City of San Jose, CA Federated City Employees' Retirement Board, 20 Feb 2020

Previous Meeting Next Meeting

⏯

youtube image

►

From YouTube: FEB 20, 2020 | Federated City Employees' Retirement Board

Description

San José Federated City Employees' Retirement Board
View Agenda at https://sjrs.legistar.com/View.ashx?M=A&ID=762105&GUID=8C21D766-9655-48B6-9986-18494A9448A5

A

Steal a roll call, and so we have here trusty Keller, her trusty Horowitz, trusty, son, myself, Castellano and so trusty Jennings. We will not be on for this part. She'll.

B

Join us, okay,.

A

All right well with that. The first item is a closed session. We will be moving to closed session for public employee performance evaluation pursuant to government code, section.

A

54957.6 acute evolve. We are estimated to reconvene at nine o'clock.

A

Into open session, there were no reportable actions in the closed session. I've been asked to remind speakers to speak directly into the microphone and that all presenters clearly state their names for the record and audio recording.

A

Also another note because we do have one of the trustees calling in today all votes must be by roll call. So whenever we take action, I'll ask everyone by name what your vote is, so that that's very clear for the record and with that, let's proceed with orders of the day.

A

See we have no time certain so I'd like to request a motion to be made to approve orders of the day as agendized okay motion by trustee Horowitz. All.

C

A

Second, by trustee Keller and then, if I could do a roll call vote for that trustee, Kelleher, aye, trustee or I.

D

A

Son Jesse Horowitz aye trustee Jennings here.

C

A

Then myself, yes, so that motion carries unanimously. Thank you.

A

Okay, I'm going to ask for the board's approval to waive sunshine item, 4c discussion and action on adoption of resolution: nine, zero, nine to Cola rate for 415, be qualified participants and their grandfather. Rule attachment for c1 memo and for c2 resolution were received. Late I can have a motion and a second to waive sunshine, okay of motion from trustee son. Second, second, from trustee Horowitz, again a roll call vote trustee Kelleher. Please.

D

C

A

You trustee or I thank you. Trustee son Jesse, Horowitz trustee, Jennings aye.

D

A

Myself, yes, so that motion carries unanimously. Thank you again. We will proceed to consent. Calendar consent.

A

Calendar today includes approval of service, retirements, approval of Board minutes, approval of return of contributions, acceptance of communication, information reports, approval of travel conference attendance and approval of administrative matters.

A

Is there any items to be pulled from consent and if not, then, if I can motion the second on the consent, calendar.

E

A

From trustee Horowitz, second, second from trustee Kelleher, thank you. Roll call vote, Jesse, Kelleher I, you trustee son, I'm, sorry, Jesse war, hi,.

D

A

Son Jesse Horowitz, dusty, Jennings, fine.

D

A

Myself, yes, so that motion carries unanimously.

A

Item to death and survivorship notifications like to ask for a Mona's silence for those who serve the city and recently passed.

A

Thank you buddy item three on the in Jetta investments: three: a oral update from the CIO retirement services; mr. Palani Thank,.

F

You mr. chairman I do have december flash reports here. The plan actually returned calendar for the calendar year, 2019 13.6%. This is a policy benchmark return of 13.8% and fiscal year-to-date return of 4.3 percent versus the policy benchmark of four point: nine percent- and that was the pension plan, the Health Care Trust for the calendar year. 2019 returned 15.2%.

F

This is a policy benchmark return of 15.5 and fiscal year-to-date, 5.5 percent for the Health Care Trust. This is a policy benchmark return of five point: four percent. These numbers are, of course through December 31st 2019, and these are flash reports so they're close, but not necessarily accurate with that. I'd actually like to I'm happy to take questions, if not I'd like to actually set the stage for the next two items on the agenda.

A

A

F

You, mr. chairman, so we have two education sessions this morning. The first one is on asset allocation and the second one is on ESG. Investing and I realize that about half the board we actually have practitioners in the investment business and then the other half of the board.

F

We don't have investment, people trustees with investment backgrounds and we will be asking the board to make very important asset allocation decisions in April, and so we are hoping that these education sessions will be useful for trustees and we actually have on the asset allocation side. We have two speakers this morning and Jeremy ev9, former police and fire trustee was actually supposed to be the first speaker. Kick it off, but I see he's not here and I.

F

Don't blame him, he's actually driving down from Berkeley, so he's probably caught in traffic, but I will introduce both speakers and we have wrong Kahn here and Ron. If you don't mind coming up, and so in terms of flow, Jeremy was going to do a high level on asset allocation and educate.

F

The board on asset allocation topics and Ron was going to go a little bit deeper into asset allocation, but we I guess we'll have to just switch the order of the two presentations I'll quickly give you Ron's background here and before he can start his presentation. Mr. pallone II.

A

I did forget an administrative matter necessity because we do have a trustee and make perhaps you don't mind I'll. Do that and then do.

G

The introduction I'd.

A

Hate to do it in between the sounds are to those okay. So because we do have a trustee calling in trustee Jennings is participating via teleconference. I do have some questions to ask for Brown Act purposes.

H

A

Jennings I have three questions: did you publicly post the agenda 72 hours in advance at the location noted on the agenda.

A

Did you are you in a room or space that is a DEA compliant and is your room or space open to the public and does the public have the ability to hear the proceedings and speak if they wish? Yes, okay. Thank you.

I

Very much thank.

A

You very much for your indulgence, everybody and then mr. Polonia, again I apologize, Thank.

F

You, mr. chairman, so we have, as I mentioned before, Ron Conn here Ron is a managing director and global head of the systemic equity research at Blackrock, and he has overall responsibility for the research underpinning the systemic active equity products at Blackrock and his service at Blackrock dates back to 1998 when the firm was well when he was part of Barclays Global Investors, which then but Blackrock in 2009. Ron is a well-known expert on portfolio management and quantitative.

F

Investing is published, numerous articles on investment management and, along with Richard Reynold authored the influential book active portfolio management, which I still use as a reference guide from time to time, and the two of them are the 2013 winners of the James Burton award, presented by the CFA Institute and Ron's book Ron and shirts book. The sequel advances in active portfolio management was published in December.

F

2019 Ron is also the winner of the Bernstein Fabozzi Jacobs Levy award for the best article in the journal of portfolio management, and he is also he teaches the equities half of the course international equity and currency markets at the Berkeley Masters, a financial engineering program. He has earned a physics, a B from Harvard from Princeton and a PhD in physics from Harvard University, and he was a postdoctoral fellow in physics at UC Berkeley with that, I will actually turn this over to Ron.

I

Thank you very much. It's an honor to to speak to you this morning and I assume you all have copies of the the presentation.

I

So so what I thought I would do is talk a little bit about asset allocation, but really more about about manager, selection and how we think about who should be managing the the pension plan and what are some of the implications and and to do that around what I set up as five myths that that that people may think about in terms in terms of this, this topic.

B

I just wanted to I'm sorry to interrupt you. Let you know that we have the presentation available so when you're speaking, if you want to particularly refer to a particular slide and staff, can can manipulate the slides so that you can refer to that. If you choose to do that, you don't have to do committee presentation as usually do I just might relate No Oh.

I

Fantastic, fantastic, in fact, I will use the slide. So so that's that's great! Yes, so you know in terms of the the performance of a pension plan that that you're responsible for the performance is going to depend on a number of different decisions at a very high level. There's the strategic asset allocation and determining that depends on understanding in part.

I

What are the liabilities that you're trying to fund and how does the value of those liabilities go up and down with markets and rates and and and that helps you determine your overall strategic allocation beyond that? There's there's a tax, so that's something you may decide over the next five years. This is this. Is your target and then tactically, you might make a decision saying we think the next year is a good time for equity markets.

I

Maybe we'll overweight them relative to strategy that it turns out to be what I'll describe later is a low breath decision. You know you kind of make one decision, and so it's hard to diversify that, and so it's fairly high risk I'm gonna I'm, going to be more precise about that about that later and then. Finally, once you have these asset classes, then you have to do manager selection within the asset classes. So there's a certain amount you're willing to invest in equities. How do you actually do that? Which managers do you? Choose?

I

You choose index funds? You choose active managers. How do those and of course those also impact the overall performance now I will say- and this goes to the introduction- that that I'm mainly going to focus on manager selection within the asset classes, so so I think Jeremy will talk a little bit more about the high-level strategic asset allocation. So this is maybe a level below that.

I

So let me go to the next slide and and answer the first myth that that which is certainly in the air these days that index funds are are you know very desirable and, and you know all academic research would argue in favor of indexing over paying managers to try to beat a particular benchmark that you're better off with low-cost index funds to match to match the asset, class performance and I just want to go into that a little bit more detail so on the next slide, I've listed a whole lot of basically academic arguments and a lot of these arguments have won Nobel prizes over over time.

I

So in terms of indexing, there's certainly a lot of academic research in favor of hiring index fund managers. The fact that you pay a very low fee turns out to be quite beneficial, and so so there are these two theories: there's the capital asset pricing model, which is sort of a fancy name, but it it basically says that the reason you are an extra money for investing in the equity market is that the equity market is risky.

I

Not everybody wants to take that risk if you're willing to take it, you'll earn an extra premium because other people don't want to own it, and somebody has to own it now. There's another theory that says: markets are very efficient: a lot of people follow markets and and there's very little. You can figure out that that's not reflected in market prices, so those are.

I

The academic arguments is another one which isn't up here, which is actually simpler, which is called the arithmetic of active management, which simply argues that that the average active manager is the market, and you know some people, overweight, test law, other people underweight Tesla, but on average people own things and sort of you know market cap proportions, and so you know the average active manager is going to under perform before fees and costs are gonna.

I

They're gonna match the market, but after fees and costs they're going to underperform because of their fees and costs, and there's an enormous of of evidence that says that that's true, okay. So that's a lot of academic arguments in favor of indexing. On the other hand, there are arguments for active management, and so it's useful to understand those at a high level.

I

The idea that there's an opportunity comes from an old paper by Robert Shiller who's, a who's, a Nobel laureate in economics, and he pointed out something interesting. He said you know: equity stock prices are more volatile than they should be that if you, if you, if you say you know, you buy a stock you're buying the underlying fundamental economics of the company, and he showed that the the fundamentals don't move around that much and so the stock price really shouldn't move around that much, but it moves around a lot.

I

All that says is if, if stock prices are too volatile, which everybody accepts due to his academic work, it says that sometimes they must be overpriced and sometimes they're under price. So there's an AI doesn't say you can successfully identify those, but it says, there's might be an opportunity, then, in terms of more specific ideas, they're there, several and I just want to talk about two categories. There are ideas that that I, think of as broad and persistent and and those are either risk premia sort of like the market.

I

The market is risky, and so, if you're willing to hold on to it, you get paid extra.

I

Some people argue for examples that value stocks or stocks that are cheap, low price to earnings, ratios low price of book stocks, they're more volatile, and since not everybody wants to own those stocks, you might be paid a little extra to own them.

I

There are also some work on behavioral anomaly, so so we know human beings are irrational, but people have pointed out that we're systematically irrational. We make the same mistakes over and over again and there are strategies that try to exploit those mistakes. So those are broad and persistent ideas. Now, there's something that's much more straightforward, actually and I and I all these more narrow and transient.

I

It's that we might be able to do research and identify things about stocks that the market doesn't know yet, and so so so we may be able to make money by. Oh, the market doesn't understand this, but we've figured it out and we think this stock is worth more we're going to buy it, and then the market eventually figures it out now. I call that a more dynamic type strategy in that the market figures everything out eventually. So if you build a strategy around informational advantages, it's very research.

I

Intensive you've always got to come up with the next idea, because the market figures out the old ideas, if you're, if you're interested in in risk premia like value stocks, should outperform over the long run, I call those more static strategies, not because your portfolio never changes, but because the idea never really changes, and you know as as trustees. One thing we've seen is: if, if something like a value strategy, underperforms and they've underperformed for roughly the last decade, value managers will tend to say you know.

I

If you look over the long history, these things are going to come back, and so maybe we're underperforming now. But this is an idea that works just stay the course. If you talk to a someone working on informational advantages and they underperform, they tend to come in and say you know what we screwed up. The ideas we thought would work didn't and we're going to do more research and we're going to come up with new ideas so as as trustees, you're gonna hear very different excuses for challenging performance at times.

I

Okay, so so one one thing that's interesting about about this. You know broad and persistent ideas of risk premia versus these more narrow and transient ideas is that the investment paradigm has really changed a bit, and so it used to be. There were index funds and there was active management and now active management is really broken into two pieces. There are strategies that are called factor, strategies that use risk premia and behavioral anomalies to try to outperform and then there's what we call pure alpha. Where were you where people use informational advantages?

I

The thing you you want to know about this is that the factor part has become more commoditized, and so, if you want to invest in active strategies that deliver these risk premia and behavioral advantages, they tend to be lower priced than than ones that that are based on informational advantages.

I

Okay, so what? What are the the potential implications here on the on the next slide?.

I

So so I I think this idea that you should be an indexing or you should be an active management, is sort of a false dichotomy. Most institutional investors have a blend of these two things. Some places active management is is very attractive. Other places it's less attractive and most people look for some blend and and the the other point, as I mentioned, that arithmetic of active manager management, we know the average active manager tends to underperform.

I

So if you hire active managers, you have to have the ability to identify the better active managers, ones they're, the top quartile. Let's say I tell my students at Berkley. It's it's! It's it's great to aspire to be an active manager, but it's not good enough to aspire to be an average active manager. If you want to go into this business, you have to have a reason to believe you can be one of the top active managers.

I

Okay, let me move on to the next myth, which, which sounds reasonable, that that investors need to seek out the active managers who can deliver the highest active returns and by active returns. I just mean beat their benchmark if it's a if it's a US equity benchmark to do better than the S&P 500 or the Russell 1000, and this is really a question of like who should you hire? Who are the attractive managers? And the key point here: is it's not about delivering returns or historically having delivered high returns?

