Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

Advocating for fair and transparent markets is one of the cornerstones of Colorado PERA’s approach to <a href="https://www.copera.org/investments/investment-stewardship" target="_blank" rel="noreferrer noopener">investment stewardship</a>, and Chief Investment Officer/Chief Operating Officer Amy C. McGarrity has taken on a new role to help further that mission at the federal level.



The Securities and Exchange Commission (SEC) announced in September that McGarrity is one of six new members selected to join the SEC’s <a href="https://www.sec.gov/about/advisory-committees/investor-advisory-committee" target="_blank" rel="noreferrer noopener" class="broken_link">Investor Advisory Committee</a>.



The committee was created under the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its members include professionals and public officials with a range of experience and expertise in finance, investing and law. Members are tasked with advising the SEC and making recommendations on matters such as effective regulation, promoting market integrity, and protecting investor interests. Past recommendations have covered topics such as climate-related disclosures, investor education, and the rules governing financial account statements.



In addition to the SEC Investor Advisory Committee, PERA staff have been active in a number of industry organizations and advisory boards, such as the <a href="https://www.cii.org/" target="_blank" rel="noreferrer noopener">Council of Institutional Investors</a>, <a href="https://healthymarkets.org/" target="_blank" rel="noreferrer noopener">Healthy Markets Association</a>, and the <a href="https://pcaobus.org/" target="_blank" rel="noreferrer noopener">Public Company Accounting Oversight Board</a>, advocating for practices that benefit our members.



“At Colorado PERA, we firmly believe in using our influence as an institutional investor to advocate for strong and fair markets on behalf of the nearly 700,000 members we’re investing for,” McGarrity said. “I’m honored to be selected to serve on the Investor Advisory Committee and I look forward to working with my fellow committee members on some meaningful recommendations in the years ahead.”



McGarrity and the other members of the committee will serve four-year terms.

PERA CIO/COO Amy C. McGarrity Named to SEC Advisory Committee

Every year—often in the spring—publicly traded companies hold shareholder meetings and ask their investors to weigh in on issues such as corporate leadership and policies. It’s an important process, and one Colorado PERA takes seriously as an institutional investor.



At its September 20 meeting, the PERA Board of Trustees voted to approve updates to its Proxy Voting Policy, which guides staff in exercising PERA’s shareholder voting rights.



<h4 class="wp-block-heading">What is proxy voting?</h4>



Simply put, proxy voting is the process that allows shareholders—individuals who own stock in a company, as well as institutional investors like PERA—to provide their input on corporate management decisions without having to be present at shareholder meetings. Proxy voting matters can come from a company’s board or its shareholders, and they cover important decisions such as approving the members of the board, mergers, acquisitions, and the types of disclosures a company makes to its shareholders.



The PERA Board believes the shareholder right to vote is an asset of the plans to be managed under fiduciary care. Because PERA invests to provide retirement income for nearly 700,000 current and former public employees, our focus is on voting to encourage corporate behavior that can generate long-term financial value. Proxy voting is one way we practice investment stewardship for the benefit of our members. &nbsp;



In 2023, PERA cast votes on more than 68,000 proposals in more than 6,000 shareholder meetings. The overwhelming majority of those proposals—more than 99%—were related to corporate governance.



“Governance matters have always been our focus, and can include things like board elections and executive compensation,” said Senior Investment Stewardship Analyst Luz Rodriguez. “Those decisions can impact a company’s financial performance, which can, in turn, affect the investments we make on behalf of PERA members.”



<h4 class="wp-block-heading">Updating PERA’s policy</h4>



Over the course of several months, PERA staff have worked closely with the Board’s Investment Committee to review and update the Proxy Voting Policy. The full Board approved those changes in September, and they will go into effect in January 2025. The last update took place in 2021.



While some of the updates simply clean up or clarify language in the policy, others are more substantive and aim to provide additional information on PERA’s voting philosophy and processes. They include:



<ul>
<li>Clarifying PERA’s focus on governance matters. Not only are most proxy voting proposals related to corporate governance, but there’s a good body of research supporting the role of good governance in generating long-term value for shareholders.</li>



<li>Broadening the general scope of the policy to be more reflective of PERA’s global investments. For example, the updated policy refers to generally accepted accounting standards rather than U.S.-specific standards and expands language on greenhouse gas emission disclosures.</li>



<li>Clarifying which duties and responsibilities fall under the Board’s governance policy versus general practices. The Board is responsible for overseeing PERA’s investment program, including proxy voting. The Investment Committee is responsible for recommending changes to, and monitoring compliance with, governance and proxy voting policies, and staff is responsible for voting and reporting proxies.</li>



<li>Expanding on PERA’s approach to corporate board composition. The updated policy states that PERA will vote for proposals asking a company to provide a skills matrix that outlines the skills, experiences, background, and qualifications of board members, which can help give shareholders a better understanding of a board’s collective capabilities. The updated policy also states PERA will vote against certain director nominees if the company’s board does not provide this disclosure.</li>
</ul>







Through regular review and updates to the Proxy Voting Policy, the Board ensures that PERA’s policies effectively guide staff in engaging with the companies in which we invest in order to maximize risk-adjusted returns for our members.



