CalPERS, the Environment, Clean Technology and Municipal Creditors

Ann Simpson is a senior portfolio manager at CalPERS and heads up their global governance efforts.  The Wall Street Journal's recent report on the Environment has contrasting quotes from two portfolio managers.

Ms. Simpson says,

"The financial crisis we've just crawled out of cost CalPERS something in the order of $70 billion. That's the cost of getting it (?) wrong. So companies, whether it's a high-quality audit or it's environmental reporting or good internal controls, we'd prefer that you think about this (?) as an investment.  ...we really want companies to invest the time and the effort in getting these material environmental issues identified, properly reported and then managed." 

So the $70 billion in losses could have been reduced by spending more money on reporting environmental issues?  I thought that the financial cascade failure in the global financial system was triggered by issues at the Reserve Primary Fund; these reflected massive failures among corporate management, their auditors and financial regulators.  Who knew that there were environmental causes?

Turn the page to the inside of the report, and there's a series of quotes from Joseph Dear, the Chief Investment Officer of CalPERS.  According to Mr. Dear, a CalPERS fund devoted to clean energy which began with assets of $460 million in 2007 has generated an average annualized return of (-9.7%) to date.  So, actually investing in sustainability as CalPERS as an objective has been an awful investment for pensioners. Mr. Dear says,

"We have almost $900 million in investment expressly aimed at clean tech.  Well, for CalPERS, clean-tech investing has got an "L-curve" for "lose."  Our experience in this has been a noble way to lose money.  And we're not here to lose money."  

If these funds had been mutual funds sold to the public, they would be seeing an exodus of shareholders, but  CalPERS is privileged as a public system because of its size and political activism.  As a high profile public scold for corporate n'er-do-wells, it is particularly ironic that in 2013 the former CalPERS CEO was indicted for fraud in a pay-to-play scheme to defraud a private equity firm. I guess that their own internal governance checks and balances were not properly managed.

In the Stockton and San Bernardino, California Chapter 9 municipal bankruptcies, CalPERS is resisting any efforts by creditors and bond insurers to treat them alongside the other creditors.  The bankruptcy judge seems to leaning to the preferential treatment avenue for CalPERS while bond holders will be asked to take a substantial haircut to principal.  Nothing like being able to take advantage of an implicit subsidy, which is what the entire shadow banking system did during the financial crisis.  Mr. Dear said that he was not here to lose money, and if preferential treatment is what it takes, then so be it.

At the end of the day, these municipal creditors have only themselves to blame.  If they were too lazy or too stupid to understand their real downside risk, then that's the way it goes: they deserve the pain.  Chapter 9 is good for city managers and  for CalPERS.  Everybody else is left holding the bag.