I

It's how much return can deliver per unit of risk that you're taking, because what you really need is consistent performance. So, if you look on the next slide, it's an interesting point that that if you hire an active manager and they outperform by ten percent one year and they underperform by ten percent the next year, you might.

I

That sounds like at the end of two years, you're flat, but actually at the end of two years, you're down one percent, because you go from a hundred to a hundred and ten and then, if you're down ten percent, you lose eleven from there and now you're down to 99. So after two years, you've actually lost money.

I

If you've got two managers up five percent one year and down five percent the next year, similar thing but you're only down 25 basis points after two years, so the volatility turns out to be something you've got to fight against. It keeps you from compounding returns in a positive way, so it turns out that the way to measure desirability of active managers is through what we call the information ratio.

I

It's just the ratio of active return to active risk and that active risk is that measure of how close are you to your benchmark if you're, if you tend to be either up 10 percent or down percent you're taking 10 percent active risk if you're up five percent are down percent five percent, five percent active risk. So so we can measure that, and we say on average, how much are you outperforming?

I

We would like to see people who outperform a lot relative to the amount of risk and a rule of thumb, a top quartile manager, one that I said is would be desirable. They have an information ratio of about a half.

I

So if they're taking three percent active risk, they should be able to deliver one and a half percent active return per year for the three percent risk, and so, in fact, what's going to be desirable, for you is to find managers who deliver a lot of return per unit of risk and then choose managers who are pretty uncorrelated with each other, so that they're not all down at the same time, but they outperform an under perform at different different periods. So I have a graph on the next slide. It just illustrates this.

I

This shows sort of the distribution of performance for three different managers. One has an information ratio of zero, one, an information ratio of a half and it wanted an information ratio of one now all of these in this particular graph have an active risk of two percent.

I

So if you look at the at the blue line, which is centered on zero alpha, okay, so this is not a very desirable manager, their average alpha zero, but half the time they outperform half the time they underperform.

I

And if you measure, if you say how often are they going to outperform it's about 50% of the time as those those curves move to the right, so the red curve, an information ratio of a half, you can sort of read off that they have an average alpha of one percent on average they outperformed by one percent and they with two percent risk. You can see that less than half of the curve is to the less left of zero.

I

So if you think of the whole area of the curve as being a hundred percent, the amount to the left of zero, which is now less than 50 percent, that's the probability than any. Given year the manager is going to underperform and as the information ratio goes up, the probability of underperforming goes down. So the more return you can deliver per unit of risk, the more consistent the performance is less likely you're ever going to underperform on the next slide. I have sort of the typical numbers for information ratios.

I

The median is about zero and 75th percent. That's a top. Quartile manager has an information ratio of about 1/2. So so what are the potential implications for for investors when you're trying to judge the performance of managers? You really want to look at their information ratio, it's not about how much return you've delivered, but the return you've delivered relative to the amount of risk and you want to build up a portfolio of active managers who additionally have low correlations with each other. I'm, not gonna.

I

I'll show you a little bit of that, but not very much. Ok, let's go on to two myth. 3.

I

This is one we hear about a lot that the best way to invest in active managers is through what people call a barbell portfolio. So so the idea of a barbell would be let's. Let's get.

I

On the one hand, an index fund and the other hand some really high risk managers, and so so the barbell is sort of these two extremes: either 0 active risk, which is the index fund or really high high conviction, managers taking a lot of risk and there's the barbell divided between index funds and and and an active funds, and this myth is a little bit more about you've chosen. Active managers and how much money do you give to each of them?

I

How do you sort of divide that up, and so first I'll go through a simple example and then I have another example. That's that's more realistic.

I

So so, in the first case, let's say: we've got a plan: they've got an index fund, they've got four uncorrelated high conviction, managers, and so these managers each can deliver one and a half percent active risk per year by taking sick return per year by taking six percent active risk, so they each have an information ratio of a quarter. So one and a half divided by six and at the pole and level you're willing to take one and a half percent active risk overall and here's the best you can do.

I

In that case it looks like you give 12 and a half percent of the plan to each of those four managers. That's 50 percent, so 50 percent is in the active managers and the other 50 percent is in an index fund. The index fund has zero risk, so the index fund is really there to help.

I

You match your overall, the overall level of risk you're comfortable with, and it turns out that, if you put that together, you get one and a half percent active risk for the plan and you you should expect about 75 basis points or 0.75 percent active return per year. So the plan now has an information ratio of 1/2, okay, fine. So so so then let's go on there. Let's add another manager.

I

So now we have a higher information ratio manager, but this manager doesn't take very much risk, so they they can deliver 1% act of return with 2% risk, as opposed to one and a half percent return with six percent risk. So first thing we can do is well, let's just throw that in with an equal weight and we'll adjust the index fund. So we still have one and a half percent risk at the plan level and it turns out that instead of 0.75 percent return, you could expect point eight six percent return.

I

So so things have improved, that's better, but actually you can do even better, so more detailed analysis and I'm, assuming all these managers are uncorrelated with each other. More detailed analysis would say: actually you want to put more money in that lower risk manager, because he's got a higher information richer. She has a higher information ratio and, in fact, instead of 86 basis points of active return.

I

You get up to 106 basis points of active return, so you can do much better by taking some money away from those high conviction, active managers and giving this to the lower risk, but higher information ratio manager.

I

So it says it's less about the barbell and it's really more about how do we appropriately allocate based on return per unit of risk?

I

So the theory says that actually you want to allocate your capital in proportion to information ratios and inversely proportion to active risk. So so, if something has less active risk, you probably put more money into it. It's less of a it's less of a bet at the at the plan level. The this result assumes that the managers are uncorrelated.

I

The math is slightly more complicated if you take correlations into account, okay and in practice we might deviate not only because of correlations, but also because of constraints and the and the targets your you're trying to achieve so I have another example, which is a more of a real-world example where you can see this so on the next page you get here. So let's imagine that that you have an MSc I AK we benchmark.

I

So this is the all country world index, so we're talking about equities and you've, grouped them all together into this world equity index. And how would you choose between active managers and index funds and also not only as you look across all different types of active managers, but also as you change, how much risk you're willing to take at the at the plan level? Now one of the things that's going to come in and you'll see this. So in the world of emerging markets we tend to think there are more opportunities for active managers.

I

We see managers do better, they're, less efficient markets and the emerging markets, part of the acqui benchmark, it's about 12%. So, even though we have a lot of opportunities to find good active managers, we wouldn't put a hundred percent of the plan in emerging market active managers, because emerging markets are only 12% of the benchmark.

I

So if you're at a hundred percent you're making now you're making a big bet that emerging markets are going to outperform, develop markets, so so you're unsafe, ER ground at least you're, taking less risk, if you're more in that 12 percent of the benchmark is in emerging markets. So at least let's consider twelve percent.

I

You know maybe twelve percent emerging market managers. So if you look at the results, we did a kind of detailed analysis of this. We looked at all of the managers in the event database, which is a database of institutional institutional managers, and you can see I'm showing you here how much money is going into managers who are in u.s..

I

The acronyms here on the bottom left us large cap, international, emerging markets and and a qui, and so one of the things you see is if you're only only want to take a small amount of active risk at the plan level, then you tend to focus on the categories where it's easy to find active managers, so emerging markets international. You tend to index the US, where it's a little bit harder to outperform. But as you start trying to take more and more active risk, then you you start to well.

I

First of all, the line that looks green on the left. This is how much is in emerging market managers, and you see that steadily goes up until you get to about 30 basis points of active risk at the plan level, and then it starts to go down and you're willing to take more active risk. But now you can get emerging market exposure, let's say through your international managers.

I

So as you take more and more risks, though, you've got to take active risk in all of these dimensions and the general result we see on the right-hand side.

I

It shows your efficient frontier, how much active return can you expect to get as you take more and more active risk, and this is the number that keeps going up the more act of return, you're willing to take active risk, you're willing to take the more active return, but it's a diminishing, diminishing scale. So it's not linear. Each additional unit of risk gets you less and less additional return.

I

Okay on the next, the next slide, so you could see the active allocations and also what happens with indexing so if you're willing to take only if you not only take any active risk at all, so you're all the way on the Left. If you look at the chart on the right, how much is allocated to indexing with zero active risk? You're, not it's all indexed, and so the emerging market index you can see is at 12%.

I

That's how much emerging market is in that overall benchmark as you try taking more and more active risk. Of course, the amount you're putting in indexing is going down. So so so the question of how much active risks you want to take over all the plan level is an important one. It's a measure of how much you might underperform in any one year, but it's also a measure of the opportunity you have to outperform and to earn additional returns to cover your liabilities.

I

Okay and the last chart shows, on the left hand side. You can also see that that, as you take more active risk, you see a kink in there, as once, you get beyond 2% active risk, you're you're, limited to lower information ratio, managers who are still available and so you're getting more return for each unit of risk. But it's less and less, and in this chart we explicitly show the the systemic piece.

I

Systemic strategies sometimes tend to have higher information ratios the lower risk levels. Okay. So so what are the potential implications for investors on the next slide here?

I

So I'd be be wary of barbells? They don't always lead to the highest expected active return per unit of risk, which is once you've decided how much active risk you want. You want to maximize that active return and, of course, if you target a very high active risk level, you will only be able to choose among high active risk managers, but but portfolios that have high information ratios and relatively low risk turns out can play an important role and that's really the argument against the bar belt. Okay.

I

So so the next myth is about high conviction, concentrated portfolio. These are these are also popular these days and and there's something that sounds reasonable about. Let's find a manager who has really strong convictions and builds a really concentrated portfolio. So here's a very small set of stocks. They know a lot about and they have high conviction, and so we've already seen and we've already discussed it really.

I

What you're looking for is managers with high information ratios, and so the question is how do managers manage to deliver high return per unit of risk and it turns out that there's a law that governs this called the the fundamental law of active management first described by my colleague and co-author Richard granola, and he said well, actually, the information ratio, the amount of return per unit of risk is determined by three things and they're all kind of intuitive.

I

There's the investment skill that the manager has the amount they can diversify across making different decisions and the efficiency with which they build portfolios. So let me just talk about those for a second, so skill, very straightforward. Every time you make an investment to decision, how likely is it that that was a good decision? So technically it's it's. The correlation of the forecasts you're making like these 20 stocks are going to outperform by a lot and then looking over the next year and see what happens if half of them outperformed and half of them underperform.

I

That's not very much skill.

I

So that's skill, but then diversification. This is what argues against these concentrated portfolios. Is you actually so skill gives you return? The thing that gives you a return per unit of risk is to actually take that skill and be able to diversify across a number of different decisions, so the more different decisions that are in your portfolio, the more diversified it is, the more consistent you can consistent. Your returns are going to be so that diversification, sometimes we call it breath, is real.

I

It turns out to be really important and then the efficiency is just how well does your portfolio actually reflect the ideas you have, and so can you now your portfolio may not perfectly reflect your views because of transaction costs because of constraints, maybe you don't allow shorting, you know leverage.

I

Some stocks are just hard to buy so so there are reasons why you won't be perfectly efficient, or maybe people are just good, are not good at building portfolios that you know don't know how to do a good job of trading off return against risk. So all of those things come into play and in the next slide, I just have a couple of examples. The examples I apologize. They might be a little hard to follow because they're, numerical and I didn't give you enough of a definition to know what all these numbers are.

I

But here's a typical if you'll bear with me here's here's a typical stock picker, so their level of skill, the correlation between what they say is going to happen and what actually happens is about 5%. Now that sounds like a really number, but it turns out to be typical for stock pickers people you might meet, who are active managers, try to outperform the US equity market, but now my breath well, if I can follow 500 stocks and every quarter, let's say I get new information on their earnings and fundamentals.

I

I might have a breadth of about two thousand, so I can make different decisions on each of those stocks. Every quarter and, let's say I'm, going to build a long only portfolio with a an efficiency level. Relative is relative to one I'm, only 35 percent efficient. That's that's kind of typical. For long only portfolios, hedge funds will do better. You put all that together and it says you can get an information ratio of 0.78. So that's a top quartile manager. It's a it's a low level of skill. That's because active management is hard.

I

The market is fairly efficient, and so you have a small edge. But if you can diversify across a lot of decisions, you can actually deliver consistent performance. Now, I mentioned earlier tactical asset allocation once what, if you're just trying to decide how much we want in stocks, bonds and cash, every quarter and, let's say actually you're better at that, so you've got more skill. Your your skill level is point 1 instead of 0.05, but you can't diversify very much.

I

This is this is the reason that tactical asset allocation isn't that popular anymore, because you can deliver strong returns in one corridor. You just can't consistently deliver returns because you're not divert you're only diversifying over a very small number of decisions. So here you know even with a higher level of efficiency. You end up with an information ratio of that point too, so not really top quartile and and stock-picking turns out to be attractive in this analysis, because you can diversify across a lot of different decisions.

I

Okay, so the potential implications here- and this I think is the important point for you to keep in mind that any successful stress, acting combination of skill and breath and efficiency. So there's more than one way to do it, and even though this fundamental law is, is a quantitative. You know it's it's a mathematical relationship. It applies to all managers, whether they're, quantitative or not, and it says that every manager has to have some winning combination of these three things, and so, as you think, about active managers, keep in mind.

I

How are they trying to put together a winning combination here? It might be kind of an equal focus on all these things. Fundamental managers might say: I'm really just going to focus on skill. I'm gonna do really well on a very small number of stocks and they're betting that the skill they have is gonna more than make up for the loss in breadth, and the question is: do you? Do you believe that? That's that that's the case? So as it says here, skill is the hardest to obtain breath in a way.

I

Sounds easy because you just follow more stocks, but it only works in combination with skill, so throwing in a lot of stocks, you don't know anything about is not it's not a a winning strategy.

I

Okay, so thinking about skill, breath and efficiency is I think a useful way of trying to understand active managers. Okay, so the last myth I'm going to talk about is actually about quantitative, active products, and you know that their black boxes, relevant 'mentally investors, would do and.

I

You know I I think this sometimes comes about, because fundamental managers are good at at telling stories. So so you know, if you have a 20 stock portfolio, I'll tell you, you know why they like Tesla or they don't like tests. So they'll talk about stocks that you know about.