“Our goal in voting proxies isn’t to dictate what companies do, but to encourage them to adopt sound governance practices that foster profitability and long-term shareholder value,” Rodriguez said. “As stewards of investments for nearly 700,000 current and former public employees, we take our shareholder responsibilities seriously.”



Take a deeper dive into proxy voting and PERA’s approach to investment stewardship by exploring the <a href="https://copera.org/investment-stewardship-report" target="_blank" rel="noreferrer noopener">2024 Investment Stewardship Report</a>.

PERA’s Proxy Voting Policy Receives an Update

We often receive questions from our members, lawmakers, and the general public who want to know: What does PERA invest in and how do staff manage the portfolio?



Every year since 2018, we’ve published the <a href="https://copera.org/investment-stewardship">Investment Stewardship Report</a> to answer those questions and provide transparency into why and how PERA invests on behalf of nearly 700,000 members.



PERA’s approach to stewardship is guided by four main practices:



<ul>
<li>We protect our members’ interests through cost-conscious investment management.</li>



<li>We integrate financially relevant factors into our investment decisions.</li>



<li>We advocate for robust capital markets and business practices.</li>



<li>We evaluate various exposures within our portfolios on an ongoing basis.</li>
</ul>



<h4 class="wp-block-heading">Protect</h4>


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Each person on PERA’s investment staff is an expert committed to serving our members’ financial longevity. We leverage that expertise to reduce the need to use outside investment managers, which saves money while adding value for our members.



As of Dec. 31, 2023, we managed approximately 60% of PERA’s Defined Benefit Plan assets in-house at a cost of about 0.05% of those assets. In the same year, internal management saved an estimated $65 million compared to the cost of externally managing those assets.



The PERA Board and staff also work to lower fees in the PERAPlus 401(k)/457 and PERA Defined Contribution Plans. For example, since 2011, we’ve been able to reduce the all-in costs for members to participate in the 401(k) plan by 82%. Lower fees mean participating members can save more money toward their individual retirement goals.



RELATED: <a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Asset Classes Explained</a>



<h4 class="wp-block-heading">Integrate</h4>


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We invest for one purpose: To provide retirement income for our members. To that end, we consider various economic and business factors in our investment decisions with a focus on long-term financial results.



PERA’s integrative approach considers many aspects of businesses and markets that can have a financial impact on our investments. Those aspects may include factors that can be labeled as environmental, social, or governance-related (ESG). However, PERA does not have any ESG-themed mandates, nor do we screen our investments on specific ESG criteria when deciding whether to include them in the portfolio.



In 2023, the Colorado General Assembly passed Senate Bill 016, which requires PERA to publicly report on how we consider climate-related risks in our investments and operations. In response, we’ve augmented the 2024 Investment Stewardship Report with new insights into how we consider both risks and opportunities related to climate change.



RELATED: <a href="https://copera.org/pera-on-the-issues/esg-making-sense-of-alphabet-soup" target="_blank" rel="noreferrer noopener">ESG: Making Sense of Alphabet Soup</a>


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<h4 class="wp-block-heading">Advocate</h4>



We promote fair and transparent markets by contributing our expertise to regulators and financial industry advisory boards in advocacy of best practices that serve long-term investor interests.



By engaging with portfolio management partners, public companies, and policymakers, we can encourage practices that are expected to be profitable over the long run, and with more transparency in the market, we can make better investment decisions on behalf of our members.



<h4 class="wp-block-heading">Evaluate</h4>


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The PERA Board and staff monitor the investment portfolio on an ongoing basis. Our priority remains financial performance and seeking the best long-term, risk-adjusted returns so we can provide retirement income for our members in perpetuity.



As of Dec. 31, 2023, the PERA Defined Benefit Plan portfolio earned a one-year return of 13.4%, and over the past 10 years, the portfolio has earned an annualized return of 7.8%. In the past three decades, the investments we have made on behalf of the PERA membership have earned $82 billion, strengthening the longevity of the Fund.



RELATED: <a href="https://copera.org/pera-on-the-issues/how-pera-prioritizes-financial-value-over-personal-or-political-values" target="_blank" rel="noreferrer noopener">How PERA Prioritizes Financial Value Over Personal or Political Values</a>



Chief Executive Officer/Executive Director Andrew Roth underscored the importance of investment stewardship in fulfilling PERA’s purpose: “By maintaining our commitment to sensible investment practices and long-term performance, we continue to work toward our mission of providing retirement security for our members while ensuring the financial sustainability of the fund,” Roth said.



Explore the <a href="https://copera.org/investment-stewardship-report-digital-snapshot/" target="_blank" rel="noreferrer noopener">Investment Stewardship Report Digital Snapshot</a> or download the <a href="https://copera.org/investment-stewardship-report" target="_blank" rel="noreferrer noopener">Investment Stewardship Report</a> to learn more.

Investment Stewardship Report Highlights How PERA Manages Plan Assets

At Colorado PERA, we invest for one purpose: To provide retirement benefits to PERA members for generations to come.



It’s not just our mission, it’s our passion. And it’s the reason we prioritize financial value—not personal or political values—in our investment decisions.



