The double bottom-line

A conversation with former State Treasurer Phil Angelides

SN&R Photo By Larry Dalton

Over the past decade there have been few people as effective as former state treasurer Phil Angelides in advocating for state pension fund investments in areas that will result in both economic and social returns. “The bottom double-line,” Angelides calls it. For eight years as state treasurer, Angelides served on the boards of directors of both CalPERS and CalSTRS. In those roles, he was among the most pro-active board members ever, successfully arguing for investment policies that would help boost the California economy, protect the environment and direct capital towards economic development projects in the inner cities – while producing a high rate of return for the pension funds.

After his loss as the Democratic Party’s candidate for governor last November, Angelides set up an investment firm of his own. In that capacity, he’s looking to put together investors for projects similar to those he advocated while in state office. (This does not involve CalPERS funds, as Angelides, like any other former board member, is barred by law from contact with the pension fund for at least a year after leaving the board.)

SN&R sat down with Angelides for an hour at his new offices on the Capitol Mall near the Tower Bridge, to discuss his experience on the state pension fund boards as an advocate for socially responsible investing.

SN&R: You had many accomplishments during your service on the CalPERS Board. Which of your accomplishments stands out as the most significant achievement?

Angelides: I think the thing I’m proudest of is that we showed that you could put money to work not only to get a good financial return but to do good things for society. A lot of people in the investment world – you know, traditionalists, people with a backward looking view – always took the view that investing money was one thing, and doing good things by society was quite another. Over the eight years that I was there I think what we showed, rightfully, was that money, particularly in a free enterprise society, was very powerful to do important things and also you could do it while being financially responsible. We invested in inner city neighborhoods that had been overlooked. We helped create jobs and housing and new opportunities, and we got great returns for CalPERS and CalSTRS. In our Urban Investment Program at CalPERS alone, where we invested in urban redevelopment in inner city neighborhoods, we got a 22 percent annual return over the 5 years that we engaged in this.

We launched the Green Wave initiative, where at CalPERS and CalSTRS we put the weight of our $400 billion portfolios behind a fight against global warming and for environmental responsibility. We helped seed the Green Tech revolution that’s now coursing across this country, funding renewable energy, environmental technologies that will provide market solutions to the world’s environmental problems. We mobilized shareholders across this country to use their power as owners of America’s corporations to get corporations to be more ethical, more responsible, to do the right thing, because it was something that would make sense by the bottom line financially and the bottom line for society. There are many examples of that. We used our shareholder power to get corporations to address their environmental liabilities and to examine what they were doing to get ready for the changed environment that will come with global warming. We pushed relentlessly to get our pension funds to divest from companies that were doing business with the murderous regime in Khartoum, in the Sudan. So I’m very proud of the fact that we set, I think, a course of responsibility for investment in this country.

Did you have resistance on the CalPERS Board to these initiatives, or from within the investment staff? If so, how did you address it or overcome it?

The answer is yes. But I think it was broader than any individual CalPERS Board member or staff. There was this notion that capital was one thing, and responsibility to society was quite another, and they were separate and distinct and you could never mix the two. And we just started to break down that barrier. We showed that in a world of investment choices, you don’t need to pick the bad ones in terms of effect on workers or the environment or sustainability. You could pick investments that were financially good and did well by society.

How would you overcome resistance when it did come up?