I

On the other hand, the the the you know I think of them a little bit more as a black box in that you know it it's in their head. What's what's going on so so quantitative managers sometimes a little harder to understand. But everything is you know it's it's actually an open box if, if you dig into it so the difference between these two approaches and I think you'll you'll see both of them in terms of investment ideas, you know fundamental. Investing is limited only by imagination and quantitative, investing limited only by imagination and data.

I

So it's a data. Quantitative investing is a data driven approach and these days like there's massive amounts of data, so there's data on many more things that you'd feel comfortable knowing or out there in terms of data gathering fundamental investing. They look at numerical text. Data they visit companies.

I

Quantitative investors tend to mainly look at numerical and tax data. They don't look at. They don't do very many very many company visits and they differ in that fundamental investors tend to have concentrated portfolios. Quantitative investors tend to have more assets, that's really the biggest difference, you'll see and they tend to be team oriented worth worth. You know in the world of fundamental investing, it's usually the the portfolio manager is the king and the world of quantitative, investing that's a little bit more team oriented in terms of ideas, they're actually very, very similar.

I

These two approaches so on the next page, I've described to two types of strategies. So these factor strategies that I mentioned earlier that that that that that are broad.

D

H

I

They're, based on sir they're, based on on risk premia or behavioral anomalies, they tended their five ideas that tend to show up in those strategies. Value cheap stocks will tend outperform momentum. Stocks that went up over the past year will tend to keep going up small size, small stocks outperforming large stocks, high quality stocks outperforming low-quality stocks, and we can measure quality a number of different ways and low volatility. Stocks outperforming high volatility stocks, at least on a risk-adjusted basis, on a return per unit of risk.

I

So those are the what I've described is more commoditized factor strategies all of those are related to either risk premia or behavioral anomalies, and then in the pure alpha space, where this is around informational advantages.

I

Those are driven by data and and I would say that we are in the heyday of of these type of strategies due to the explosion of available data out there be, you know, what's called Big Data machine learning to harness those data and in terms of types of data.

I

I have is listed, tax search, social media images, potentially video, there's just so much data out there now and, and a lot of it allows you to do things that that that, in a much better way than we could do before, I'll just give you one example in in the category of search.

I

So so active managers have long been interested in consumer sentiment and we think if consumer sentiment is going up, people are more likely to go out and buy things, that's good for the economy, that's a good sign and there's this classic data source that people have looked at for years. The University of Michigan consumer confidence survey. So once a month, people from the University of Michigan they make phone calls, they call landlines. They ask people some questions and they come up with a number that says: is consumer confidence going up or going down?

I

How does it relate to last month and last year? Here's a here's actually a better way of doing that. We know now that that, if, if a consumer is interested in a big-ticket purchase, let's say they're thinking about buying a new car.

I

The first thing they're going to do now is they're going to go online and they're gonna search. You know, let me look at what the new Ford is. What are the features? What are what are the reviews say? Which model exactly do I want and we can. Actually we have. Data on searches and, and the searches are our geotag means.

I

We don't know the individuals are doing the search, but we know where we're which country they're in sometimes we know which state they're in, and so we have a sense of consumer confidence as measured by people doing searches for things they might consider buying and publicly available data. It's it's much faster and more accurate than the University of Michigan survey, which comes out once a month, and so it turns out. We can use this to figure out. How is consumer confidence going up or down in different countries is?

I

Is the University of Michigan's survey over over estimating under estimate? There are lots of examples where it's not about weird stuff. It's about ideas. We were always interested. We can measure them better.

I

Okay, I have I'm almost up here, so so the last slide, just just a decomposition of active returns, I kind of talked about this before you invested it in in a product you get that investment return at the top, there's a benchmark and there's the active return. So the active return is, did we underperform or outperform our benchmark? It turns out. We can break that act of return into two pieces. What's coming from static exposures to those factors, the value, momentum, quality and so on, and that pure alpha return.

I

That's coming from informational advantages, and it's it's useful to think about. Those are the two sources of active returns. You can now buy those separately, so the one on the left returns from average exposures to this. What are called smart beta factors, those are inexpensive, the pure alphas is, is more expensive, but I think that's actually where a lot of the more interesting work is going on in active management these days.

I

So let me let me summarize, on the last slide here so I've mainly focused on on you know, choosing managers within asset classes- and you know the key. The key issues: the goal is to deliver consistent, positive return, positive actor returns, most plans, they invest in active and index, it's not one or the other, increasingly investing in factors and pure alpha and indexing.

I

It's important for for you and and working with others to to identify high information ratio managers. Those are the ones who are going to help get you to where you need to be, and you're gonna allocate capital in proportion to those information ratios, and you know that's that sort of on paper. There's some practical constraints around. You know what is the benchmark invested in? How much active risk do you want to take overall and how correlated are the managers so hopefully that that was a useful, a very quick overview of a lot of material.

F

Thank you on mr. chairman, I have a question: I have.

A

A question yes, so.

F

Ron, if you go back to slide 28 or 29, we spoke about two buckets of alpha the static and the pure alpha. Where you do a lot of research, so it seems like the pure alpha gets arbitrage away and which is why we need to constantly do research. Yes, what's the reason for the persistence of excess return in the static sort of the former French three factor model, though people who are following the following value would probably say it's dead for at least in the last few years. But why are we still persisting with that?

F

I

That's that's a that's a very relevant question these days, because because value is underperform for so long so so the arguments are either that these are risk premia. And so you know within the market, there are some people who just don't want to own value stocks, and so, if you're willing to own value stocks, you should get a premium for them or their their behavioral anomalies.

I

Where we're taking advantage of consistent mistakes that human beings make now the one thing I would say, is and I'm gonna maybe pick on value in particular, people who invest in these strategies say you know what. If we look over the last hundred years, value is done really well and it's outperformed by a lot and it's return. Per unit of risk is really high. It's actually much higher than the overall equity market, I would argue looking forward.

I

There's no reason to expect any of these things to do better than the market in terms of return per unit of risk.

I

Furthermore, with with value you know, the world has also changed so so you know the idea that we can invest in. Let's say stocks with a low price relative to their book value. That's a classic value, investing approach.

I

You know my team as a strategy with that started in 1985 and in 1985 we did a lot with value and, in fact, just being able to calculate access and calculate book to price ratios for every stock in the S&P 500 was an edge. We could do it. Many people couldn't do it now. Anyone with an internet connection can do it there. Those kind of edges are gone, and so I tend to be suspicious of this kind of historical research that says oh wow over the last hundred years.

I

This has done really well and you're testing it with technology that absolutely did not exist even 25 years ago or 50 years ago. Okay,.

F

D

So, for when we select a manager, we can look at their past performance and the past risk exposure to calculate information ratio. But when we hired- and we expect them to duplicate that kind of performance, how do managers I, guess I'm, asking statistically how consistent our information ratio for for a manager? Is there any empirical evidence to show that the managers are able to maintain the consistent information ratio and that helped us to make us so.

I

Unfortunately, the answer is basically no. So if you ask the question, if you just look at historical performance, you know it's: what's in the Prospectus historical performance isn't much of an indication of future performance. If, if all you go on is information ratios, they may be slightly better than looking just at the Returns themselves.

I

But if you pick a manager with an above median information ratio historically- and you say, what's the probability that they're above median in the next period in information ratios, it's a little bit higher than 50%, but it's not like 80%, you know the the highest numbers you see might be 60%, so there's a little bit of an improvement, but but but that's about it, which, which is why you really have to do more research than just the historical performance numbers, and so I do think that understanding.

I

You know that mix of skill diversification, efficiency at least gives you a few more handles to try to measure you know. Do we think this performance is going to persist.

A

Jesse Horowitz thank.

E

You, first of all, thank you for your presentation. It's very comprehensive and informative, especially for those of us who are not investment professionals, but I do have a number of questions.

E

In your studies, what percentage of active managers have outperformed passage indexes over the past one five and 10 years? Yes,.

I

So it's it's less than 50 percent, so so so so and I I can probably get you the data there. Different people do Studies on this over different periods and different methodologies, but they often have the same general result, which is consistent with that arithmetic of active management that the average active manager under performs and the average active manager under performs by about what their fees are. So so you know you can say roughly one percent under performance if you're looking at mutual funds might be a little different with institutions where the fees are lower.

I

So so that does tell you that if you don't have any particular skill at picking active managers, you shouldn't do it at all. It's it's a losing game on average you're gonna underperform. So so so the idea of you know picking active managers. You have to have the ability to identify at least managers that are roughly in the top quartile. So.

E

If the average active manager, underperforms an index and information ratios, show very little persistence year by year, by what means do we pick these mythical active managers who can outperform year after year after year, right.

I

So so, first of all there are managers who outperform year after year, but they are I think the way you have to find them is it's beyond just looking at historical performance. So so so historical performance by itself would not be a very good measure, and so you know there are a number of other things you can look at in terms of what is the process that they're using what kind of edge do they have it's? It's really. You know the real question is they've. Outperformed historically, was that luck or was that skill?

I

And if it was skill, was it skill that they still have sort of on their own or have lots of other people come into the same the same field, so I do think it's possible to do this, but I but I, don't want to say it's easy or or not, without some some risk.

E

It seems that an alternative strategy is simply to go with indexing and not to pursue the search for active managers who can consistently beat their indexes you've. Given us no guide to how to select these managers other than looking for the ephemeral, skilled breath and efficiency, we have no means. No mathematical means no intellectual means to identify these managers and, in fact, indexing. There is a vast academic literature that have illustrates the superior performance of indexing over active management. Is that not true I.

D

Would say it's.

I

Yeah, basically, yes, I would not say that there's there's also some academic evidence for active management, but there's an awful lot for in favour of indexing.

E

So I guess I'm a little disoriented by the title of your presentation, the five myths when it is certainly not a myth that indexing has been a very successful approach and can, conversely, the search for active managers can be a hopeless and fruitless task. Well,.

I

You know the only thing I would I would I would push back on. That is that if the upside of active management is is delivering more returns for the plan, and so so you know by going indexing, you or you are saying we're matching the the the asset classes exactly and not going to try to outperform them now. Not the other thing I would say is it's. It tends to be somewhat easier to find successful, active managers in certain areas and others I- haven't really focused on that here.

I

So though I mean I could come back and and and talk more about that, but but I and and I would say, we've just been through a you know. 10 year period, where indexing has been a phenomenal investment like that, like all of the asset classes, have gone up a lot coming out of the financial crisis, and you know it would have been hard to outperform indexing.

I

If you expect that the next ten years and along those lines, if you think that the index, let's say US equities, are going to be up 15%, is it worth the risk to try to be up 16%?

I

On the other hand, if you think US equities over the next 10 years are going to be flat, if you can find someone who can deliver 1 or 2 percent more performance that that might be meaningful. So so so this is not answering your question to saying here's the magic way of finding them, but I'm just saying there are some good reasons why you might consider it.

E

But it strikes me a bit like the example you gave of a value investing. It's shown a history of of good episodes of great performance. Recently hasn't done so well, so are we going to see a reversion to the mean or is something changed in the world? Oh.

I

I think a lot has changed in the world, and so so I and I and I think an understanding of what active management might be appealing gone, for. It is very much tied to how the world has changed.

I

So, if you think I don't have to tell you have all the ways the world has changed, but I do think that has opened some opportunities now. I do think the active management isn't isn't a static thing or it's not something where, like as an active manager. Myself like you, know, resting on your laurels, because you did well the last five. Like that's a terrible idea. It's it's it. It's got to be what's going to work over the next ten years.

I

How do we identify that how's, the world changed and, and and how do we make sure we're not caught up but by it.

E

Well, thank you very much for your views. I would like to ask I presume you were invited here by the CIO I would love to hear a presentation by a financial academic who might be more in line of defending an indexing approach and enlightened the board upon their views. Perhaps they would title it to five myths of active management. Well,.

F

I would certainly like to it might bill Sharpe if he would actually come and talk, but but.

E

F

Certainly I think I. Think one of the one of my takeaways from from Ron's presentation is that active management is very, very difficult. I, don't think we're on suggesting that we should do active management. He's just saying that it's a very difficult exercise. There is room for active management, but you know you have to watch out for these things. So again we actually went into chapter 2 of the asset allocation discussion, because Jeremy was not here who was going to do chapter 1 and I just heard that he felt sick and I.

D

F

It's the common cold and not the virus. That's.

I

Making the headlines these days but.

F

Hopefully, he will be here next month to educate the boards, and we will have next month, dr. Myron Scholes, talking to the board, who was the author of the black Scholes option, pricing model and the 1997 winner of the Nobel Prize in Economics. So you can actually post these questions to dr. Scholl's as well. Okay, I want to thank Ron, my colleague and teacher, and the fundamental law of active management I think deserves the Nobel and I hope he gets it with dr. granola someday thanks Rob thank.

A

You, sir, thank you very much. Thank you. We're gonna take a five-minute break. We need a little setup for the next agenda item. Let's be back please at 10:21.

A

On item 3c education session on ESG by sarah bernstein over rock Andrew Collins and Verity shavar Thank.

F

You mr. chairman, I just want to introduce the panel sort of give a background as to why we're doing this. So the city passed an emergency climate resolution sometime in the fall of last year, and the boards were asked to look at there at you know the plants, fossil fuel exposures and at that time I did actually present the fossil fuel exposures to the board and I also promised the boards that we will do an education session, because it's entirely the board's decision on what direction we want to take in terms of ESG integration.

F

But the point is really that fossil fuel calculating fossil fuel exposure is just one small part of ESG. Esg is much bigger topic than fossil fuel exclusion, as we call it and and also be lucky to have council member Davis here who I guess was who authored the resolution. The emergency climate resolution last fall. So we have I'm going to introduce the speakers.

F

Real quick I have their BIOS and Roy took us from the website, so Andrew Collins is with the San Francisco Employee Retirement System he's their new director of ESG investing well new, as in about a year two years old. Now.