<h4 class="wp-block-heading">Fiduciary duty</h4>



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PERA serves nearly 700,000 current and former public employees who have worked hard to make our Colorado communities better places to live. Each of those members counts on PERA to provide a retirement benefit they cannot outlive.



The PERA Board and staff have a fiduciary duty to those members. That means we’re required by law to act solely in the interest of members and benefit recipients, and we must manage the trust funds only for their financial benefit. We make every investment decision with that duty in mind.



Each PERA member is unique, with their own personal values that guide them. It would be impossible to invest based on personal or political values of our individual members or stakeholders. Our fiduciary duty demands that we do what’s right for the membership as a whole, and that means focusing on financial value.



<h4 class="wp-block-heading">Prioritizing financial value</h4>



Our sole investment goal is to pursue the best risk-adjusted returns for our members. That means when we’re researching a possible investment opportunity or assessing an asset we already hold, our focus is on that investment’s ability to earn money over the long term.



We sometimes hear from stakeholders and others who want us to invest in some segments of the market or divest—sell our investments—from others based on their individual preferences or political beliefs.



That would be contrary to our mission and our fiduciary duty. Our approach involves finding companies, properties and investment funds that we believe will be competitive over time, allowing them to be profitable and generate returns to the portfolio.



Investing based on the financial interest of the whole PERA membership is our fiduciary duty, and we take it seriously because our hard-working members depend on us for their financial future.



Learn more about Investment Stewardship:



<ul>
<li><a href="https://copera.org/investment-stewardship-report" target="_blank" rel="noreferrer noopener">Investment Stewardship Report</a></li>



<li><a href="https://copera.org/stewardship-snapshot" target="_blank" rel="noreferrer noopener">Digital Snapshot</a></li>



<li><a href="https://www.copera.org/stewardship-videos" target="_blank" rel="noreferrer noopener">Video Library: Investment Stewardship</a></li>



<li><a href="https://www.copera.org/pera-on-the-issues/asset-classes-explained-global-equity" target="_blank" rel="noreferrer noopener">Asset Classes Explained</a></li>
</ul>

How PERA Prioritizes Financial Value Over Personal or Political Values

If you follow the stock market and investing news, you may have noticed a term that’s been gaining in popularity in recent years: ESG.



ESG is an acronym for environmental, social, and governance factors. It’s a widely used caption for labeling non-traditional aspects of a business that may have a financial impact on a company and its investors.



The term “ESG” is sometimes used to describe business or investment strategies perceived to have a global sustainability focus. However, that may be a misnomer. &nbsp;



<h4 class="wp-block-heading">Evaluating business practices through an ESG lens</h4>


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<figure class="alignright size-large is-resized"><a href="https://content.copera.org/wp-content/uploads/2022/10/ABCDESG-graphic.png"><img decoding="async" loading="lazy" src="https://content.copera.org/wp-content/uploads/2022/10/ABCDESG-graphic.png" alt="An infographic illustrating PERA's approach to ESG." class="wp-image-44041" width="306" height="396" srcset="https://content.copera.org/wp-content/uploads/2022/10/ABCDESG-graphic.png 612w, https://content.copera.org/wp-content/uploads/2022/10/ABCDESG-graphic-232x300.png 232w" sizes="(max-width: 306px) 100vw, 306px" /></a><figcaption class="wp-element-caption">Click to view infographic</figcaption></figure></div>


Rather than being a one-size-fits-all way to describe a company or investor, ESG is intended to be a way to describe nuanced inputs, outputs, and operations that can affect the environment, society, and/or business governance. These factors may or may not be financially relevant to a company and its investors.



Take a soda company for example. The company’s usage of water, an important ingredient in soda and other drinks, makes it neither an ESG nor non-ESG company. Instead, water could be considered a financially relevant input with implications for business that can be labeled through an ESG lens. Water is a natural resource, and it therefore can be considered an environmental factor. How the company accesses and uses that water in relation to the local community can be considered a social factor, and how the company adapts its strategy to changing supply, demand, regulation, and technology could be considered a governance factor.



How the company approaches these and many other elements of its business can affect its ability to remain competitive in its industry. Competitiveness and profitability are important to companies and their investors, and ESG is just one way to label various factors that may influence long-term financial outcomes.



As investors managing the retirement funds for nearly 700,000 members and retirees, it’s important for PERA to consider financially relevant factors when managing the portfolio, regardless of how they are labeled, or whether they may also have non-financial impacts.



<h4 class="wp-block-heading">PERA’s investment approach</h4>



PERA invests with one objective: to provide present and future benefits for our members and their beneficiaries. To that end, our approach to <a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">Investment Stewardship</a> is to seek out investments that are expected to provide the best risk-adjusted returns. PERA values financial sustainability first and foremost, and we do not invest to suit the personal beliefs of any one person or entity.



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PERA staff consider a wide variety of financially relevant factors when deciding what to include in the portfolio, including some that can be labeled as environmental, social, or governance-related. As of Dec. 31, 2023, PERA staff managed approximately 60 percent of the Fund in-house with most of those assets in actively managed portfolios using this integrative approach. PERA does not have any ESG-centric investment requirements and does not screen investments based on any specific ESG criteria.