I think it’s fair to say that what we decided to do was take the route of educating, expanding knowledge, wipe away myths. Here’s a great example: I believed from my own experience in the real estate business that there was going to be a growing set of opportunities in inner city communities, for a variety of reasons: available infrastructure versus overloaded suburbs; available workforce where you had people hungry for jobs versus, for example, in the suburbs where companies and retailers were falling over themselves to compete. I believed for a variety of reasons that California’s and America’s inner cities were ripe for a new wave of re-investment. There had actually been some very cogent writings on this subject. In 1995, a guy named Michael Porter, one of 16 university professors at Harvard, he’s at the Harvard Business School, he’s a world renowned competitive strategist. He’s written a book called On the Competitive Advantages of Nations, a book called On Competition (which is probably somewhere here, it’s right down there). In 1995, before I took office, he had written a piece called The Competitive Advantages of America’s Inner Cities. He made the case that smart investors should be looking now at investing in inner cities, because this was where America’s population growth would be, with the growth of ethnic and immigrant communities, this was where you had a workforce that was hungry to work, that had high work ethic. These were communities that because in some ways they had been abandoned, had available infrastructure, transit and roads. And he basically made the case that smart investors should be looking ahead and they should stop overlooking these markets.

So what I did when I arrived is I really started asking the professional staff a series of questions: What are we doing in the urban environment? What are we doing to invest in inner cities? And the answer was, ‘Almost nothing.’ In fact, CalPERS had one venture with Magic Johnson which was $50 million. And I started this process by going to the CalPERS Board and asking our professionals to do a report on the opportunities for investment in inner cities, particularly in real estate. I pointed them to a number of studies of experts who were beginning to examine this area. They came back 6 months later and they said, ‘You know what? This is a good area for investment.’ Now over the course of the next several years we had a lot of people come before us who repeated the mythology, not based on fact, that these were areas of risk, they were terrible places to invest. I remember a quote-unquote professional consultant – not a member of the staff – coming in and recommending against certain investments in inner cities because, as she put it, they were places of great risk. To which I said, ‘What leads you to that judgment?’ ‘Well, that’s just what’s commonly understood.’ I said, ‘I want to know what materially are you relying on.’ ‘Well, that’s just what people know.’

I think what we ended up doing, particularly in the dynamic with inner cities, is we wiped away a lot of the myths, we wiped away a lot of the biases, and we supplied facts and hard data and we brought in experts and we made the case. We did that with the Green Wave initiative. I went to visit John Doerr, I think in 2002, and I asked him a simple question: I said, ‘John what do you think is the area of greatest growth potential for California’s economy and the nation’s economy? At the pension funds, what’s our best opportunity to do well financially and to also help grow our economy with good quality jobs?’ He didn’t miss a beat, and he said very quickly, ‘It’s green technology.’ Now this is before green tech was the buzz word. It was before global warming had burst into the nation’s consciousness. He said, ‘Look, Phil, it’s pretty basic. All over the world you have people moving from rural areas to urban areas – particularly in the developing world. There’s going to be a crying need for clean water and clean and affordable electricity. You have indisputable evidence about the rising carbon emissions that is going to lead nations across this globe to cap carbon emissions. You have increased public awareness, particularly with the young generation, about environmental responsibility. These are all going to come together and create a tremendous opportunity for marketplace solutions for our environmental challenges. Smart investors will be leading that charge.’

After listening to John we took it upon ourselves to take the CalPERS staff on a one-year listening tour across the country, to meet with venture capitalists, with experts in this area, so that we together could learn about what our opportunities were and how we could succeed in that marketplace. That was in 2003 we did it. What we did with inner city investment, what we did with environmental technology investment, is we kind of wiped away the stigma, the biases, the rantings of the traditionalists in the investment arena that you can’t mix social responsibility with good investment. What we did is we said, let’s go find some ripe opportunities, let’s engage experts, let’s find how we can win in the marketplace, and that’s what we did.

Were there any investments in these areas that didn’t pan out and caused the doubters to return?