A

F

Mr. Collins earned a BS in environmental engineering from Yale University and has over ten years of ESG experience, and he comes to s first from State Street Global Advisors, where he served as an ESG expert and also spent five years at the sustainable Accounting Standards Board. So we're happy to have mr. Collins here in no particular order. We also have a fair if there is a relationship manager with un PRI, which is the United Nations principles for responsible investment.

F

The world's leading proponent of responsible investment and offer leads the pr I--'s network and initiatives in West in Western, North, America and prior to joining the PRI or fair was an analyst at the University of California Office of the CIO, and he also kindly put together this panel and obviously is a proponent of ESG and, as was all our panelists here and then Sarah Bernstein is PhD and principal from makida and mr.

F

Bernstein is a seasoned institutional investment consultant and it's concentrated on institutional investor, ESG and sustainable sustainability issues for nearly two decades, and she has senior responsibilities across varying clients at makida and is a member of the firm's ESG investment committee and miss Bernstein is also a member of SAS, be sustainable, Accounting, Standards, Board and last, but not the least.

F

We have Verity sugar from Blackrock she's, a director in the ESG integration team at Blackrock, and she is previously an ESD strategist within the Blackrock investment stewardship team and has also worked at Alliance global investors and she's. Currently the vice chair of the sustainability accounting standards board. So we couldn't have picked a better panel to educate us on ESG issues and they've all been very generous with their time and in fact, they're going to repeat this presentation to the police and fire board on March 5th.

F

So with that I'm going to turn it over to the panelists. Thank.

A

You welcome. Thank you all for coming.

G

Okay, thank you and thank you for having us, Sarah, Bernstein, I. Think I'll just jump right into the introductory presentation.

G

So, let's move to a slide: five I don't want to take up a lot of your time if we can start on slide just to give you a big picture overview of environmental, social and governance. Investing it encompasses a very wide range of approaches to investing and combine. These numbers are from 2016 to 2018. The numbers when they come out for 2019 will show even further growth in in assets being managed with some version. Some type of ESG mandate.

G

Important element on page six of ESG investing is in addition to just the allocation of assets and how you're, managing and investing is the proxy voting and engagement that comes along with your equity investments, shareholder proxy resolutions related to ESG issues have gained a tremendous amount of Ament 'm in the in the last I would say decade even more so in the last five years, and in addition to that I've around particular climate issues, but around a number of environmental, social and governance issues.

G

There has been a growing number of institutional investor coalition's trying to work together to ask questions and forward less risk and more return on the ESG material risks that they face in the in the marketplace and in the economy.

G

Page 7 just lists a number of typical common risks that you'll see folks paying attention to identified under environmental and social, and then governance issues I'm not going to read them all off, but some of the the governance ones have been actively looked at on a fixed income side and on the equity side for before the term ESG coalesced a lot of this and aggregated it.

G

It would put on a important point at this point at this stage, which is what really is important across the number of issues that you can identify as environmental, social and governance is whether they're material from a financial point of view.

I

G

Your investment, so you can come up with all kinds of issues that either from an environmental point of view or a social issues, point of view, but they may or may not be important to your risk or return as an investor page, eight and I'm trying to go through this fairly quickly. Please stop at any time and ask a question or interrupt me or any-any at any time.

G

The other thing that's evolved over the last few number of years is data on ESG issues. It's no longer something that is just the purview of an active manager seeking it out on particular companies, but it's really become an industry in itself, and so there are very large data vendors like MSCI and sustain oolitic, sandra b, co sam, who are not just gathering the data organizing it and and attempting to make it valuable to investors and investment managers. That process is still underway a lot of it.

G

It's not similar to data that, for example, is already required in disclosures by the SEC. So it's not standardized number more and more companies report, but there's still a lot of gaps, which means what are the data vendors do with that?

G

They try and get the best estimates they can looking at peers and and other information, and just one data point here for the S&P 500, so even very large companies in 2011 it was estimated about 20% of the companies in the S&P 500 index reported yeah, any kind of ESG metrics, and now that number is up to 80%.

G

That's just large cap companies, reporting data just like for any organization, cost time and money and resources and reorganizing how you think about your reporting function and accounting functions in your company, along with just purporting data data, vendors and there's. Many of them have started to try and aggregate the information and score the data so and they are putting out ESG scores and isse cores and gee scores, and s course trying to indicate whether one company has a better, for example, climate risk strategy and indicators than another peer.

G

The one thing I would say about the the scoring and the ratings these days. It's very different than what you'd find in, for example, the fixed income markets, comparing a Moody's rating to a Fitch rating that where the correlations are about 99.99%.

G

So that's a clear market signal coming from two very well-established on very long-term, looked at metrics in the ESG world. There's a lot of judgment there result is that the the correlation among vendors one recent report showed it was between 44 percent and 70 70, odd percent. So, and there's good reason for that. There's judgment involved, there's less data, but there's also your particular perspective in in some ways you could think of it as one active managers perspective on these all these sets of companies compared to another.

G

On page nine, we try to categorize the types of approaches, broadly within all ESG, investing into three buckets, those that are focused directly on financial value, improving lowering risk, improving return across your portfolio or within a certain asset class. Those and I think everybody on the panel is going to talk more about how they integrate key material, ESG metrics into their process for analyzing and investing on the far right.

G

You call it values rather than value where your investors are concerned, about a particular social issue and they're changing their investment profile, regardless of looking at the financial impact of that that could be anything many types of investors, an easy one to think about is perhaps a a religious organization which doesn't want, or anybody that doesn't want exposure to send stocks or something despite which can be very important and mission driven.

G

But it's not necessarily being done as with the financial implications of those positive or negative taken into account and in the center a new term of impact has come up which tries to both get market returns, at least and at the same time deliver some quantitatively.

G

A quantitative impact on whatever the social or environmental issue is that you're focused on so.

G

Those are started that kind of impact investments really started out in private equity and private sector. There's still a lot of debate about calling something impact in publicly listed securities. For example, if you just invest in a company really in the market you're or you divest say you divest from a company and you think you'll get a better market return and have more, you know more correlation with your own values.

G

Are you really, if you divest somebody else, you're trading that stock, so somebody else buys the stock. The only time you're really having a direct financial impact in the public markets is in an initial public offering situation or a secondary. Where there's actually new money going to to that particular company. It doesn't mean the companies aren't doing better or worse in what they're doing, but as an investor, you have a little bit of a different role than you do in the private markets.

G

I, don't want to take too much time, but this next page page 10 kind of summarizes the same things I've been talking about and just organizes and Sue when a competitive financial performance is required, which is really only in value or integrating integrating ESG into your portfolio, the others. It's not always required, and you really have to look at the mandates and the and the strategies of the particular investment managers and, on the other, extreme ESG outcomes, aren't always, in their words a quantitative ESG outcome for your portfolio of for integrating them.

G

That is not the necessarily goal. The goal is to reduce risks based on the ESG issues and improve returns from our point of view as consultants, we don't feel like there's any right or only approach to integrating ESG issues into your. How you think about your portfolio. We think they can be very important in terms of materiality maketo works with clients. Many public pension funds in the u.s.

G

also endowments and foundations, which will have different fiduciary responsibilities and different missions, as so last bullet here, integrating it depending on how you do it can be an incremental ink change to your portfolio, but depending on, if how much resources you want to put into you into it, it can be timely, cost both time and money, both board time staff, time consultant time and and resources which may be justified in what you get out of it.

G

But I don't want to say that this you know, you're gonna, do this and not have any thought going into what you how you want to pursue it if you should want to pursue something and and and and what you're gonna do with it.

G

The next page page 11 gives more background. This could be in appendix I'm happy to go through it. If you wish, if not I'll skip over it, it's really just sort of defining some terms that are commonly and more acronyms, for you to digest that commonly are used in in in this field.

G

And actually the same, those are continued on the following page, so I'm gonna move to the next section on what US institutional investors are really working on and concentrating on today, in integrating ESG issues and on page 14, you see a picture of the across the US, the hundreds largest public plans and whether they have any clear ESG policies and this fully full information on this.

G

This is just what the legal in general, who put together this, got from published on their websites that they could find so folks might be doing stuff that isn't it wasn't right up there for them to find. It does show that there's a number of large some of the largest in the country are very active in this area. On the on the right, I.

G

Mention this, because it's important to note that being active on ESG doesn't necessarily mean that your reallocating $1 based on ESG, it can be the you're really working more carefully on your proxy voting and your engagement within the spectrum of your existing asset allocation and managers and on the bottom. You do see the types of negative exclusions that have been historically used, which is very different than what sort of emerged more recently in terms of using a more more of an integration and proxy and engagement approach.

G

Not just sort of more I would call a blunt or tool tour to achieve, hopefully achieve any goal. You're. Looking for on page 15,.

G

If you look at this list, it kind of looks like what you do every day on your investment portfolio, so ESG is really beginning to be looked at across the board, integrating it first and foremost, if you're into your investment beliefs, adding or discussing having an investment belief that focuses on your ESG or your climate approach and the beliefs about that.

G

From an investment point of view, taking from there into your investment policy asset allocation, I would say, for the most part today, at least in the US and in particular in public lands, is primarily more with the in asset classes. There's no big, my you know, I'm sure you all do a you know three every three to five years, but look at your overall asset allocation.

G

There's work on that, but there's not a lot of just do something based on ESG to switch out of equities and into something else, or vice versa, investment manager, selection and monitoring. It's getting a lot more attention and usefulness based on the ability to actually have data to, and information to, look at your managers. From this perspective and and then engagement, I guess I put in gate types of engagement into three categories.

G

You all vote your proxies, but in addition to that, engagement is starting to occur, with sort of an additional step in talking to your investment managers, in other words, doing monitoring with them and then following up with them and asking well. Why is your portfolio look like this, or why does your proxy voting for for us look like this, and in some cases you might be in situations where compared to other peers or other options, you might want to consider looking at all their alternatives, given everything else equal.

G

In other words, you know we're not advocating in any way that you, you change, anybody for less risk, adjusted return or from black box presentation, lower information ratio and other measures of your overall portfolio impact and regulators are government governance, governments. There is a again primarily through larger institutional organizations that from counsel and institutional investors to series to PRI I should start with them they've one of the global leaders- and this are really coordinating to a degree we haven't seen before.

G

Historically, institutional investor, acid owners to have similar approaches or coordinated approaches to issues where that wasn't the case 20 years ago.

G

That can take the range of writing a letter that, in support of say to the SEC, the Securities Exchange Commission on their new rules on proxy voting guidelines or when they out asked for commentary on ESG and climate issues that it's something these organizations would support, help, write letters and and individual organizations and plans would support it by putting their feedback in and company engagements.

G

Not going to talk about it a lot today, but I would say it's the most can be the most time intensive and effort and I. Think Android can give you a really good example of how they're doing it and managing it in a way that makes it a great sense for it and can be very exciting. But the caution is this is not something you take without doing it carefully and well thought-out.

G

So page 16, this I think I. Can you know we can kind of skip over this I think things that are accelerating in the last couple years are really looking at the portfolio level. The climate changed risk in some cases, because it's legally required but PRI well to speak to what they're doing on that in integrating the t.

G

Cfd regulars, a Task Force on climate related financial disclosure, just getting disclosure on issues that can be material to a certain industry and companies and I'd, say emerging- is broader environmental and social and governance, reporting for on your portfolio and the asset classes, and and still in the publicly listed securities, so equity and fixed income. It's not enough data to make it sensible right now on, for example, a private equity so, but that's certainly beginning to be take hold and look at in and.

G

The next page just gives some examples. It's it's I'm going to not go through this, but some of the larger plans and and smaller throughout the country are the public plans. This gives some examples. It certainly doesn't summarize everything each of these plans are doing, but some many I've been active on ESG issues for over a decade and earlier and San Francisco is one of them. I'd highlighted here.

G

This isn't everything they do but far as I know, they were the first pension plan in the United States to start monitoring it at the individual company level, their fossil fuel companies. So there's been a huge lots of issues on fossil fuel and the energy transition that we're seeing take hold, but looking at both the financial risk and the and the climate risk at a company level, as opposed to the whole energy sector, is a very different way to approach. Should we divest from them should we engage?

G

Should we monitor and how do we do that.

G

G

Page 19 just summarizes some of the first steps. We would talk to you about if you were interested in moving forward on doing something in this field, and so depending on the board's interest, you could develop an ESG investment policy statement.

G

Similarly include an investment belief that high you know summarized where what you believe on these issues, or some of them are directly on climate issues, hot key issues that people believe are critical.

G

You can review on an annual basis the results of estsd due diligence questionnaires for your managers as a part of manager, monitoring and selection, and you can consider various ways to expand your engagement and the three I. Don't want to do it today, but if that's of any interest obviously come back and talk about the different areas for that, from working more with your investment or on the regulator, coalition, side or company level, engagements and.

G

Another area of monitoring and reporting of interest is discreet: periodic monitoring on climate risk and other ESG issues a deep analysis of your portfolio. It's one thing to put out a carbon footprint of what you have versus your index, for example, versus doing a more thorough analysis of the crime climate risks and how they are exposed in your portfolio today. Those you may not want to do annually, but might be more on a timeframe of when you do.

I

G

Allocation studies- every few you know every few years. The next couple pages just for example, outlines some ESG questions as a starting point. Those you want to develop. We, you know we work with clients to develop them to make sure they fit and they are evolving over time and evolving to make sure they're appropriate for each asset, class and I think I'm going to stop there and open up for questions. The next couple pages lists a lot of details of various types of engagement and on investment managers and companies and regulators.

D

Trustees, Jenni's can I say something of.

A

Course please of.

D

G

H

All right, thank you, can't raise my hand here. I.

J

Just wanted to.

D

State I appreciate thank.

J

You so much for the presentation. It was very informative and.

D

As a board, we're getting this as information I assume, so that we can think about this as possible.

J

H

D

Include going forward is that correct, I just wanted to confirm, with our other what maybe, with Roberto or with Prabhu yeah.

F

Yeah trusty Jennings- this is Prabhu here. So the idea really is this all came about because of the emergency climate resolution that the city passed and personally I've always felt that we should be looking at ESG as part of our investment process, but the first step to do that is really to educate the board's on what the options are, the definitions and what it means, and so the panel of four speakers today is precisely to do that is to educate the boards and, following this education session, either today or in a future meeting.