“As ESG terminology becomes more prominent, it’s important that our members know PERA’s priority is maximizing long-term, risk-adjusted returns so we can continue paying benefits for decades to come,” said PERA Director of Investment Stewardship Tara Stacy. “By focusing on financial sustainability in our investment decisions, we uphold the fiduciary duty we owe to PERA members and their beneficiaries.”



For PERA members in the Defined Contribution Plan or a PERAPlus 401(k) or 457 plan who want to invest their own savings in companies that are screened on ESG criteria, PERA offers the <a href="https://www.copera.org/pera-on-the-issues/peradvantage-sri-fund-a-sustainable-investing-option-for-401k-457-and-dc-plan-participants" target="_blank" rel="noreferrer noopener">PERAdvantage Socially Responsible Investment Fund</a>. The SRI Fund is designed for long-term performance through investment in companies that have demonstrated leadership in ESG-related practices — that is, companies that have shown an ability to manage risks and take advantage of opportunities associated with environmental, social and governance issues. Participants may also choose from a large variety of investments within the self-directed brokerage option.



To learn more about how PERA integrates various financially material factors into its investment decisions, read the Investment Stewardship Report, <a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">available online here</a>.

ESG: Making Sense of Alphabet Soup

2022 marks the fifth year Colorado PERA has published its <a href="https://content.copera.org/peras-investment-stewardship-report-turns-five-years-old-2/" target="_blank" rel="noreferrer noopener">Investment Stewardship Report</a>, which highlights how PERA manages and invests the funds that provide retirement benefits for nearly 650,000 members.



Released each year following PERA’s annual report, the Stewardship Report provides insight and transparency into PERA’s investment program and its focus on financial sustainability.



PERA invests with one goal — to pay current and future benefits to members and retirees. For five years, the Stewardship Report has detailed how PERA staff serve as good stewards of assets to ensure the plan can continue to do so.



<h4 class="wp-block-heading">Five years of the Stewardship Report</h4>



“We manage approximately $60 billion in assets on behalf of our members; that’s a big responsibility and it’s one we take seriously,” said Tara Stacy, PERA’s Director of Investment Stewardship. “The Investment Stewardship Report provides a great deal of helpful information on how we serve as stewards of funds, and we hope the report has become even more useful to those with questions about how and why we invest on their behalf.”



Over the years, the Stewardship Report has expanded and adapted as PERA’s investment staff have engaged with various stakeholders interested in how the organization makes investment decisions.



PERA often hears from various groups that would like to see PERA divest — or sell — certain types of investments, as well as groups that would like to see more money invested in certain industries or sectors. PERA’s approach to investment stewardship is straightforward: Seek out investments that are expected to provide the best risk-adjusted returns to PERA’s portfolio over the long term. &nbsp;



“A key takeaway we hope readers get from the Report is that our approach prioritizes financial value, rather than personal values, and supports PERA’s mission to provide retirement benefits while ensuring the financial sustainability of the Fund,” Stacy said.



<h4 class="wp-block-heading">Highlights from this year’s report</h4>


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New in 2022, the Stewardship Report release includes an <a href="https://www.copera.org/peras-investment-stewardship-report-turns-five-years-old-2" target="_blank" rel="noreferrer noopener" class="broken_link">online digital snapshot</a>, which provides an interactive overview of the report’s highlights and key data points.



The 2022 report also includes additional case studies, charts and graphs that help explain various investment philosophies and practices.



The report includes expanded disclosures about how the PERA Board and staff consider climate-related and other environmental, social, and governance (ESG) themes in the management of the portfolio. PERA does not manage the portfolio to target any specific ESG metric or outcome, but staff do take into consideration any financially relevant factors when making investment decisions.<ins></ins>



The Stewardship Report now includes more information on how PERA integrates various financially material factors into its investment decisions, and why PERA chooses to engage with companies through proxy voting and other strategies <a href="https://www.copera.org/divestment" target="_blank" rel="noreferrer noopener">rather than divesting</a>.



The PERA Board <a href="https://peraontheissues.com/proxy-voting-keeping-policy-current/" target="_blank" rel="noreferrer noopener">updated its proxy voting policy in 2021</a>, and the Stewardship Report provides insight into some of PERA’s proxy voting activities, as well as other ways staff engage with companies in which PERA invests. 



For learn more about the Investment Stewardship Report and PERA’s approach to stewardship, visit <a href="https://www.copera.org/investment-stewardship" target="_blank" rel="noreferrer noopener">copera.org/investment-stewardship</a>.



More stewardship coverage over the years:



<ul>
<li><a href="https://peraontheissues.com/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/">Burritos, Boardrooms, and Ballots: The Story of One Shareholder Proposal</a></li>



<li><a href="https://peraontheissues.com/evaluating-sustainability-in-peras-investment-portfolio/">Evaluating Sustainability in PERA’s Investment Portfolio</a></li>



<li><a href="https://peraontheissues.com/investment-stewardship-considering-relevant-issues-like-esg-factors-in-investment-decisions/">Investment Stewardship: Considering Relevant Issues Like ESG Factors in Investment Decisions</a></li>
</ul>

PERA’s Investment Stewardship Report Turns Five Years Old

In this story:



<ul><li>PERA casts about 60,000 votes on company ballots every year</li><li>PERA&#8217;s Board regularly updates its Proxy Voting Policy, which guides staff who review proposals </li><li>The Board last updated this Policy in February</li></ul>



<hr class="wp-block-separator"/>



As a shareholder of billions of dollars in thousands of publicly-traded investments, PERA casts a lot of votes on company ballots.



