Public Pension Profiles: LACERA CIO, Jonathan Grabel
Jonathan Grabel, CIO of LACERA, discusses the evolving investment strategies at LACERA, the significance of ESG factors in their decision-making process, and the opportunities and challenges surrounding responsible investing in today's financial landscape. ”We need to move beyond the nomenclature, beyond three letters, and focus on how the inclusion of these and other factors in comprehensive diligence should enhance outcomes in the dimension of either mitigating risk and or enhancing returns.“
By: Andy Muthoni, NCPERS
As part of an ongoing series of public pension executive profiles, NCPERS spoke with Jonathan Grabel, chief investment officer of the Los Angeles County Employees Retirement Association (LACERA), about the role of ESG in the fund's investment process and Grabel's candidacy for the Principles for Responsible Investment (PRI) board. LACERA is the largest county public pension in the U.S., managing more than $77 billion in assets on behalf of over 185,000 active and retired employees.
Please note: This interview has been edited for clarity. If you would like to participate in a public pension profile interview, please contact firstname.lastname@example.org.
Since you joined LACERA in 2017, how have its investment strategies changed?
From 2017 through 2021, we had to adapt to a lower interest rate environment. And as a result, we added some new asset categories to further diversify the fund. For example, we started making infrastructure investments and created a discrete credit allocation.
Perhaps the most noteworthy shift has been in our asset allocation framework. We moved away from the traditional approach of eight distinct asset categories and adopted a more functional framework centered on growth, credit, real assets, and risk mitigation. This change allows us to group assets with similar characteristics, like private equity and public equity, both of which are forms of equity. Instead of treating them as separate categories, we now recognize their common traits and incorporate them into a unified strategy.
Under your leadership, you've worked to incorporate environmental, social, and governance (ESG) considerations into LACERA's investment process. Do you believe ESG factors are important for asset managers to consider?
LACERA's investment beliefs recognize that how our portfolio companies and asset managers put in place sound corporate governance practices and manage E and S operational factors like energy efficiency and human capital can shape their financial performance. ESG considerations therefore hold significant importance for us. We want to understand and evaluate all asset managers' on their process for evaluating and managing ESG factors in each mandate, rather than seeking separate ESG investment products. Often, people categorize ESG within various investment products. However, for us, it's an integrated process utilized throughout our portfolio to enhance the assessment and monitoring of all investments. The materiality of E, S, and G factors can vary by geography and industry, forming a critical part of the overall assessment as we underwrite and monitor investments.
To emphasize its significance, we've implemented a manager scorecard. Each quarter, within our quarterly performance report, we employ a five-factor rating methodology encompassing both quantitative and qualitative aspects. Stewardship and ESG are among these discrete factors, with investment managers being rated by how rigorous their investment process is in identifying and managing financially relevant ESG factors in their mandate. Additionally, the LACERA board has endorsed a strategic plan titled "Allocator to Best in Class Investor," consisting of five pillars, one of which is “maximize stewardship and ownership rights”. This emphasis on ESG is critical at both the total fund and strategy levels.
What do you think are the greatest challenges and opportunities today with responsible investing?
The greatest challenge may be that some are too focused on three letters—E, S, and G—without going deeper into all financially material aspects of any investment. We need to move beyond the nomenclature, beyond three letters, and focus on how the inclusion of these and other factors in comprehensive diligence should enhance outcomes in the dimension of either mitigating risk and or enhancing returns.
So, the challenge may, in fact be an opportunity that leads to more information about investment risks, better informed investment decisions, and ultimately better outcomes. Once again, we believe this is a process applicable to every investment.
LACERA has been a committed signatory to the Principles for Responsible Investment (PRI) since 2008. What led them to become a signatory, and what does that involvement look like today?