F

You know the board can then discuss what we want to do if any about ESG.

D

Agendize for an education item today in terms of what you do with it, you know that deliberation should be at a different meeting.

F

And I was also hoping that we can hold our questions for the panelists to the end. We have 15-20 minutes at the end for Q&A. Thank.

D

J

So probably, thanks to the introduction, the director of ESG, investing for the San Francisco, Employees, Retirement System, so happy to be here and just want to be a resource to you, guys and sort of walk you through how we've thought about ESG issues and building on ESG strategy for the plan so start here really with the second slide, which is you know, an overview of of our plan in terms of when we were founded and our size, but really going back to our mission, which is like your mission, is to secure and protect and prudently, invest the assets and ensure that retirement benefits are being paid in the amount that they're promised and we always sort of start and end with that when we think about ESG issues, because, ultimately, as fiduciaries, our board needs to make all decisions, including decisions around ESG issues that are consistent with with their fiduciary duty and not influenced by political, social.

J

Environmental objective. So you know always want to make sure and that's part of the way we think is always centering it around. What is our ultimate mission? How do any decision we make, including environmental, social and governance decisions, influence that decision, so we, you know again right think of ourselves as a fiduciary, we're also an allocator like the plan here. So again we have to think about decisions.

J

We make around ESG issues in the context of being an allocator to external managers, not managing our own money and it's you know different decisions and Verity, we'll talk more about as a asset manager and making decisions about and directly about investing how ESG issues are considered and then, thirdly, we're a diversified plan across asset classes across geographies, as Sarah mentioned ESG issues how they manifest how we can make decisions about them, how their material do you really depend on what asset class we're talking about.

J

So it's not a one-size-fits-all solution for us across our whole portfolio. We have to be sort of nimble and cognizant that there's different considerations depending on the asset class. We're looking at the the third slide here, really just sort of summarizes. What would I just said again in more words, but what we've done to sort of codify our strategy is put in place. What we call a three pillar, ESG platform and that's what I'll go into- is sort of the evolution of that and what?

J

What each of those elements of that ESG platform are slide for, but you know, begins our evolution over the last you know, 30 years or so really beginning in 1988 is when Spurs first began to think about environmental, social and governance issues. We call it a social investment policy at the time and I think you know. Our evolution is very consistent with the evolution of this type of investing in this lens of investing moving really from things that were viewed as socially responsible or social, investing to a more risk-based.

J

What we now call ESG investing approach, and so we've had this policy in place since 1988 it's evolved over time. You can see that over the last thirty years or so or the first 30 years or so, a lot of the work that we did was really focused focused on what we wanted to exclude from our investment universe. So these were sectors or particular companies that we felt posed a particular risk to us or posed a social risk to being invested in. We didn't want to provide capital to those types of industries or companies.

J

So 1998 we divested from the tobacco sector um in 2006 at the height of the Darfur genocide we divested from companies that were operating in in Sudan and partnered with the Sudanese government that was perpetrating the genocide in 2016.

J

We said we weren't going to invest in civilian firearms manufacturers and ammunition manufacturers and 2017. We excluded thermal coal companies, so cold, that's being used for energy purposes from our portfolio due to the the risks that we saw in that sector.

J

Moving forward to to the last few years, and so I joined the plan in 2018 and we can go to slide five here.

J

We really said you know: we've we've done a lot of work over the last 30 years, or so, let's think about how we can codify and formalize our ESG strategy and platform, and so we established in in ESG Department I was brought on board. We put in place an ESG platform. We update our ESG policy and we really started to think about all of these different issues.

J

You know perhaps more from a risk return perspective rather than a sort of binary perspective of we are okay being invested in this sector, but not okay being invested in this sector, so the initial focus was really on our fossil fuel investments.

J

Due to you know a lot of concern globally about global climate change, as well as secular changes that are underway in the energy sector, as Sarah Sarah described. We put in place this risk-based framework that really tried to identify oil and gas companies that we felt like pose particular investment risk to us and really focus in on on those companies.

J

We made a lot of steps to join investor initiatives and coalition's like the principles for responsible investing, as well as the climate action 100 group, the 30 percent coalition, which advocates for more women and underrepresented minorities on corporate boards and a few other collaborative initiatives with other institutional investors, and we really kicked off that process. To say, let's begin to think about how ESG issues matter to each of our different asset classes in 2019 was the first year we did our inaugural PRI report.

J

So this was the first time we sort of formally did a assessment and report on our ESG practices across our whole plan. We further integrated ESG decision-making into our due diligence process for all the managers that we bring on board, so Sarah provided some of those example. Questions that you can ask you external managers. We began to incorporate these into every underwriting decision and sort of set up the the expectation to our board that they could expect to see these considerations as part of any recommendation that we made and brought to them.

J

And then we really ramped up our engagement efforts with underlying companies in our portfolio so sitting down with boards and company management to discuss with them how they're managing issues like climate risk, gender diversity, executive compensation and I think took something that had always been in our policy as aspirational or something that we felt like it was important to do, but really now put those resources towards having those conversations and, as Sarah said it, you know it does take a lot of resources to do that in a lot of time.

J

So I think the time was right for us to say. We now have two staff members myself and an analyst. We can have those conversations with those underlying companies so more to come this year. Nothing, nothing to report yet out of what we're doing, but that's sort of what we've been up to over the last last couple years and slide six here: sort of organizes all these different types of activities into these three pillars that I mentioned.

J

So you know that first pillar is really about Act what we call active ownership. So this is about engaging with underlying portfolio companies that we hold to talk about how ESG issues can affect their their long-term performance and viability, and we do this in conjunction with other other investors and really feel like they're. Our unmanaged ESG risks that are, you know, affecting the performance of overall financial markets. Our incremental ability to reduce that risk to have companies themselves manage these big systemic risks can hopefully improve the overall performance of the market, improve beta performance.

J

Our second pillar is, we call ESG investment management. This is about our efforts to engage with our external managers and honesty issues. We, you know always like to build really long-term relationships with our external managers.

J

Part of that process to onboard a manager is make sure that we're comfortable with the way that they invest the way that they think about the world.

J

So we've begun to incorporate an understanding of their views around ESG issues when we screen our potential managers and as we continue our relationship with our existing managers, to make sure that they're casting a really wide net when they think about risk and opportunity over different time horizons and that they do have a viewpoint on ESG issues and that they're able to articulate how they're they're incorporating that that into their investment management process, and then the third pillar.

J

Here is what we call it ESG collaboration and communication, and we feel like it's really important as a long-term investor, with a very long time horizon that we're able to communicate externally to the market our viewpoints around what matters to the long-term success of businesses I'm in the long-term success of the economy. So this manifests in a few different ways.

J

It's through our policies, our investment policy statement that includes consideration of ESG issues that goes out to any of our managers or potential managers, includes our PRI report and other public reports that we make to our beneficiaries and to the public, and it includes our membership in initiatives like the PRI, the 30 percent Coalition Council of institutional investors to band together with other major institutional investors, other public pensions, to really make clear that there's a collective mass of investors who are fiduciaries that care about these issues and that want one then incorporated into the way that our money's being managed.

J

I'm gonna, probably just stop there, just given the time and the next slides really dive into each of these pillars and talk about the operational areas that we've done under each of these pillars and really break it down so happy to answer questions at the end about any specific areas there, or certainly follow up with staff or the board on these issues.

C

I

C

Everyone it's a pleasure to be here. My name is OFIR brock, I'm with the UN supported principles for responsible investment get in to who we are and how we support asset owners with integrating ESG factors into investment. Decision-Making.

C

I've got a few slides ahead ahead of that that I'll quickly cover first of all, I'd like to just commend you for for making time on the agenda for ESG education, primarily because there still exists a lot of competing definitions, misconceptions myths, so we're here to hopefully bust. Some of those myths help get everyone on the same page. Even within boards. We find that you know individual board. Members will have different views on what's important to them. What does ESG mean to them?

C

I know Elaine's been at this for a while high and probably you know just commending you as well for bringing this to the board, so we can kind of help again get everyone on a similar page. So we know what we're talking about and then from that point the board can make an informed decision on how to move forward.

C

So with that you've heard from Sarah and Andrew about a little bit about the what you know, what is ESG, what is responsible investment, a lot of definitions out there in our name the principles for responsible investment, those those latter, two words responsible investment, it's it's in our name, so slide. Four gives a very broad definition here of responsible investment and you'll see that coming up in just a minute here. So it's a strategy and practice right to incorporate environmental, social and governance factors in investment decisions and in active ownership.

C

What has been referred to here as proxy voting and engagement? So so this is a catch-all definition. It's a broad umbrella under which we've heard some other terms like ESG integration, right incorporating those financially material ESG factors into your investment analysis in order to get a better sense of how these risks are informing the valuation of a company and and and so you can apply a proper discount and and and ultimately assess an asset for for long term es and G risks.

C

Other other things that fall under this broad umbrella include socially responsible, investing, which you heard more negative screening divestment impact investing. You know. How are we thinking about generating positive environmental and social impact alongside our financial returns and others as well? Mission related, investing and and- and the list goes on, so what I'd like to make sure we keep our focus on. Is this term that you've heard a couple of times now financial materiality right?

C

What are those es, ng factors that actually drive risk and return and are relevant to a given industry, a given sector or a given company you'll hear more about that from my colleague Verity in a moment, but if we, if we flip the slide five touching on what what is why invest responsibly, you know: why would the board dedicate time and resources to this, and so starting with these sort of four primary reasons, a materiality?

C

So if we, if so I'll, take a step back, there's a very quickly growing academic body of research and industry, research as well, that's really showing the the relationship between ESG factors and financial performance, both at the company level. At the asset level, in the portfolio level, and so if, if we now understand, if the research really shows that this is the case, how is investors do we prudently incorporate these factors into our investment decision making to to execute our fiduciary duties? If these do really drive risk and return? How should we think about them?

C

So so materiality is, is one reason you would invest responsibly another's market demand we're really seeing a sort of an explosion if you will or mainstreaming of responsible investing practices. Some of that was touched on just to throw a few figures at you. You know over in the US over seventy percent of of the 50 largest investment managers are signatories to the UN PRI.

C

We have. You know you as you'll, see in a moment over two thousand nine hundred signatories across nearly sixty countries that collectively represent over 90 trillion in assets that have signed on to the principles for responsible investment, so this is coming into the mainstream and now that it's firmly here, the question is: how do we incorporate this prudently?

C

The third is regulation. So what we're seeing as well is a proliferation of policy and regulation globally and in the u.s. that is either encouraging or mandating the incorporation of ESG factors into into investment decision. Making and I'll touch on that in just a moment.

C

C

Me maybe I'll, maybe I'll touch on that now, actually so so. On on slide, 7 you'll see a you'll see a steep Steve upward trend here, and this is uh so. The PRI has tracked over 700 policy instruments and market initiatives worldwide across the top 50 economies that either support encourage or require investors to consider ESG factors and decision making. So this includes things like ESG integration requirements, so laws that are actually mandating pension funds in certain countries to incorporate ESG factors into their into their investment decision making.

C

It includes stewardship codes that are more voluntary initiative, as well as corporate disclosure guidelines in the EU. The the non-financial reporting directive, which mandates the companies in the EU, disclose their sustainability related risks and how they're managing those so 97% of these policies. These 700 policies were adopted after 2000 and over half were adopted after to 2013 80 of these were adopted in 2019 last year, so we're seeing a real uptick in in regulation of pension funds globally in the u.s.

C

a good example of state of Illinois adopted, what's called the sustainable investing Act, which is mandating that all public funds in Illinois adopt an ESG policy. We're seeing some policies in in California as well, mainly focused on CalPERS and CalSTRS in the university California. My former employer, but the point here being is is that this is also a driving factor of why fiduciaries should think about responsible, investing so moving along to slide. 8 I mentioned the growing academic body of research.

C

That is, is really digging into this question of what is the relevance of ESG factors for financial performance. So a few, a few key studies are listed here on the the U n PRI website. We also maintain a repository of over 900 academic studies, but you can search through by category to get a sense of of what's out there in terms of the research and you'll see on the left.

C

Here, a meta study by the University of Hamburg that took 2000 underlying studies which look at the relationship between ESG factors and financial performance, you'll see that 63% found a positive link between a company's ESG performance and its financial performance, and this is across a range of measures, including operational performance, cost of capital, stock, price and and and stock price volatility.

C

10% found a negative link remaining 27% found no impact at all.

C

So that's a bit of background you've, already kind of heard a little bit about about the trends here, I'd like to focus the rest of my time on what the PRI is and what we do. So, if you flip over to slide 10. Thank you.

C

So the the UN supported PRI principles for responsible investment was developed in 2006. When then Secretary General Kofi Annan gathered a group of global institutional investors at the UN and created a set of six principles that together form an overarching framework for how to integrate ESG issues into into investment decision-making, how to be active owners and how to how to drive how to basically achieve a more sustainable global financial system and in 2000 in April 2006. We were officially launched at the New York Stock Exchange.

C

Since 2006 we we've grown to become the world's largest responsible investment initiative. I mentioned earlier over 2,900 asset owners, investment managers and service providers make up our global signatory base. They collectively represent over 90 trillion in assets, so a significant portion of the the world's institutionally managed assets.

C

We are supported by the UN UN permanent bodies have a permanent seat on our board and and if you'll flip over to slide 11 you'll see our the pr I--'s mission statement and the six principles themselves and you'll see that our mission statement is quite broad and quite ambitious. Right achieve a sustainable global financial system and we believe that such a system is a necessity for long-term value creation.

C

This is important a long term Universal asset owners such as yourselves, so so we work to achieve this by encouraging adoption of the principles and collaboration in their implementation, by fostering good governance by fostering integrity and accountability, women within financial markets and, ultimately, and by addressing obstacles that exist within the financial system to its long-term sustainability. So the six principles here I'll quickly run through them.