In a recent story, we <a href="https://peraontheissues.com/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" rel="noreferrer noopener">followed one ballot through the entire process</a>—from the day it arrived in Denver to the day the election results were announced. “Voting is our way to communicate to companies and to other shareholders,” said Luz Rodriguez, PERA’s Senior Analyst in the Investment Stewardship division.



Guiding this entire process is the Board’s <a href="https://www.copera.org/proxy-voting-keeping-policy-current" target="_blank" rel="noreferrer noopener" class="broken_link">Proxy Voting Policy</a>. The first edition of this document was created in November 1979. Since then, the Board has made updates 19 times. While the policy changes to meet the needs of evolving issues, the goal remains the same. As the opening to the Policy states:



“We will continue to seek alignment of corporate management interest with PERA’s investment interests, with the ultimate aim of encouraging companies to adopt sound practices in aspects of business that can enhance profitability and long-term shareholder returns.”



<h4 class="wp-block-heading">Issues That Matter</h4>



The 60,000 votes PERA casts annually cover a wide array of subjects. Although it’s a detailed document, the Policy does not specifically address every issue that comes to ballot.



“Governance has always been our focus,” Rodriguez said. “The core governance issues of a company include things like director elections, executive compensation, and audit.”



Over the years, the ballot topics the Policy covers have grown. The Board updates the Policy for a variety of reasons, including: changes to government or industry regulations; industry trends; the need for further clarification of an existing policy; an uptick of a certain issue on company ballots; and new or more data on an issue.



Crafting a good policy takes work, too. “The policy needs enough guidance to be useful but enough flexibility to do a proper analysis of each issue,” Rodriguez said.



<h4 class="wp-block-heading">An Addition to the Policy</h4>



The Board last updated the Policy in February 2021. One topic on the agenda: Human capital management. As Rodriguez explained: “Interest has been growing about how companies are managing the relationships existing throughout a business: Who are their suppliers? How are they managing employees? How do they interact with their customers? How are they impacting the communities in which they operate?”



It’s a complicated topic. But the COVID-19 pandemic underscored the importance of human capital management in markets, business, and communities. “Companies are confronting social externalities of their businesses that were once difficult to conceptualize,” Rodriguez said. 



For example, effective hiring and retention practices at a company can lead to long-term financial benefits and can lead to resiliency when confronted with unforeseen events. The inverse is true as well. Rodriguez said that investors are increasingly considering a company’s human capital management when thinking about its long-term profitability.



Human capital issues can present real financial risks and opportunities to a company, and are appearing on more and more ballot proposals. “This isn’t about taking a stance,” Rodriguez said. PERA staff reviews each proposal in its own context. “We might support a proposal at one company but vote against the proposal at another one.”



So what does staff look at when analyzing a proposal? “Proposals need to be well-targeted and relevant to the company’s operations, and seek financially material disclosures” Rodriguez said. “We need to be able to assess how the company is managing risks and opportunities related to human capital management. We do not support proposals that are overly prescriptive or overly burdensome.”



<h4 class="wp-block-heading">Voting with Purpose</h4>



PERA does not exist to change the way businesses operate. And, while PERA does cast a large number of votes every year, it can’t singlehandedly dictate the outcome of an election. But voting is still a crucial part of the investment operations at PERA.



Voting is part of being a responsible, engaged investor. When the ballots come in, PERA staff must be prepared to vote on every issue, whatever the issues happen to be. The goal of every vote is to align corporate interests with long-term investor interests. Investors benefit from business practices that drive long-term financial performance. And at PERA, these results ultimately benefit PERA members and retirees.

Proxy Voting: Keeping Policy Current

Chipotle’s original store is in Denver, just a few blocks west of the University of Denver. Its quaint corner location has withstood more than 27 years of branding changes; a green sign that vaguely resembles a space-age burrito with a bite taken out of one corner comes across as a family-owned business more than a nationwide chain worth $37 billion.



But it’s not family-owned, at least not anymore. It’s been publicly traded since 2006. In fact, PERA is a shareholder in this homegrown company. At the end of May 2021, PERA owned 4,808 shares—worth about $6,823,000. That’s a lot of guac. &nbsp;That means PERA gets 4,808 votes when the board of directors of Chipotle Mexican Grill, Inc., holds their annual shareholder meeting.



Shareholder voting might seem removed from PERA’s core mission. But it’s an integral piece of being an engaged investor. PERA votes in more than 6,000 annual meetings, casting more than 60,000 votes backed by billions in publicly-traded investments.



<h4 class="wp-block-heading">The Making of a Ballot</h4>



Four to five months before Chipotle held its annual meeting on May 19, 2020, shareholders submitted proposals to be considered. At the most fundamental level, these shareholder proposals are ideas to improve the company’s governance, reduce investment risk, and strengthen long-term shareholder value.