Well, some people cite tobacco. They’ll say, ‘Gee, if you had stayed in tobacco stocks, you might have made X dollars.’ But I just disagree with that premise. My view is that we got rid of our tobacco stock, and instead what we did is we invested in inner cities, we invested in environmental responsibility. And in both those areas, we’re doing as well if not better than we did by holding tobacco stocks, which are companies that target and poison our kids, and don’t add value to society. They cost society hundreds of billions of dollars. But look, it’s interesting: It’s been a long journey, but I have this view: I do not believe that there’s any turning back, because I believe what you’re seeing generally now in the marketplace is a great public demand, consumer demand, public policy demand for corporate responsibility. It is growing every day. So I don’t believe this dynamic we helped launch will be turned back. If anything it’s going to accelerate. When we came in, it was a long, hard slog. Let me just say that when I proposed that we should dump our tobacco stocks, and instead focus our efforts on looking for good opportunities in cities and environmental responsibility, it was a tough fight. I believe the ultimate vote at CalPERS was 7 to 6. We worked overtime. Or look at the Sudan investment effort. I started in 1999. I was only visible for one event, the governor’s press conference where he signed the bill, but it was a long, hard, hard road in each of these instances.

Did the CalPERS Chief Investment Officer [prior to Russell Read] oppose the tobacco stock divestment?


So you were asking the CalPERS Board to go against their Chief Investment Officer?

But we did our work. We did our homework. We put together our facts. We put together a whole book called The Case for Divestment. I mean I think we were equal measures tough as well as…certainly we were tough and we drove at our goals. But along the way most of this was about educating people about what the possibilities were for a more fulfilling investment dynamic.

I heard some rumor that CalSTRS is reconsidering investing in tobacco stock?

There was an article to that extent. Apparently one of the governor’s new appointees has asked them to do that. But it would be a mistake. It would be a mistake from the standpoint…I mean the easy thing to say is, Gee, if we get these tobacco stocks we’ll make money. That’s an easy thing to do and it’s the wrong thing to do. The better thing to do is to say, what are the new places where we can add value to our pension fund as well as add value to society? It’s very clear that our decision to go into environmental technology was a smart bet, because the whole world is now following and that marketplace is going to explode. Our decision to go into inner cities turned out to be a smart bet. You know, when I took over [as Treasurer and taking a seat on the CalPERS Board], we had $50 million invested in urban development projects in the U.S. at CalPERS. Zero at CalSTRS. Today those two pension funds have, I believe, over $5 billion in current commitments to urban projects in California and across America. And like I said, they’ve been money-makers.

The new Chief Investment Officer Russell Read tells me that CalPERS currently has about $5 billion invested in hedge funds. Most people still don’t know what a hedge fund is, and there are recent media reports that many of these hedge funds’ investments are undisclosed and the risks are undefined. Do you have any concern about CalPERS getting into hedge funds?

No. Really what it comes down to is, are they picking the right funds? Are they picking as partners people with integrity and good judgment? That’s really the question. I mean a hedge fund is – I’m not going to say its simple – but it’s a fund that invests in everything from real estate to stocks to bonds to debt – , in a sense, it’s almost like a pension fund. That’s what our pension funds do, they invest across the marketplace, that’s what a hedge fund has done. Really what CalPERS is doing when it brings on a hedge fund manager is they’re really saying, ‘we respect the skill sets of these people.’ I think the judgments ought to be, are you partnering with people who are competent? Are you partnering with people who have high levels of integrity? That’s the key.

On the social responsibility side of investments, six months ago CalPERS redefined the policy so that if a country is below investment quality, they can still invest in a company in that country if it is acting appropriately. Does that splitting of the social issue between country and company agree with your sense of things?

Let me tell you what we started out to do, and it’s pretty simple and I believe we’re achieving our goal. A lot of what we wanted to do was to put these issues into discussion. Again, before we came along with our standards for investing in developing countries, it was ‘Katie bar the door.’ One of my greatest fears is we’d wake up one morning and find out that our teachers’ and our police officers’ pension money was supporting sweat shops in the Marianas or in China or in Malaysia. So our goal was to make sure that as we were investing in developing countries that, first of all, our investments were protected, that we weren’t making stupid bets in places that were so unstable as to risk our pensioners’ money. But that if we were going to be investors in these countries, we were contributing to sustainable economic progress for those countries and those people, that we were not participating in exploitation. So we put together a set of standards that said, countries have to meet certain standards, and then companies have to meet certain standards. I’ve always said that we should be flexible about it. Really what we created was, once we created those standards, those countries started to pay attention. They want to receive capital investment. So you now found that ambassadors and general counsels were coming in and saying, ‘what do we need to do to step up our efforts to ensure that there’s protections in the workplace, environmental practices that are respectful, what do we need to do to hit the mark?’ The goal was never to penalize poor countries. But rather to get American investors thinking about how to invest in a way that was good for the bottom line here, but good for economic progress in those countries. And to get those countries to think about what they needed to do to really go on a path of sustainable development. So I think it’s a fair judgment to say that if you can find a good company that’s treating its workers well, that has good practices operating in a tough country, that’s the kind of company you want to encourage.