C

The first and again these are high-level principles, think about them as a menu of options for how you, as a fund, would would integrate responsible investing into your decision-making. So the first is a commitment to incorporating ESG issues into your investment decision and analysis.

C

The second is that you will be active owners. You will vote your proxies and you will gauge with companies where you see that there are financially material ESG issues. The third is that you'll seek appropriate disclosure on ESG issues from the entities in which you invested data was mentioned earlier, and, and so we know that institutional investors play a key role in garnering the data that we need to make informed investment decisions, principles four and five really speak to collaborating with peers.

C

As Andrew mentioned s, effers is doing as well as promoting the principles which- and your being here today is- is doing, and the rest of us are doing, and sixth principle six is is: is about reporting, so our entire signatory base reports to us annually on how they're incorporating the principles into their investment decisions and what that does is.

C

It creates a plethora of data for asset owners such as yourselves to be able to incorporate into your manager, selection appointment and monitor the process to understand how managers in your portfolio are integrating ESG factors into their investment decision making. You can look at their their PRI reports to do that and you'll hear a little bit more from familiarity today about about how a manager is is doing so slide. 12 is our governing board just to give you a sense of how we're governed we're very much led by asset owners.

C

Seven asset owners sit on our board, including the chair of the CalSTRS board, two investment managers and one service provider, and that service provider sustained oolitic, s-- and EST research provider.

C

So if you'll flip to slide 14 you'll see a breakdown, a global breakdown of our signatory base, geographically, that the u.s. is the largest single signatory base, largest capital market over 550 signatories here and slide 15 as a list of the US asset owner signatories. So what acid owners, including public pension funds, have become signatories to the principles for responsible investment? Sf FERS is one other municipal funds, Los Angeles, City, Seattle, City and and then you've got county plans and and state pension plans as well, that are signatories throughout the country. So.

C

What does it really mean now to be a signatory, okay, so you've signed on there? There are two things that we ask our signatories to do. One is to report annually with the first year being a grace period, and the second is to adhere to a set of minimum requirements that are listed on slide 18. So, if you just flip the slide, 18 and signatories have two years from their first reporting cycle to adhere to these minimum requirements. The first is to have a policy that covers the firm's responsible investment approach.

C

The second is to have staff that are responsible for implementing the policy. This doesn't mean a dedicated responsible investment professional, but just a clear line of responsibility there. The third is senior level commitment to responsible investment and account about accountability mechanisms for it, and we capture all this information through the reporting process.

C

Now those are the requirements. What are the benefits? So we see ourselves as sort of a pronged organization, or at least I like to think of us as a an investor collaborative initiative and a platform to come together with peers, to learn from peers and to exchange knowledge on best practices on responsible investment. The second is, is: is a standard setter, so we're really putting out best practices and guidance into the marketplace, the tools and the resources in your hands to figure out how to how to do this, and the third is.

C

The third is, is I like to think of us as sort of a low-cost, ESG consultant. So you know Sarah touched a little bit about you know what kind of resources are required for for implementing this at the plan level, it's really gonna vary. Some plans like CalPERS, have a dedicated team, as Affairs has dedicated staff, others don't we have. You know the City of Seattle has I think for investment staff. So so each fund is going to have their own unique context and and resources and and some will lean more on their consultant.

C

Makita- is a PRI signatory. They help with with reporting for for certain signatories and there's a real. It's I like to think of being a PRI signatories as sort of a gym membership. You you can have the membership, you can never go. You can make use of the personal trainers there. You can think of me as your personal trainer. I spend a lot of my time. You know supporting our signatories, with with making use of our tools and resources and I'd like to touch really quickly about what some of those tools and resources are.

C

So if you'll flip over to slide 21 I'll run through the next couple, I'd and then hand it over to Verity so slide. 21 is our fiduciary duty in the 21st century program. This is a program that was developed in 2015. That really dug into this question of what is the relevance of ESG factors to fiduciary duty and and and and and how should fiduciary is.

C

You know ultimately think about this, so we launched our final report last year and we really concluded that if, if the ESG factors are indeed financially materia, which which we now know they are then failing to incorporate them into investment decision-making into investment strategy into investment policies, we see as a failure fiduciary duty now that's strong language, but but if you read the report you'll find out why we why we strongly believe that and take that position.

C

Slide 23 is an example of some of the resources that we have for our asset owner signatories guidance on how to incorporate ESG into your investment strategy, how to develop an ESG policy, how to incorporate ESG factors into your manager, selection, appointment and monitoring how to engage with your investment consultants on ESG slide. 24 you've got ESG due diligence questionnaires off the shelf to be able to incorporate into your managers selection process slide.

C

25 resources dedicated to climate change, a tool that allows you to upload your list of equity and fixed income portfolio and stress, tested against various climate. Related scenarios.

C

Guidance on on how to on how to how to think about strategic asset allocation and how climate change in the transition to a low-carbon economy might impact asset classes on a forward-looking basis, also shareholder engagement. How can so the PRI plays a very key role in bringing together our signatories if you'll flip over to slide 26 and then 27, we bring together our signatories to engage collaboratively with companies on a range of ESG issues so slide. 27 is a great example of that.

C

There's an initiative called the climate action 100-plus initiative as AFER's is a member of Blackrock recently joined as well, and this is the world's largest collaborative engagement initiative on the topic of climate change.

C

Over 400 investors representing over 37 trillion have come together to engage a group of 100 companies that together account for over two-thirds of global greenhouse gas emissions, on a very specific set of that are being made to these companies and and when you bring that number of outstanding ownership together, you know the companies really start paying attention and we've seen a lot of a lot of corporate commitments being made on climate change. Via this engagement initiative, I'll leave you with one more slide slide 29.

C

This is our PRI Academy, which is an online educational platform that offers CFA accredited courses in responsible investment. We recently launched a 90 minute online course for trustees, that is self paced and is all about understanding. What responsible investment is its relevance to you as trustees as fiduciaries and and ultimately how to integrate this into your plan. So I'll stop there and pass it over to very.

H

17-Year career in asset management and half of that was in listed US equities and the other half has been in sustainable investment, which I'm going to talk about today. I'm currently, a member of the Blackrock sustainable, investing team focused on ESG integration, and my hope is that, by talking to you today about sustainable, investing at Blackrock you'll be able to use our investment management firm as an example of what is happening across the investment management industry globally.

H

In response to this clear and consistent expectation from asset owners such as SF, ers and and many others that as a fiduciary which Blackrock is managing assets of other owners, we are now just expected to be integrating ESG considerations into every investment decision into every asset class into every investment team. And that's what I want to tell you about today.

H

So on the next page, you can see how we think about sustainability at Blackrock. It is a it is a collaboration across many teams and and encompasses many different activities. The Blackrock sustainable investment team is focused for the three, the first three circles, focusing on generating investment insights in a research format, understanding the connection between ESG information and asset prices. We also collaborate with the investment teams to enhance their investment process.

H

That's what we call the HD integration, we're also developing sustainable solutions, so those are investment offerings with dedicated ESG objectives and our platform today amounts to about 90 billion in dedicated sustainable solutions of our total assets, under management of 7 trillion dollars and and so combined with investment process and sustainable solutions. We find ESG and sustainable. Investing applies to everything we do at Blackrock. So those three first three circles are what our team focuses on my team.

H

We work very closely with the investment stewardship team at Blackrock, so, as you've heard, that's the team that focuses on engagement with portfolio companies and also voting proxies for asset owners who delegate that authority to us at Blackrock. We have more than 45 people dedicated to those activities which we believe is the largest group of any asset manager there in local countries.

H

They speak local language, which we think enhances that conversation in a collaborative, constructive way to achieve more outcomes and finally, Blackrock has a corporate sustainability function, which is the acknowledgment that it's not only what we do in our day to day activities. We're also expected to walk our own talk and we're going to talk about that in more detail, but before we leave this page I just want to mention.

H

We don't list the investment teams on this page, but they are absolutely central and critical to this effort of sustainability of Blackrock and I'm going to talk about that a little bit later so on on. The next slide is a quote: our black rocks CEO and chairman Larry Fink, who writes a letter to CEOs every year and January 14th. He he made this letter publicly available on our website and the big message here is well one of many important messages in this letter, which I really enjoyed.

H

Reading personally was the underlined idea that climate risk is investment risk and a bigger picture that that that not all of the the news outlets focus on was that this acknowledgement and sort of acceptance of this risk being a factual risk and worthy of investment decision-makers. Attention is really leading to a significant reallocation of capital and, on the next slide, I want to tell you what I mean by that.

H

So this tectonic shift is really acknowledging and sort of a an outcome of massive investor, adoption of sustainability, information and ESG information as relevant to the investment process, both on the asset manager, side and the asset owner side, including public pensions such as yourselves, there's also a wealth shift to younger generations where there is a clear and persistent preference for activities such as sustainability, that translates into corporate sustainability performance, which translates into which jobs you know younger people want to choose and which companies they want to work for.

H

Along with that, there is a rapid acknowledgment of the risks presented by climate change. That is now. Just being you know, it's an enormous problem. We all share it and we just are now developing the tools and the data to analyze, to understand the implications of this issue to our portfolios, and all of this is adding up to a massive reallocation of capital, which we think is establishing this sustainable risk premia.

H

You heard about this a little bit earlier, but that kind of translates into the market favoring, investments that are more sustainable and therefore we need to make sure that our are more sustainable. It's sort of a virtuous loop on the next slide. This is why sustainability is black rocks new standard of investing.

H

So in the in a letter to clients that we issued in January 22, we announced a number of commitments that we plan to make that that both sort of build off of things we've been doing for many years as well as striving for new aspirations and and harder goals for ourselves to achieve in order to take advantage and make sure our clients are well positioned, vis-a-vis, reallocation of capital.

H

So we are making sure that ESG funds are the standard building blocks and all of our standard offerings that that affects our sort of multi asset strategies in particular, and model portfolios. We are making sure that all active portfolio managers integrate ESG into their investment processes by 2020 that goes down to the fund level and I'll talk about that more. Our stewardship team is raising the bar for disclosure with new commitments on describing the work they do and making sure that our clients are clear about the impacts from that work.

H

We are also scrutinizing the highest ESG risk issues, including a focus first on thermal coal and our active strategies, as well as controversial weapons systems manufacturers. Those those things that we find are just not offering a trade-off of a value given the out size risk our ETFs we want to. We want to increase the amount of offerings there and disclose more sustainability characteristics, as well as expand options within index strategies and active strategies.

H

So on on the next slide, you see this adds up to really three main areas of focus: strengthening our integration and our investment process. Increasing access to investment, solutions that are aligned with sustainable investing objectives, both in index and active, as well as enhancing transparency.

H

We want to make sure that investors and the general public understand what we mean and, as you've heard already, there's a lot of jargon in this space. It's it almost feels like that.

H

You have to learn a new language to understand what we mean by this, but I want to remind you, we're still talking about investing, so it's still about understanding activities to get comfortable with the opportunities that investments are offer, as well as the risks involved and then finally, we want to make sure that we're doing enough measurement of our own activities and description of those activities, because, ultimately, you manage what you measure and we need to measure and report these activities of ESG integration, all the way down to the specific strategy and fund level in order to contribute positively to this bigger question of us, a sustainable financial system which we realize we are a part of, but all investors are part of so I- want to tell you a little bit more about ESG integration if you'll advance to slides, please it's as I said you know, a sustainable, investing is still investing, but what we mean by ESG integration is is looking at the same thing, we're doing with a little bit of a different lens.

H

So again, ESG information is still just in information, so investors of all kinds of strategies taken important and relevant data points, metrics reporting information. We think you up. All of those investors ought to include environmental, social and governance information in that broad bucket of information that makes a difference to investments when we're talking about integration, we're talking about making sure it's embedded in the process.

H

There are sort of three main areas of the investment process that are sort of common to any asset class in any style of investing, whether it's systemic or fundamental or, at you know, fixed income or equity. It's sort of a research and due diligence phase, it's a portfolio, construction phase and it's a portfolio monitoring and reviewing phase, and we find that ESG is relevant to all of phases and it's up to the investment team to make sure it fits in at the relevant place.

H

And, finally, where SG can be a proxy for quality, it can also be a proxy for risk and so we're making sure that we are understanding ehe as a risk not only focusing on the highest ESG risk issues or business activities. Such as thermal coal, but also making sure that our team are a very important team at Blackrock, called the risk and quantitative analysis team or our QA. This is risk and quantitative analysis team partners.

H

They sit outside the investment team, but they collaborate and review portfolios on a regular basis to understand unintended bets and exposures, such as you know, a climate risk exposure that may not be intended in the objectives of the strategy. So that's a really important collaboration on the next slide. You'll see at Blackrock, investors are responsible for ESG integration because it's about investment. We do have a global executive committee with that includes leaders from every investment division that oversee this activity.

H

They oversee investment process and they also oversee ESG integration into the investment process and that's on purpose, because it's relevant to the investment process. The team I sit on the Blackrock sustainable.

H

Investing team serves as a kind of a coordinating platform team in order to make sure teams feel connected and those that sit within an investment division can connect with people in a different investment division who might share a common problem so, for example, our alternatives division includes private credit teams and they may have something to learn from the global fixed income division because they're both debt investors.

H

We have a coalition of ESG integration partners that make sure this connectivity happens, but ultimately it's the investment professionals, the analysts and portfolio managers who are responsible and should be held accountable and I. Invite you to ask any one of them. How do you integrate ESG into your strategy in your portfolio on the next slide?

H

You can see one of the efforts we're doing to coordinate this work is to make sure that we're evaluating investment teams to understand that they meet a minimum level of quality and credibility according to Blackrock standards, but that they're also continuously improving. We want every one, every investment team at Blackrock to be continuously advancing. We want them to have a an approach to ESG integration.

H

That is useful and therefore you know adapted to their own investment process, and we continue to monitor these teams in order to strive and push for this continuous improvement and one big switch. We're making in 2020 is to move from evaluating teams evaluating this ESG integration work at the investment team level, which could oversee many funds and portfolios to get down to the strategy level in order to really get to that granular level of accountability and the unique investment process for a given portfolio.