LACERA has long advocated sound corporate governance practices in global financial markets to mitigate the downside risks to our fund performance of governance failures ranging from Enron and the dot.com bust to the great financial crisis. Signing on the PRI was a natural extension of the fund's commitment to collaborate with peers to create and disseminate best practices in advancing credible investment stewardship practices, like ESG due diligence. We find it crucial to partner with like-minded investors and organizations, such as NCPERS and PRI, to advance shared interests, amplify our voice, and further our mission to our members.
Regarding our involvement with PRI, I serve on the Asset Owner Advisory Committee, and one of my colleagues serves on the Western North America Advisory Committee We've participated on working groups to help develop practical tools, such as the PRI's private equity diligence models. We also look at the reports of current and prospective managers to better evaluate their stewardship efforts.
Would you recommend fellow public pensions engage with PRI, and if so, how can they get involved?
I believe that PRI offers an abundance of valuable resources. For those asset owners who are already signatories, I encourage them to explore opportunities beyond the initial commitment. Going beyond the annual reporting requirements and seeking to collaborate, learn, and partner with global investors can be immensely beneficial. PRI provides a tremendous resource for those looking to amplify their voice and expand the scope of their engagement.
For those plans that are considering becoming a signatory, the PRI website is a great place to start. It offers numerous insights into PRI's mission, various engagement approaches, and ways to integrate responsible investment principles into an organization's processes. As time progresses, the engagement can be deepened. From my perspective, there are no downsides to this endeavor. As fiduciaries, it's always incumbent upon us to add rigor, processes, and fresh perspectives to what we do.
As a candidate for the PRI board, why should fellow asset owners vote for you during this election?
First, I bring a wealth of experience to the table. I've served as a Chief Investment Officer (CIO) for multiple plans of varying sizes and geographies, managing diverse teams and resources. Prior to that, I've had roles as a private equity investor, investment banker, and public accountant. I believe that this multifaceted background adds value by offering different perspectives and approaches.
Furthermore, my governance experience is a critical asset. In the realm of ESG considerations, governance (the “G” in ESG) holds immense importance. It is often the linchpin for achieving positive outcomes and effectively managing all other considerations. I've served on numerous boards, both as a board member for various companies in my private equity role. This extensive governance experience equips me to contribute meaningfully.
Lastly, as a CIO, I would bring to the PRI board the perspective of someone with a broad perch, someone who not only understand all asset categories, but also who understands all those asset categories in the context of advancing the mission of an organization through its investment mandate. Critically, by integrating ESG throughout LACERA's portfolio and all asset classes, LACERA has gained crucial insight on the state-of-play and best practices in ESG integration across asset classes. I believe this perspective is crucial for making informed decisions that align with PRI's objectives.
And if elected, what would your priorities be?
I'd like to outline my priorities in three key areas, which I've also discussed in my video. Firstly, I believe it's crucial to deepen the engagement of signatories. This aligns with the PRI strategic plan and is a priority for me. Secondly, given the increasing allocation to less liquid alternative assets, we need to prioritize enhancing ESG reporting and transparency for private assets. This is of great importance to LACERA and many other asset owners. Lastly, at LACERA we approach ESG considerations from a total fund perspective. While ESG products may be relevant for some, I believe the primary focus should be on ESG as a process rather than a product across all aspects of our portfolio management where analyzing ESG risks and opportunities can enhance our risk-adjusted returns and strengthen our ability to achieve our investment objectives.
You've served as CIO for public pension plans in Maryland, New Mexico, and now California. What initially drew you to working in the public pension space?
My journey into this field can be traced back to the origins of my career in public accounting, a path heavily influenced by my interest in policy. During my college years, I had the privilege of interning in Washington, which further fueled my fascination with policy matters. I believe that public pensions represent the dynamic intersection of policy and investment. This unique blend of disciplines occurs in an environment driven by a mission that holds paramount importance: enabling people to retire with dignity. I consider myself exceptionally fortunate to undertake the responsibilities entrusted to me, allowing me to integrate and pursue my diverse interests toward this meaningful goal.