March 01, 2002
CalPERS Divests from Four Emerging Countries
by William Baue
California's public pension fund withdrew its equity from four emerging countries in response to a
review that considered social and financial factors equally.
On February 20th, the California Public
Employees' Retirement System (CalPERS), which manages more than $151 billion in assets,
announced the results of its review of
emerging countries for equity investment. CalPERS' Investment Committee revamped the criteria of
the review, which has been performed by Wilshire Associates since 1987.
this overhaul, Wilshire considered seven factors in its review: country development; political
risk; market liquidity and volatility; market regulation, legal system, and investor protection;
capital market openness; settlement proficiency; and transaction costs. In the revision, CalPERS
replaced the country development category with two separate factors, transparency and productive
labor practices, to create eight overall factors. It also redefined political risk more broadly as
political stability. The restructuring then grouped these three factors (transparency, productive
labor practices, and political stability) under "country factors," and the rest under "market
Based on these guidelines, CalPERS decided to end its investment of public
equity in Indonesia, Malaysia, the Philippines, and Thailand.
"We're not trying to send
a message to these countries," said CalPERS spokesperson Brad Pacheco. "We do believe there are
things that need to be improved before we will invest there. But this is not intended . . . to try
to create some ripple effect or effect some kind of change. This is really intended to make sure
that we're meeting our [fiduciary] obligations to our pensioners and that we're investing in a
However, CalPERS' intention does not control how the global community
perceives its actions.
"CalPERS has sent an important message to these governments
regarding their fostering of civil society and ratification and respect for core [International
Labour Organization] conventions," said Tessa Tennant, executive director of the Hong-Kong-based Association for Sustainable & Responsible Investment in
Asia (ASrIA). "[The] CalPERS decision will undoubtedly . . . reinforce the reform process,
although it's a fairly blunt instrument . . ."
CalPERS' analytical process relied on
research provided to Wilshire by credible third party sources. For example, Verité, an Amherst, Massachusetts-based non-profit
that monitors international human and labor rights standards, researched productive labor
practices. Based on this and other third party research, Wilshire rated all eight country and
market factors on a scale of one to three, with one representing the least able to support
institutional investment and three representing the most able.
Today, ASrIA posted a page on its website
that criticized this point system, questioning whether the extensive research could be reduced
accurately to one of merely three numerical designations. ASrIA cited Argentina, which scored
highest of all emerging countries in the overall evaluation of suitability for institutional
investment, as a prime example of the potential flaws in the rating system. Argentina scored a
"two" in political stability.
ASrIA questioned the broad structure of CalPERS' review,
which assessed entire countries. Individual companies within those countries vary widely in their
degree of social and economic responsibility. It also condemned CalPERS' use of negative exclusion
instead of positive engagement with companies. CalPERS uses positive engagement to improve the
social and economic sustainability of companies in the U.S.
access to capital) is disempowering and could foster further resentment to western financial
institutions and America. Given the events of the last six months, this is especially unfortunate
in the case of moderate Islamic countries such as Malaysia," said Ms. Tennant. "The policy does
nothing to reward best practice by corporations in those countries."
However, CalPERS has
not determined a set response to the review, but rather intends to fine tune the actions elicited
by the review.
"This is a living document subject to on-going change, not a static
policy," said William D. Crist, president of CalPERS Board of Administration.
Tennant recognizes this fact, and hopes that CalPERS will take into account the shortcomings ASrIA
has identified in implementing policy.