H

So all of this work we do is for internal use. We do these evaluations to understand who was doing an excellent job and could be a source of learning and knowledge sharing across the firm and who needs more help, more resources and and the information we we glean from these evaluations, it's very valuable, but we don't make public. However, on the next slide as a signatory to the PRI, you can go onto our website and read our PRI report, it's more than 200 pages.

H

So please, let me know if you do read it I'll be very grateful. The time we spent doing that. But here you can see, we also are willing to share our our scores that our assessment scores from PRI about our our PRI reporting. So, in the right hand, column you see our 2019 scores and we were very proud that each one of these scores was either at median or above median.

H

In fact, most the vast majority of these scores are above our median peer group, which is set managers with greater than fifty billion in assets under management.

H

But what I really want you to take away from this table is is the fact that we are working to increase our transparency over time by reporting to more asset classes and we're also improving our scores over time. So we believe that, as new data, new tools, new frameworks emerge we're going to be smarter, we're going to be able to do more and and and we want to be able to demonstrate that going forward.

H

So this is just one other way that we disclose our our approach to ESG integration, and it's one way you could understand how other managers are doing ESG integration by requesting their PRI reports and their assessments. So.

C

Where your report will not be 200 pages, I promise. Yes,.

H

You see here we're highly diversified, which means that, because we are doing ESG integration in infrastructure and property and private equity and fixed income and listed equity and stewardship, we have a lot to say and the and the top half is where we're managing assets directly in our funds and the bottom half is where we're advising strategy.

H

So we also have an advisory business where we recommend allocations to other funds, and we also include ESG considerations in in manager selection through that advisory business on the next slide, you'll see more about our commitments so again in 2020, mmm in the spirit of continuous improvement and refinement and raising the bar on ourselves. Here we started out at a team level focus in 2018 and this year we're really taking it to the fund level and we're thinking about our work in the ESG integration and three main buckets of activity really deepening our material insights.

H

So that is understanding the the ESG information that makes a difference, influences the investment decision and making sure that we can not only have the climate risk tools and data to support that, but also facilitating this peer to peer learning investor to investor. Ultimately, with the goal of having every investor team, an investment professional be able to provide an example of how ESG information influences the investment decision in the investment process.

H

A really important step is to have that partnership with our risk and quantitative analysis team and this focus on highest ESG holdings highest highest ESG risk holding.

H

So we made a commitment for 2020 to exit all thermal coal positions that his company is earning greater than 25 percent revenue from thermal coal activities from our active portfolios, as well as all holdings in our active portfolios of controversial weapons and civilian firearms and then, finally, where we have a huge commitment to increasing and improving our transparency at the corporate level at the investment level and also in our investment stewardship team.

H

This year we plan to have every we plan to publish sustainability characteristics, but for every fund worldwide, and this will be available to the public as well as to clients, so in the next slide, I want to give you a little bit more of an example of you know. All of the these are.

H

These are four examples: they're nearly chosen at random because we have examples from every investment division, but I want to illustrate here with the slide that we find a way to do ESG integration and to investment research in fixed income in in active equities, also even in our cash portfolios.

H

So your money market fund could include an ESG integration component, which is totally new if you've been interested in following ESG, which means maybe you haven't like I have, but the idea is that not only is this sustainable investing theory relevant for long term investments like private equity, where you might have a 10 or 15 year, commitment and over that time scale you can actually sort of see if the physical effects of climate change come to realization rising sea levels.

H

You know look decreasing coastline, but even in a portfolio with a three-month time horizon, there is a way to think about ESG as being a value for understanding credit quality, with the idea that for corporate credits in in a fixed income portfolio, that is a cash portfolio, you would just not want to be owning the single stock that blows up during that three-month period.

H

So this is why it's just to illustrate that we find ESG is relevant for every asset class and every investment division at Blackrock want to just mention again that investment stewardship is, is the mechanism by which we manifest ESG integration for index strategies, so we're in index strategies where there's not that option to exit thermal coal, because if it's in the index, our obligation is to mirror that index. Our investment stewardship team can write letters and meet with directors on the board and meet with managers to understand.

H

How are you preparing your business to be relevant 15 30 years from now, when we're still going to be invested on behalf of our clients,.

D

Trustee Jennings and start interrupt, but are you really having a hard time hearing you I'm.

H

Sorry I'll make that microphone closer apologize. Is that better.

J

It's like cutting you now, I, don't know if it's your mind, but again I don't want to disturb okay.

H

I'm, switching mics and standing a lot closer, I hope that helps so in the interest of time. I I want to mention that there is on on the slide.

H

You know a another trend from scarcity to super abundance of ESG data, a few slides ahead and and you've heard a little bit about company disclosure being more prolific than maybe 15 years ago. You've heard about unstructured big data, AI and other methods of using information, including from you know, sort of EPA databases or Glassdoor ratings on good places to work there.

H

There are ways to get this information as well as third-party research providers, but generally there is a lack of reliable, comparable decision, useful data, and so the next few pages talk a little bit about how we're taking the best of this available data set. But I want to flip ahead to the to the last slide which talks about how we're working to improve the supply of investor grade data.

H

So you know thinking about a bigger trend, accounting, the accounting profession and accounting rules have been around for hundreds of years, and financial reporting has been not only standardized but regulated for decades, but that has not happened yet with the ESG data. So in order to increase the standardization, the reliability and the comparability of solid environmental, social and governance data of the quality that investors require in order to inform investment decisions, we are collaborating with a number of organizations, especially listed here.

H

The Task Force on climate related financial, disclosures and SAS, be the sustainability, Accounting, Standards Board, and this table is meant to show you where they align and where they have specialties that that help address certain needs. So the T CFD has a focus on climate risk, which is important. It goes deep into governance and and and strategy and risk understanding in order to understand not only what what is climate risk doing to a potential business. But then what is the company going to do about it?

H

It's getting past that that sort of annual report- boilerplate disclosure, yes, climate change- could affect our business. Well tell us how and what you're going to do about it? That's what the T CFD is about. It is also global. It is also intended for investors. It's it has a financial materiality focus and the scope of operations is global, which just means a company is not going to tell you about its favorite facility and low-flush toilets there. It's going to tell you that its whole business and and what climate due to that whole business.

H

It is generally one set of recommendations for companies and in all sectors, but there is some specialty and guidance for for a few industries. Sas be in comparison is also intended for investors. It also is global. It also has global operations as the scope. It also has this material.

G

H

Materiality standard of relevance for what should be reported, and that is determined by the companies who are reporting, but the difference is. It includes broader sustainability issues.

H

Climate change is definitely one of them, but also more of the human capital issues, which is the second most common theme of indicators included in the SAS, be standards, as well as having a difference of being industry, specific saying that the what matters to companies send the asset management industry with a very small environmental footprint are very different to what mining companies should be paying attention to and disclosing to investors acknowledging that it's not all the same for all companies, but many ESG issues are super industry specific and therefore more relevant to investors to be reported at the industry specific level.

H

So we're very proud to be not only members of these two groups, but also now working on our own corporate reporting aligned with these two initiatives. So Blackrock put out its first SAS B report earlier this year and we are expecting to put out our first two CFD report later this year and with that turn it back to you. Prabhu.

F

E

Have some time.

F

A

F

Okay, thanks thanks thanks to all of our panelists for spending time. You don't have to be here, but you chose to be here to educate our ports. I do have two questions, but I. Let trustees go first.

E

I've got a question for you. It seems like this would be very applicable.

I

To your active strategies, are you doing anything strategies.

H

Yes, so at Blackrock, the the mechanism for ESG integration into index strategies is through our stewardship activities. So that's the work that the team does more than four 45 members across the globe. They engage with companies owned in index funds as well as active funds, but it primarily benefits these index funds where we don't have that option of selling, so the team can meet and hold accountable directors and other managers at portfolio companies and say tell them number one: our investors are making decisions. We expect this to be core to management and strategy.

H

We expect you to disclose this information to the public not just to Blackrock, but to the general public and all investors, and if you don't do that, we're gonna vote against those we think are responsible for not only coming up with that strategy, but then also disclosing it, such as through SAS, B&T, CFD, aligned reports. That's.

C

Great, thank you. Maybe one thing I'll just add to that as an asset owner who, with the passive allocation some pension funds, you know, will be heavily tilted toward passive. This is where you are going to be able to ask your managers. Tell us about your stewardship activities. Tell us about your voting activities.

C

There's a lot of differentiation there, so so just wanted to plug that as well.

E

Thank you as well. Hi.

D

All thank you for the presentation, a lot of content there. A lot thank.

I

D

I wanted to ask you to elaborate just a little further, because I think I'm hearing something that might be not quite aligned so Sarah. You said something about if if entities were to go down this road of incorporating for the ESG, that there is a cost- and that seems to make a lot of sense to me that there's a cost of commitment, time and strategy, but then of fear. Yours there's a page that said page 5 says: there's no cost so I think you're defining costs differently differently. So could you just clarify yeah.

C

Yeah that that slide has been pointed out as confusing before so so. I was talking specifically about the academic research that exists out there, where Sarah was talking about as a fund. What kind of resources will you be allocating to this? So so maybe cost different thought about differently. There is that is that enough of a yeah okay.

D

C

Want to make sure yeah thanks.

J

But there could be a net benefit to the fund, correct.

C

F

I would think the cost of a staffer who's gonna be far less than any alpha generated.

D

Actually, um the work that you do around proxies: do you work with any single partner or multiple partners when you're looking at proxy vote and policy? Officially, we.

J

Do we use glass, lewis's research to inform our proxy voting, so we have a customized proxy voting policy. We have voting discretion over about 65% of our public equity investments, and so those are where we invest in a separately managed account vehicle rather than a commingled fund. So we've developed those customized voting guidelines over the last ten years, or so we use glass, Lewis Research to apply those to me. Thank.

D

E

A couple questions: thank you.

E

Detailed presentation, I'm struck by the idea that there's very low correlation between different rating agencies who are rating the ESG performance, and that leads me to wonder what happens if there are varying ideas about what good ESG investment is. One thing is, we might be subject to endless debate here on the board and another perhaps more relevant is we will be subject to endless lobbying by outside groups to include or disinvest from various companies. And/Or entire asset classes as a beta has a basis. So how do we implement the policy that is actually workable?.

H

I'll start and welcome others to add on it's a very insightful question and you're 100% correct in fact that the low correlation between ESG ratings manifests in two different things. First, I want to want to be clear: we're not calling them rating agencies. That term is something that is specific to the credit rating agencies, which allows them to see private information, and so these public, these ESG research providers, because it's a research opinion are telling us that they're providing their estimates and other research based on publicly available information.

H

So that's really important, but because of this lack of correlation, what investors at Blackrock have found more useful is to go below that top-line ESG rating into the sub indicators, and that allows investors to really focus on the issues that they find more material more relevant to their unique investment process and also enables them to kind of pick and choose the sources that they find more useful across the varying different providers.

H

So at Blackrock we subscribe across our firm to you, know more than three different ESG research providers and make those available in our Aladdin research investment and risk management platform. To investors, but they can get the the sub indicator, information that is more useful, more directional to their particular question and and our investors find that much much more valuable I.

E

Guess I guess I was wondering what happens if they're actually at odds. For instance, I I saw a debate last night where some people said fracking was very important as a interim energy source for the planet and other people who are adamantly opposed to fracking and then, of course, if we were to take a position on that here at the board yeah, there might be many people who are advocating one way or the other. How do we decide amongst competing visions of what good ESG is, regardless of what an outside vendor may rate them at.

J

Yeah I think that's a it's an important consideration as the board, but also for the investment staff to ensure that again, as I said, all these decisions for us come back to. What do we think is consistent with our fiduciary duty. What do we think is consistent with factors that drive risk and return for our plans?

J

So for the most part, we try not to focus on binary outcomes around single issues or single practices, but really try to interrogate them through the same lens that we look at other information, and we expect our investment endures to look at other information and exercise their professional judgment on whether a particular issue creates a risk or provides an opportunity. So, when I think about something like the debate, around fracking I would approach that through an ESP lens and encourage our managers to approach it through that lens.

J

To say that the mere fact that there's a debate that it's coming up in a presidential debate implies that there is some risk associated with that activity.

J

Nobody knows how it may be regulated in the future, how it may play out, but we would expect our managers to have some view on that risk to account for the risk and the potential for there to be different outcomes on a particular issue. So we try not to predict the future or expect our managers to predict a future around these different ESG issues, but I guess cast a wide net of what could create a risk and be able to articulate how they are managing the risk posed.

E

And finally, you mentioned that, according to a number of academic studies, there was in fact no cost to doing ESD cost meaning reduced return. Some.

C

Studies do show cost there, the great or the very minority of studies right.

E

But it's still a very young area, so I I wonder if we first of all I think we should certainly review those studies, but if we were to encounter studies that indicate the opposite that there is a cost and a real cost, would it be in our fiduciary duty to pursue these ESG strategies? It would come at the direct cost of our members. They would be required to pay more into their pension plan if the pension plan is introducing the returns we had hoped and planned for if we pursued strategies that were suboptimal.

G

Various is first of all across that broad range of environment is G efforts. You focus on materiality, in other words your financial. Nobody knows the future, but what you see is potentially and get your managers both active and passive consultants. Thinking about where there are where these made in effect potentially affect your long-term risk, adjusted returns on your passive side. If it's a in a commingled fund which I believe your managed through commingled funds, it's not going to change any of your investments.

G

What you would be looking at is comparing one of your passive managers vote proxy voting record for, for example, disclosure on climate risk or disclosure on exposure to energy transition risks or in or physical climate transition risks, comparing how those are to a similar, passive manager, who's going to charge you the same fees and give you the exact same market return. Those are kind of differentiators may make a difference that you want to think about.

C

J

I was just gonna. Add that I think it there's a really important distinction to be made between ESG specific strategies and incorporating ESG factors into existing investment approaches and in strategies and I. Think the body of academic literature that exists is is wonderful. It's worth reading, much of that focuses on the former.

