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The virtue of CalPERS' Emerging Equity Markets Principles

This article argues that CalPERS' new principles-based approach to investing in emerging markets stands at the midpoint between its previous alpha-generation policy of complete country-level divestment and its beta enhancement associated with universal investing in its domestic and developed markets. Although CalPERS' previous policy addressed macro-level standards at a country level by negatively screening out companies in restricted countries, it precluded CalPERS' normal practice of corporate engagement to raise environmental, social and governance (ESG) standards at the company level in these markets. We argue that the new policy brings CalPERS' emerging market portfolio more closely in line with its policies of engagement. We describe this policy as ‘enhanced alpha generation’. We use CalPERS' emerging market portfolio holdings data and cross-reference these company holdings with KLD data to contract extra-financial merits of the new policy. We further examine the share prices of these firms against standard industry benchmarks to determine the policy's material impact on CalPERS' portfolio. We conduct interviews with CalPERS' investment managers—both internal and external—to determine how the new emerging market investment principles are incorporated in investment processes. This allows us to identify two approaches to the implementation of the Principles: a ‘hard-fast’ screening approach, and a ‘value tradeoff’ approach. One of which entailed significant opportunity costs. These findings, when assessed in the context of various trends in the investment environment, and issues brought fourth in our interviews—with related investment practitioners, CalPERS' trustees, and leading ESG experts at KLD and Verité—sheds light on the future state of ESG investing in emerging markets.