Not every shareholder proposal gets a spot on the ballot, however. A company may challenge a shareholder proponent and attempt to exclude the proposal from its ballot. This is when the Securities and Exchange Commission (SEC) steps in to settle the dispute. The SEC reviews the challenge to determine if the proposal(s) <a href="https://www.natlawreview.com/article/sec-finalizes-changes-to-requirements-submission-shareholder-proposals-prepare-2022" target="_blank" rel="noreferrer noopener">qualify to be on the ballot</a>. Among other things, a proposal must not interfere with “ordinary business.” In other words, a proposal must not overstep the authority given to staff and to the board of directors. The SEC relies on rules and precedent to make a determination on each ballot proposal.



Once the approved measures are finalized, the ballot, which in most cases includes items like the election of board members, is sent to shareholders. The ballot for Chipotle’s May meeting contained seven proposals, four of which came from shareholders. Companies typically include information such as a description of the proposal and the rationale behind the Board’s position, if applicable, similar to the Blue Book that Coloradans receive before elections. You can see the full ballot from Chipotle’s May 2020 meeting <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">here</a>.



<h4 class="wp-block-heading">The Ballot Arrives at PERA</h4>



With tens of thousands of proposals to sort through every year, voting season never ends for institutional investors like PERA.



Luz Rodriguez is PERA’s Senior Analyst in the Investment Stewardship division. She spends a part of each day reviewing proposals and submitting votes. It’s a monumental task. To aid in the research and analysis for every vote, PERA employs the help of a proxy voting service. In addition to research, this service also provides a digital platform that helps manage and organize the constant inflow of ballots.



When a company sends a ballot to PERA, it gets routed through this digital platform where the Investment Stewardship staff can review and submit PERA’s vote. How does PERA staff know how to vote? PERA’s Board has established a <a href="https://www.copera.org/proxy-voting-keeping-policy-current" target="_blank" rel="noreferrer noopener" class="broken_link">Proxy Voting Policy</a> that guides staff on how they make voting decisions.



For example, if a board member of a company attends less than 75 percent of board meetings and committee meetings, PERA will not support that board member’s reelection. Policies like this, which call for a specific vote for or against, are coded into the digital platform PERA uses to vote. For other ballots issues that do not fall into this category, the Policy guides staff to vote on a case-by-case basis.



The best position for PERA to take on any given proposal is sometimes tough to discern, even after being filtered through PERA’s voting policies and procedures. About one in ten shareholder proposals requires a case-by-case review. In these instances, PERA’s Investment Stewardship team reviews each one and performs a more in-depth analysis. Depending on the topic, they might consult with other investment staff and even with other shareholders on occasion. They also reach out to the company directly if they need clarification.



<h4 class="wp-block-heading">Considering Each Vote</h4>



In April 2020, proposal #6 on Chipotle’s May 2020 ballot landed on Rodriguez’s desk. The shareholder proposal, which Chipotle’s board of directors opposed, was titled “Shareholder proposal requesting a report on arbitration of employment-related claims.”



The proposal, if passed, would require Chipotle to do the following:



<ul><li>Report on its use of <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">mandatory arbitration</a> provisions in employee contracts</li><li>Specify the percentage of its workforce subject to these provisions</li><li>Specify how many claims employees initiated and how many claims were decided in favor of employees</li><li>Share how Chipotle updated policies after California proposed banning mandatory arbitration in employment agreements</li></ul>



Chipotle’s board opposed this proposal, saying it would be too costly, offer few benefits, and cited privacy and speed as reasons arbitration was a preferable alternative to taking disagreements to court.



Because this issue dealt with corporate governance but was not specifically addressed in PERA’s voting guidelines in effect at the time of vote, a case-by-case analysis was performed. &nbsp;



<h4 class="wp-block-heading">Making a Decision</h4>



PERA staff does not analyze proposals like this in a vacuum. PERA’s investment goal—to maximize risk-adjusted long-term investment returns—remains at the center of every analysis prior to voting. Proposals are assessed on whether and how they affect the long-term financial stability of a company.



PERA’s analysis of proposal #6 concluded the following:



<ul><li>The proposal was reasonable, sufficiently narrow, and would not infringe on Chipotle’s judgment on the appropriateness of arbitration</li><li>PERA generally opposes forced arbitration as it diminishes shareholder and other stakeholder rights</li><li>Employment-related claims can lead to significant legal, human capital, and reputational costs. Receiving more information about the use of arbitration would be useful to assess risk.</li></ul>



PERA ended up voting in favor of this proposal.



<h4 class="wp-block-heading">The Long-term Impact of Stewardship</h4>



Think about the ballot you cast last November. You likely remember who you voted for president, and you probably remember which Senate candidate got your vote. How many other issues, offices, and ballot measures do you remember?



It’s easy to lose sight of the potential impact that lies behind each vote when your ballot runs three, four, or five pages long. When an institution like PERA casts hundreds or thousands of votes every month, the magnitude of this task can have a blinding effect to outside observers; it’s almost impossible to comprehend, so it is easy to look away and move on.



But PERA takes each vote seriously. This work is done transparently as every vote is <a href="https://viewpoint.glasslewis.com/WD/?siteId=COPERA" target="_blank" rel="noreferrer noopener">published online</a>. To stay current, the Board reviews and updates its voting policies on a regular schedule.