J

So yes using ESG data to guide investment strategies or ESG tilted or ESG thematic strategies, there's more and newer emerging research that looks at how ESG issues and consideration of those risks and opportunities can inform or provide a fuller picture of risk and opportunity for an investor so its firs, we I, don't a portfolio manager, I work with all of our teams. We don't have a dedicated ESG portfolio or ESG strategy.

J

We hold all of our managers, whether they incorporate ESG issues or don't incorporate history issues to the same standards and expectations and really are looking for managers that have conviction that consideration of these factors informs them and makes them better investors.

J

There are other other plans and it's it's a valid approach to have an allocated, ESG strata bucket within your asset allocation or within a sub asset class allocation. That's not the approach that we've followed and I. Think that that's where you do have to have perhaps more conviction that a specific strategy that plays to an ESG theme or approach will generate a different risk return profile for you than a comparable non est strategy.

G

You had a discussion earlier about passive versus active if you're, dedicating some ESG the portfolio or fund those are active manager, decisions and they're going to be at the same risk. Over long. Do you know values out of favor for the last decade? Those kind of things will be things you need to think about. That's a different level of incorporating environmental, social and governance issues into your portfolio by asking your existing managers. Are these risks for your active manager? Are these risk that you believe are material?

G

If so, how do you manage them in your work? For us and on the passive side? Are these important, critical issues that how do you vote the proxies on you know? I used an example. Disclosure or 30 percent coalition is looking at areas of diversity and inclusion, asking those managers how they're voting for and then thinking about, whether they they make sense to you and comparing to them. Their peers is a completely different level of integrating.

I

G

If you're going to start, let's divest from this or that or the other I or or even tilt, you're making active manager decisions carefully, it's.

C

Really about understanding the risk right, so fracking I think Andrew pointed out. You know just the fact that it's being debated but but you know, there's research. You know black rocks conducted internal research on climate factors. We have research on on fracking methane.

C

What is best practice on reducing leakage on protecting waterways, and you know the companies that are going to be better actors relative to their peers.

C

You know those those are going to be weighted more highly from an ESG scoring perspective and and that's where you get into not as fracking good or bad, but who are the better actors within that given sector industry on the academic research question I think it's a great question: I wouldn't lean I, wouldn't hang your fiduciary hat on the research for some of the reasons you mentioned and and to Andrews point. You know you really have to look at each study and look at what it's looking at.

C

What's the underlying methodology and is it taking a lens of materiality? Is it looking at materiality at the company level or is it a study focused on you know, screening it's non non screening and and for that reason I just wouldn't wouldn't hang your hat on the research, but it is interesting and for that reason we have that repository I mentioned earlier over 900 studies. You can filter them.

C

You can look through them and and and kind of find what you, what you're interested in finding in terms of the specific type of study on the manager do the due diligence side last thing I'll say real quick is is this is where again you're assessing a manager's ability to manage these risks and and their processes and policies for doing so, and this is where making use of the PRI of the PRI reporting framework right.

C

Seeing you online, we call it the data portal, you hop on there, you can find a specific manager download, what's called their transparency report and and look through how they've reported their ESG integration policies and practices, and this is where you also work with your with your consultant and see how they're rating their managers and using that data to do so.

B

Thank you. Thank you. Everyone. It's been magnificent presentation, very, a lot of information to digest and so I apologize. If the question is a bit naive, I think mostly directed to Andrew and user Francisco Zachary has the plan attentive or measure the results of implementing the years at the the concept in the portfolio over time and, if so, has added value or not, or is that something that that or is that something that is not really relevant to to you to the plan goals in terms of implemented implement in their problem? It's.

J

A very good question and something you know we're wrestling with and I think the short answer is no. We don't have a quantitative way to measure the impact of our ESG platform on the overall plan results. We're looking at ways that we can try to do that and there's emerging tools that can sort of use ESG as a potential factor.

J

It's not an established risk premia right now, but people are looking at it through that lens, but I think for all the reasons we've talked about it's because it touches on so many aspects of investment management, from manager selection to the due diligence to things we screen out of our portfolio to strategies we may opportunistically, invest in around renewable energy, for example, it's going to be really hard to quantify it.

J

So in some ways we think about my role and function, sort of parallel to our risk and asset allocation function, and so we can't necessarily quantify the value add from the function, but we generally have an understanding that it's important to consider these factors. One thing we have measured and we've begun to measure is the impact of excluding sectors from our investment universe and on an overall basis, that's actually been negative to our performance due to our exclusion of the tobacco sector in 1998 and the compounding effects of that over time.

J

Our other investment exclusions on a on an additive basis have actually been positive to the performance, but that's again one narrow slice of our overall strategy.

J

Of course, what I'm gonna hold off my.

F

Question for the March 5th meeting in the interest of time, but again, I want to thank our fabulous notwithstanding what the president says. Climate change is real.

E

F

In it and I think and I what attack the board, because you've been very patient for three hours, there's been too heavy education sessions, but I think these are important topics, both asset allocation and ESG, and you will have to make those decisions in the months ahead. So again, thank you for your patience. Thanks to the panel thank.

H

A

Okay, we're gonna go on now to item 4a or all update from the CEO over time with services opinion Thank.

B

A

So a couple of things: I.

B

Finally, reach out to the city, our city staff liaison apartment. As you know, we have an annual meeting jointly of the boards with the City Council.

B

It has been completed the last two years and on the april/may timeline, so just wanted to kind of kick it off. Let you know that we are standing conversations, so they will be reaching out to the City Council to see when in terms of timelines, when some days may be available and then I will bring that back to you boys. Just to so we can coordinate timing and topics for discussion.

B

I will be going to the City Council on April 7 to present the results of the of the work by Chiron on the actuary evaluations for June. 30 2019 also wanted to share with you that we just issue an RFP for legal services, all kind of legal services, whether it's general fiduciary, disability, tax and everything else, and that way now it was posted last Friday, February, 14th and I believe is going to be.

B

It will close on Monday March 16th, the the timeline and the goal is to be able to do the diligence work and come back to you boards for the month of June for approval so that we can kick off new agreements in the July 1st 2020 timeline and in closing I wanted to. Let you know that a couple of weeks ago, as part of the implementation of the pinch and immunization system, we issue member direct letters. We issue member direct letters about a month ago to retirees so to allow them access to the new system.

B

So they can look up information, the calculations and find out kind of sort of information, and we just issue the same type of letters to our active members and so so again. So they can access the data directly at the system and grand and get some information and and and do some estimates, themself and I think we're still working through the process. But I think has been very successful, especially the direct letters to active members, because we use the the the work that we did with a tie race to learn from our mistakes.

B

So that we could make the second letter a little easier to understand, and next week we're going to be issuing the annual member statements for the for the pension plans to members and in closing I wanted to share with you the seagull seek a company actually acquire our WL for those of you that don't know, Alan W is the consulting firm that actually did our work with staff and helped us on managing the pension administration system, work and implementation over the last five years, and so now a lot WL is part of the signal company.

B

That concludes my statements. Mr. chair, so I'm happy to answer any questions. Good.

E

Question mr. Pena.

B

E

The joint meeting between the board and City Council does that happen at a regular board meeting, or is that a with scheduled time he.

B

Will be a most likely a separating schedule, time.

A

In that's both boards, its.

B

Police and fire failure a day and the City Council, and it's right here.

E

A

Other questions, for instance, Pena.

A

Okay, thank you very much item 4b oil update from the city council liaison to the board member.

D

So we are doing priority studying on Tuesday and that kind of kicks off the council activity in terms of the the 2021 budget process. The mayor actually had his budget Town Hall last Thursday with neighborhood leaders just to kind of.

G

Kick off the process and get some initial feedback we I'm just looking at the the budget calendar so that you, you will know the city manager's budget requests.

D

Including there are five-year forecast will be released at the end end of this month, so it should be next week Friday and then we'll get the mayor's budget message the following week and then we'll hear it the week after that at the council. So that's kind of where we are at the beginning of the budget process.

B

Thank you Thank You councilmember, so mister shave, you allow me I do I because of council member comments. It reminded me to let you know we plan to come before both of the boards next month to present our request for the administrative budget for the 2021 fiscal year. So again we're gonna be going the first week to police on fire and on the third week in March to fire. A tit and I also wanted to share with you. This is just tentative.

B

It hasn't been scheduled, but I just got an email from Shelly Park man who was sitting at the audience tentatively April, 13 and so right now may be the day for the joint meeting that hasn't been addressed.

B

I don't know too what extent the city clerk has actually reached out to the council members, but that's the first day there has been mentioned. We will continue working on the timeline and we'll keep I'm sure the city will keep the City Council apprised and I will keep both were surprised. Thank you. Oh one last comment since you're here Cheryl. Thank you. Can you comment to the board on the work and the timeline for the implementation of the CalPERS defined benefit plan for the investment professionals.

D

G

Everyone I'm Cheryl, Parkman I work in the office of employee relations for the new trustees on the board. There are some investment professionals who are not.

D

Included in the city's defined benefit plan, that was through a recommendation from a previous.

G

Board Governance report, so we've been requested to add these particular individuals. Those.

D

Who were hired on or after November 4th 2014 to a CalPERS defined benefit plan? We are working with CalPERS on a timeline right now to be taken to City Council for two different things: one to approve a resolution and another to approve an ordinance which is a municipal code change. We are right now, generally estimating.

G

That everything will be done by middle of May of this year, so there is a nice. You know end in sight for this and we're happy to report that.

A

Thank you very much. Ok, let's go on to item 4c discussion and action on adoption of the resolution. 9:09 to cost-of-living adjustment rate for 415 be qualified participants under the grandfathered rule, so I am going to recuse myself from participation in this item 4c due to my involvement in the 415 lawsuit and though the topics are not related, I do choose to avoid even the appearance of impropriety trustee sun has graciously agreed to cheer this item, and I will step out of the room and wait forward to that. It's okay for me to return I.

D

Would show that the CEO will introduce this topic to the board well,.

B

Thank you, trustee stone, actually and I will just pass that along to our deputy director, Barbara Heyman, who actually will be introducing the discussion for the.

D

Concerning the study in the coal area, 415 be qualified participants, as of as of today. Usually, the whole area is a 3% annual, but for qualified participants and.

D

For 415 be qualified participants as defined by their or IRC, and the allowance that someone gets cannot be below what they would have received under the system rules as of October 14th 1987, and as of that time, M. The caller was applied using the CPI and so for those that are affected by 415. They will recalculate their benefit using the CPI for every single year, and at that time this the board would adopt.

D

They am CPI reott and set it, and so for last year the CPI we it was 2.5 and which is below the 3%, and so those M members can also use 0.5 from prior years access accumulations.

D

And so this resolution is setting the color rate for those members at 2.5 and 0.5 that can be used from prior years. Accumulation.

D

If they had enough in their bank could draw from it to bring it up to that 3% capped at 3, so every endeavor II participant is different. That is true depending on when they retired yes, okay, any more questions and comments.

D

Okay, do we have a motion for this item? Item 4c.

E

Hold a second great.

D

Then follow the example of a chair. I will call individual trustee full our vote. First, a trustee, calor I.

E

D

B

We forget about trusty Janus again, but they. Finally, oh yes, sir.

D

D

I seem to recall this coming up before it do we do this annually? We.

B

Do this annually.

D

B

Is correct, the CPS and the culinary bases, and we need to do this on the annual basis. Yes, thank you.

A

Thank you item 5 committee reports, recommendations, 5-1 investment committee last meeting was January. 28Th next means March 24 and oral update from the chair and investment committee trustee John. Just not here.

D

Yeah happy to just a quick comment, so that was the first meeting I kicked off with and with all of us at three of us, including some staff.

D

We agreed that at the next meeting on the 24th we'll be focusing on strategic asset allocation as a priority and then the asset actual policy and the investment consultant reviews will be derived on to the upcoming board meetings, which I'll I'll leave to someone else to confirm those dates. So I don't miss beak. Okay,.

A

Five one be minutes of the October 22nd federated I, see meeting receiving file 5c minutes of the October 22nd joint investment committee receive and file 5.2 Governance Committee last me was December 5 and next meeting is March 5 certain oral update from.

E

The chair, unfortunately I, was not yet assigned to the Governance Committee.

F

B

E

So I've nothing to I have.

B

E

B

Have no updates at this point we're just going to be. We provided an update last time and the next meeting is next month. Okay,.

A

Very good, thank you. 5:3 Audit, Committee last minute was October 17 and the next meeting is February 20th. Is there an update from the chair of the Audit Committee I'm.

B

Sure trustee killer her won't be able to provide you with enough day, as he wasn't even a trustee of the board. But you will you will he will have another for you, I do March meeting for today's meeting after the board meeting, that's for sure, but but just to remind the board at the last meeting, October 17. The main discussion was around the presentation of the kafirs and the acceptance of the report by Grant Thornton and the review for the federated board.

A

Okay, 5.4 joint Personnel, Committee and- and we do know this- should read: Castellano Chandra, and/or /. The committee assignments proof that last month's board meeting last meeting was October 28th. The next meeting is February 25 and we do not have an oral update on that one. We.

B

Do know, but I do want to take this opportunity. Feel me. Mr. chair, a couple of things. The meeting is on Tuesday from 10:00 to 12:00 our offices fee floor. This is the only real joint meeting of the boards on committees, as you require, quoting from bos from each side of the equation. So two out of the three for federated and two out of the three for police and fire.

B

In your case, we already know that trustee Chandler I won't be able to attend so I'm gonna ask just the Orang Casta John or you know, to let us know. If something comes out that you cannot make it. Let us know, because we will have to cancel the meeting and I certainly hope that you both can make it on Tuesday. Thank you. Singer.

A

Okay item 6 education and training. 6A is the core-tex report. 6 B's, Calif CalPERS program calendar succeeds CalPERS program assembly, D, CalPERS, advanced principles for management of Trustees e sackers spring 2020 conference. Sackers f is sackers UC berkeley program and g sackers fall 2020 conference, any future agenda items.

A

There are any public retiree comments from this audience and is there? Are there any members of the public present at the teleconference location who wish to address the board yeah? Okay? Well with that we're adjourned? Thank you. Everybody.