave initiative. The Vermont State Employees' Retirement System (VSERS) and the Vermont State Teachers' Retirement System (VSTRS) boards have approved a proposal set forth by Vermont Treasurer Jeb Spaulding to search for an investment manager for an environmental fund.

"Such an investment manager would use positive screens to identify and invest in companies that employ environmentally sound policies that add to their bottom line, making these attractive opportunities," states the Treasurer's 2004 Annual Report.

Before ending her eight-years as Maine State Treasurer due to term limits, Dale McCormick proposed a "Two Percent Initiative" to apply environmental screens to that much of the Maine Trust Funds.

"We have entered a memorandum of understanding with an investor--Light Green Advisors--while it assembles a mutual fund for best in class environmentally responsible investments," current Maine Treasurer David Lemoine told "We are currently waiting on the start-up of the fund."

The Treasurers of California, Vermont and Maine are members of the Investor Network on Climate Risk (INCR), a coalition of 10 institutional investors formed at the Institutional Investor Summit on Climate Risk at the United Nations in November 2003. The summit was co-chaired by one of the most vocal shareowner activists on the issue of climate change: Connecticut Treasurer Denise Nappier, the principal fiduciary of the $20 billion Connecticut Retirement Plans and Trust Funds (CRPTF).

"We have two separate operations--shareholder activism and pension fund management, which is the investment side," said Don Kirshbaum of the Connecticut Treasurer's Office. "On the investment side, there is no screening at all in any part of our portfolio, with the exception of one statutory screen which has to do the MacBride Principles," a code of conduct for companies doing business in Northern Ireland.

"We discussed it with the treasurer a year or two ago--for example Steve Lydenberg of Domini Social Investments spoke to the investment advisory council about the steps you have to go through to do different types of screens," Mr. Kirshbaum told "But the treasurer has not decided to do any screening at all on the investment side."

As a fiduciary responsible for billions of dollars in investments, making the decision to apply screens is no simple matter, as will be discussed in part two of this article, which examines the structural implications of pension fund screening.

Part two of this two-part article examines the opportunities and limitations that social and environmental sustainability screens present to pension funds and other institutional investors.


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