Fund agrees to U.N. ideals

Trustees of the California State Teachers' Retirement System stepped onto the international stage Thursday, agreeing to embrace a United Nations campaign to prod giant multinational corporations to follow responsible business practices.

The move comes as the $176 billion fund increasingly looks at overseas investments and updates its strategy to put new weight on environmental and social issues.

CalSTRS joins about 250 institutional investors representing $11 trillion in assets in signing onto the U.N. Principles for Responsible Investment. The California Public Employees' Retirement System, the nation's largest public fund with $258 billion in assets, was one of the pact's first backers.

The principles offer a framework for major investors to integrate environmental, social and governance standards with traditional ways to analyze investments.

CalSTRS trustees said the U.N. initiative, launched in April 2006, incorporates many of the responsible investing practices followed by the fund for decades.

"It's not going to be a profound shift. This is completely linked with good investing," said trustee Peter Reinke.

Indeed, former Vice President Al Gore on Thursday endorsed CalSTRS' efforts and applauded its $50 million investment in his London-based Generation Investment Management firm, a part of CalSTRS' green wave initiative. Gore said a company's track record on environmental, social and governance issues will affect profit potential.

"We're out to prove it's the right way to do business," Gore said, during a video conference call from Nashville, Tenn. "You have given us the opportunity to make this case."

Meanwhile, the United Nations wants to create a uniform guide for investors who could band together to push companies with poor business practices on things such as child labor or greenhouse gas emissions. Today, about 4,000 of the world's 75,000 multinational corporations have signed the U.N. global compact.

"We have a way to go. The role of the financial markets in this is critical," said Gavin Power, senior consultant to the U.N. Global Compact. "To have a fund of CalSTRS' size (join) is really a shot in the arm."

Power said some investment funds, for example, have joined forces to deal with South American automakers and steel companies over forced labor issues. "You are joining an international network. You have the potential to have more impact than acting unilaterally."

A survey released this summer found more than half of the investment groups that have adopted the U.N. initiative have asked companies in their portfolio to issue reports on these issues, including disclosing carbon emissions, which contribute to global warming.

About 83 percent have established specialists dedicated to responsible investment issues while two-thirds are considering these factors when hiring outside money managers.

CalSTRS and CalPERS have both been on the forefront of governance and social investment causes, reasoning that companies with poor business practices will produce subpar returns in the long run. By shoring up standards, companies would flourish financially, officials say.

"This is not an ethical investing framework. It is about maximizing long-term returns," Power said. "There is increasing evidence ... companies that do manage these issues outperform their peers."

This summer, Goldman Sachs researchers reported that 120 companies in five industries, including energy and pharmaceuticals, that subscribe to these practices lead their peers in stock performance by an average of 25 percent.

The U.N. principles, however, are not without some controversy.

"They are viewed as political," said Charles Elson, a corporate governance expert at the University of Delaware. "You can maximize shareholder value. The question is: Are they appropriate?"

Business groups are skeptical about the motives. They argue pension funds could wind up sacrificing investment returns to further social causes promoted by special interest groups.

"Pension fund administrators need to be careful to fully understand the priorities of their beneficiaries and not be subjected to their own priorities and interests," said David Chavern of the U.S. Chamber of Commerce. "There are a number of people who want companies to push somebody's social goals. One shouldn't expect businesses to solve all the social and foreign policy issues faced in this country."

CalSTRS trustee Beth Rogers also questioned whether CalSTRS would become a bigger target to social activists as well as lawmakers using pension fund divestment as a political tool.

"Right now we have tons of investments in a whole lot of unpleasant places. Where do you draw the line?" Rogers asked. "We may create our own monster."

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