Being an engaged shareholder of more than 6,000 publicly-held companies is an action that connects the sometimes abstract idea of investment stewardship to the tangible mission of providing retirement security to PERA members and retirees. Shareholders don’t run the companies they invest in, but they can help make sure that elements crucial to a company’s long-term success, like effective governance and strong stakeholder rights, are attended to.



In the case of proposal #6 on last year’s Chipotle ballot, PERA voted in line with the majority of investors. It <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">was close</a>: the final tally was 11,552,113 votes for and 11,098,669 against. Earlier this year, Chipotle <a href="https://www.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal" target="_blank" rel="noreferrer noopener" class="broken_link">released the information</a> this ballot proposal called for.



<h4 class="wp-block-heading">The Results of Voting</h4>



Shareholder ballots allow PERA to be an engaged investor, voting on issues that can affect a company’s long-term sustainability and investment returns. Voting also allows PERA staff to continually learn about emerging issues that can affect shareholder value.



For example, the issue at the heart of proposal #6, managing human capital effectively, is not unique to Chipotle. In fact, more and more ballot proposals like this have appeared in recent years. In response, PERA staff made a recommendation to the Board to update its Policy to include guidance for human capital management disclosures and mandatory arbitration provisions.



The Board’s Proxy Voting Policy was formalized and established in 1979 and has been updated many times since. It’s a dynamic document, the product of a continual flow of information among the Board, PERA staff, and the companies in which PERA owns shares. It’s also a plus for PERA members. As this year’s <a href="https://content.copera.org/burritos-boardrooms-and-ballots-the-story-of-one-shareholder-proposal/" target="_blank" rel="noreferrer noopener">Stewardship Report</a> states: “The Policy acts as a public statement on why and how we make voting decisions, and can guide conversations with companies, peers, and stakeholders around PERA’s stance on a variety of issues that can affect financial value. The Policy parameters seek to encourage public companies to adopt sound business practices that align with sustainable shareholder value creation.”

Burritos, Boardrooms, and Ballots: The Story of One Shareholder Proposal

In this story:



<ul>
<li>PERA invests for the long term for its members</li>



<li>The investment team considers a variety of risk factors when evaluating investment opportunities</li>



<li>Comparing the risk in PERA&#8217;s investment portfolios to the risk found in their respective benchmark portfolios is one way these factors are evaluated</li>



<li>Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation</li>
</ul>



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Colorado PERA invests billions of dollars on behalf of its members. It holds investments around the world in a variety of asset classes and industries. This diversified approach to investing helps PERA achieve its investment goal: to maximize risk-adjusted returns for the benefit of members and retirees.



PERA is also a long-term investor. To better understand how an investment might perform in the long-term, PERA’s investment team considers a variety of risks when evaluating investment opportunities.



Risks come in many forms, and they can be considered in isolation or in combination with other risks that can impact an investment decision. Examples can include:



<ul>
<li>Interest rate risk: How do interest rates impact valuations and expectations for future growth? </li>



<li>Competitive risk: Does a company operate in an industry that has highly innovative peers? </li>



<li>Climate risk: Does a company have a business plan that takes into account potential impacts of climate change? </li>



<li>Supply chain risk: How dependent is a company on resources that it does not directly control, and what are the risks associated with those suppliers?</li>
</ul>



PERA considers these and many others as they evaluate investments.



<h4 class="wp-block-heading">An Example of How PERA Evaluates Risk</h4>



One method PERA uses to evaluate risk is to compare a PERA portfolio to its respective benchmark .



For example, carbon risk is part of environmental or climate-related factors an investor may consider. So it can be helpful to compare the carbon risk in PERA’s portfolio to the carbon risk in the portfolio’s benchmark .



The chart* below shows the carbon intensity&nbsp;of a few PERA portfolios alongside the carbon intensity of each portfolio&#8217;s respective benchmark . Lower bars indicate lower carbon intensity . 



While PERA does not target specific environmental, social, or governance (ESG) scores when making investment decisions, these factors are part of a much broader mosaic of understanding of a company’s fundamental business.



<h4 class="wp-block-heading">The Importance of Sustainability</h4>



PERA has in place many measures to evaluate its portfolio exposures to various risks and opportunities. Because investments contain multiple risks, PERA takes a comprehensive approach, considering the sum of these factors rather than each in isolation.



Investing is also a dynamic activity. Markets evolve as political, social, environmental, and economic conditions change. Broadly speaking, a company that operates with sustainable business practices may be better able to navigate these changes. How? 



<ul>
<li>Sustainable business practices can signal the ability to manage risks and seize business opportunities more effectively than competitors. </li>



<li>Sustainable practices can lead to more efficient operations, which can boost profits. </li>



<li>Companies that have sustainable business practices also can attract and retain top talent. Top talent can yield innovation that enhances competitive advantages and, thus, returns to investors.</li>
</ul>



“PERA’s commitment to investing in companies that have strong financials, operations, and opportunities for growth means we have a bias toward higher quality companies in our actively managed portfolios,” said Tara Stacy, PERA’s Director of Investment Stewardship. “These companies are likely to score more favorably among their industry peers in other aspects of their business as well, such as in the management of various ESG risks.”



