CalSTRS Investment Portfolio operates in a unique and complex social-economic milieu, and the Teachers’ Retirement Board expects corporations in which securities are held to meet a high ethical and social standard of conduct in their operations, which, in the long-term, will result in superior investment performance.

Importantly, CalSTRS ownership of securities in a corporation does not signify approval of all of a company’s:

• Policies
• Products
• Actions

This policy is intended to address the financial and administrative risks associated with corporate decisions that support Government endorsed genocide, as identified by the U.S. government, or that violate the CalSTRS 21 Risk Factors adopted by the board.

It is important to state that investments shall not be selected or rejected based solely on the basis of:

• Geopolitical risk factors
• Social risk factors

In fact, geopolitical and social risk factors can only be taken into consideration to the extent that such factors bear on the financial advisability of the investment; e.g., not investing in a corporation whose conduct demonstrates a negative effect on the corporation’s financial viability.

The extent of the responsibility of the system to engage in activity to address these issues will be determined by both:

• The number of shares held in the corporation
• The gravity of the violation of CalSTRS policies

When faced with a corporate decision that violates CalSTRS policies, at the direction of the Investment Committee or at the discretion of the CIO, the Investment Staff will directly engage corporate management to seek a change in corporate behavior that supports government endorsed genocide and/or that violates the CalSTRS 21 Risk Factors, a subset of the Investment Policy and Management Plan, in the following manner:

1. CalSTRS will actively engage, in a constructive manner, corporate management whose actions are inconsistent with this Policy.
   
   All forms of engagement will be utilized (letter writing, meetings, participation in advocacy groups, media campaigns, proxy voting etc.)



2. CalSTRS will inform its active investment managers that, to the extent that suitable alternative investments are available and that their inclusion in the Portfolio would result in no diminution in portfolio return or increase in risk, the managers shall invest in said alternative(s) until such time as the violations of this policy cease after all reasonable efforts have been made to constructively engage management and:
   
   
   • There is a clear nexus between the corporate behavior and the CalSTRS Policy violation.
   • In the CIO’s opinion, the corporate remedies are insufficient or non-responsive.
   
   Notice of this action will be reported to the Investment Committee in writing. Passive portfolios will cease to acquire shares of companies in violation of this Policy until such time as the violations of this Policy cease.



3. Upon remedy of the policy violation, CalSTRS will inform the active investment managers and passive managers that the securities can be purchased and report such action in writing to the Investment Committee.

Adopted by the Teachers’ Retirement Board June 7, 2006