Just finally: CalPERS has become such a major player in the investment world, what risks do you worry about as you look to the future? A million and a half people now depend on CalPERS. What’s the area of risk where there’s legitimate concern?

The biggest area that I think people need to focus on is how are we going make sure that over time in an increasingly challenging investment world and economic world, that CalPERS and CalSTRS are going to be able to honor their obligations to the good public servants who have worked a lifetime for their retirements. Now there are some on the Right who say that the solution to that is to strip away retirement benefits for that teacher who has been in the classroom for thirty-five years, giving their heart and soul to teaching our kids. My view is that…

You mean by changing the pension plans from defined benefit to defined contribution plans?

Yeah. Or ramping back the benefits. My view is really to ask ourselves, what do you need in the pay and retirement to attract the highest quality people from the next generation into the classroom to teach our kids? What do you need in the way of pay and benefits to get people to be police officers and fire fighters, to risk their lives for our society and our neighborhoods and our families? To make sure that you make the case with the public for those wages and that you provide for their secure retirement. And I just want to say very quickly, the challenge we face in California today is, we’re facing a shortage of teachers. The governor’s privatization plan would have been an absolute disaster. Right now, a teacher in California starts at about $34,000 a year, they top out at about $75,000 a year at the end of their career. Pretty modest wages for one of the toughest and most important jobs in our society. At the end of over thirty years in the classroom, a teacher gets a retirement of about $3500 a month. Hardly a king’s or a queen’s ransom for a lifetime of service of mentoring the next generation. Under the privatization plan the governor put forward, that teacher would have been left with a pension of $1900 a month. The real question for me is not how you dumb down retirement benefits for worthy public servants, but how do you attract a new generation of young people willing to be math and science teachers, teaching in our cities taking on those tough jobs. I think its going to require that you pay teachers more, and you make sure their retirement is worthy of their service.

Just one follow-up and I’ll let you go. With three out of four dollars paid out for benefits from CalPERS coming from the investment side, what do you see as a major concern on the investment side that you would be cautious about?

Here’s what I think you shouldn’t do – no investor should. When people get in trouble is when they try to hype up quarter by quarter returns and they take high-flying risks. CalPERS needs to do what it has done historically, and it shouldn’t be pressured politically into doing otherwise – which is, take the long view. They’re not a quarter by quarter investor. They’re a ten and twenty and thirty year investor. So they need to be looking to opportunities which have that kind of horizon, that over time will give them a good, solid, steady return. That’s why, frankly, the inner city investments made so much sense. These were markets in which there was a lack of investment, a market that was growing exponentially. The Latino consumer market has exploded in the last two decades, and every demographic trend shows that ethnic communities, immigrant communities will continue to grow.

It’s a smart bet to stay involved in what I call the emerging markets of America. You know, there’s always this talk about emerging markets overseas? But investing in the Vietnamese-American community, the Latino-American community, these are growing sectors that will provide sustainable returns. Investing in renewable energy and environmental technology – it’s clear that sector is going to continue to grow. So they need to be taking the long view, not the short view. That’s always a danger. The danger is when people begin to look for the deal of a lifetime, the quick hit. Generally the quick hit, the big return with no work, is always a formula for trouble.