By focusing on financial sustainability, PERA is able to effectively evaluate and manage investment risks and opportunities across the portfolio in order to provide lasting benefits to its members and retirees.



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* This report contains certain information (the “Information”) sourced from MSCI ESG Research LLC, or its affiliates or information providers (the “ESG Parties”). The Information may only be used for your internal use, may not be reproduced or redisseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. Although they obtain information from sources they consider reliable, none of the ESG Parties warrants or guarantees the originality, accuracy and/or completeness, of any data herein and expressly disclaim all express or implied warranties, including those of merchantability and fitness for a particular purpose. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such, nor should it be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. None of the ESG Parties shall have any liability for any errors or omissions in connection with any data herein, or any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Evaluating Sustainability in PERA’s Investment Portfolio

In this story:



<ul><li>A new divestment bill would limit PERA&#8217;s investment options </li><li>PERA&#8217;s Board has stated that PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants</li></ul>



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A bill recently introduced in the Colorado House would limit the investments PERA has access to, which could affect the ability to maximize the long-term risk-adjusted return for members.



<h4 class="wp-block-heading">Bill Summary</h4>



If passed, the bill, <a href="http://leg.colorado.gov/bills/HB21-1246" target="_blank" rel="noreferrer noopener">HB 21-1246</a>, would do the following:



<ul><li>Require PERA’s Board to create an exclusion list of all direct investments PERA has in fossil fuel companies.</li><li>Within 6 months after completing the exclusion list, the Board would be required to determine whether divestment from the companies on the exclusion list complies with the Board’s fiduciary obligations.</li><li>If the Board determines that divestment from any company on the exclusion list does comply with its fiduciary duty, the Board would be required to divest from those companies on the exclusion list.</li><li>And the Board would be required to cease new direct investments in any company that is a fossil fuel company.</li><li>Beginning one year after the effective date of the bill, the Board would be required to ensure that no money or assets of the fund are invested in an indirect investment vehicle unless the Board is satisfied that such indirect investment vehicle is unlikely to have in excess of 2% of its assets directly or indirectly invested in fossil fuel companies.</li></ul>



<h4 class="wp-block-heading">The Position of PERA’s Board</h4>



PERA opposes divestment efforts unless such opposition is inconsistent with its fiduciary duty and recommends the legislature thoughtfully consider such proposals with caution and fiduciary care.



Per the Board’s <a href="https://www.copera.org/pera-board-of-trustees-updates-divestment-policy-statement" target="_blank" rel="noreferrer noopener" class="broken_link">Statement on Divestment</a>, PERA serves the singular purpose of ensuring the retirement security of Colorado’s current and former public servants. Global issues are difficult to prioritize and proper recourse falls beyond the duty of the retirement system.



<h4 class="wp-block-heading">The Problem With Divestment</h4>



<h5 class="wp-block-heading">Divestment is expensive. </h5>



Requiring PERA to divest comes with significant costs – including costs to research, sell, and replace its fossil fuel investments. This bill would cost millions of dollars just to implement and does not include the opportunity cost of continued investment in the securities that meet the stated criteria.



<h5 class="wp-block-heading">Divestment is a slippery slope. </h5>



Just in the past several years, advocacy campaigns have pressed pension funds to divest from countless industries for varying reasons. Divestment could cost PERA members more by limiting the investable universe and PERA’s ability to generate the investment returns that make their retirement benefit possible. PERA’s investment program has generated over $69 billion over the last 30 years – returns that fund benefits and fuel <a href="https://content.copera.org/recently-introduced-divestment-bill-would-affect-pera-investments/" target="_blank" rel="noreferrer noopener">local economies</a> across the state.



<h5 class="wp-block-heading">Divestment is not effective.</h5>



Divestment mandates are a blunt instrument designed to impose economic hardship on the subject companies, but often result in assets simply being transferred from one investor to another with no impact on the company’s financial position. To make a change you need a voice and divestment means leaving the conversation entirely. PERA prefers engagement with companies to promote responsible business practices because it has a real and lasting impact.



<h4 class="wp-block-heading">PERA’s Investment Framework</h4>



PERA&#8217;s investment framework has been the focus of previous PERA On The Issues stories, including:



<ul><li>A <a href="https://peraontheissues.com/peras-investment-objective-ensuring-retirement-security/" target="_blank" rel="noreferrer noopener">look into</a> the Board’s Statement on Divestment</li><li>How <a href="https://peraontheissues.com/investment-stewardship-considering-relevant-issues-like-esg-factors-in-investment-decisions/" target="_blank" rel="noreferrer noopener">PERA considers issues like ESG factors</a> when making investment decisions</li><li>How PERA has a positive track record of taking its role as shareholder seriously by <a href="https://content.copera.org/recently-introduced-divestment-bill-would-affect-pera-investments/" target="_blank" rel="noreferrer noopener">engaging with the companies it invests in</a></li><li>An overview of how PERA’s <a href="https://peraontheissues.com/issue-spotlight-responsible-investing/" target="_blank" rel="noreferrer noopener">commitment to stewardship</a> includes considering a variety of factors that could have a financial impact on PERA’s investments, including: carbon emissions, labor rights, natural resource utility, executive oversight, animal welfare, corporate culture, and social impact.</li></ul>

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