State and Local Governments Eye ESG Investing Strategies for Returns and Impact

Across the U.S., state and local government funds demonstrate interest in using sustainable investing strategies. They are driven to do so to help maintain or improve financial performance and to promote broader social or environmental goals that will benefit their constituents.

In 2015, then newly elected Chicago City Treasurer Kurt Summers and his team believed that assessing environmental, social and governance (ESG) indicators in their investment strategy could yield benefits on multiple fronts. Two years later, Oregon State Treasurer Tobias Read issued his department’s first ESG stewardship report and won legislative approval to hire an ESG investment officer. And, earlier this year, the city of Boston revised its cash investment policy to favor local community banks with positive ESG records when it allocates the city’s cash deposits.

According to the most recent data from the U.S. Census Bureau and Federal Reserve, in 2016 state and local governments—through both public treasuries and retirement funds—held approximately $6.855 trillion in assets.[1] Our data at the US SIF Foundation showed that state and local public fund respondents to our 2016 Trends Survey assessed ESG criteria across $2.62 trillion of those assets under management.[2] In other words, in 2016, state and local governments were assessing ESG issues across 38% of the assets under their jurisdiction.

The initiatives being undertaken by the financial administrators of Chicago, Oregon and Boston offer compelling examples of sustainable investing’s appeal.

In Chicago, City Treasurer Kurt Summers (recently retired) and his team began a three-year portfolio modernization project in 2015. Along with more traditional modifications to the Office of the City Treasurer’s investment policy statement (IPS), the team developed a tailored ESG model to drive greater risk-adjusted returns while better aligning city investments with the social interests of Chicagoans. The model provides customized weightings to ESG factors and has shown strong initial results. In the three quarters after implementing its ESG model last July, the office reported better performance than in any other three-quarter stretch since Summers took office in December 2014. Moreover, the model allowed Chicago to achieve a carbon-neutral portfolio and spurred the city to become the first in the world to sign on to the global Principles for Responsible Investment (PRI) program as well as become a member of US SIF. The specifics of the model are available in the treasurer’s recent report Demystifying ESG in the Public Sector: A White Paper on Chicago’s Innovative Approach to ESG Integration.

In Oregon, the Corporate Governance and ESG Stewardship Report details the approach the Oregon State Treasury is taking to ensure sustainable long-term returns for the $102 billion in assets it manages. Besides integrating ESG factors into its financial model, the department also emphasizes “off-balance-sheet” activities to improve market transparency and to align the priorities of portfolio companies’ managers with those of their long-term shareholders. To this end, the treasurer’s office is engaging in shareholder advocacy on issues including climate change risks, executive compensation and gender equity on boards of directors. The treasurer’s office joined the shareholder coalition that advanced a resolution pushing Occidental Petroleum and ExxonMobil to better disclose climate-related risks and opportunities; the resolution won majority support at both companies’ annual meetings last year.

Meanwhile, the city of Boston Treasury Department, under Chief Financial Officer (CFO) Emme Handy, has revised its cash investment policy, which governs $1.5 billion in city assets, to facilitate greater investment in community institutions and initiatives while keeping the assets safe and liquid. The city will keep a minimum of $100 million deposited in Boston community banks. Additionally, the city has earmarked another $150 million for purchase of other “suitable and authorized” investments, as outlined in its cash investment policy, that have high ESG ratings with comparable financial flexibility and returns. Boston also recently joined the Ceres Investor Network on climate risk to expand its shareholder activism.

The appetite for sustainable investment appears to be growing across the nation. Cities and states responding to the US SIF Foundation’s most recent biennial Trends Survey, last year, reported a collective $2.9 trillion in assets engaged in sustainable investing strategies, moving beyond the previously mentioned 2016 figure. The recent examples of Chicago, Boston and Oregon demonstrate why state and city treasurers can find it well worth their while to take a new look at sustainable investing.

Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment.

[1] Federal Reserve, State and local governments, excluding employee retirement funds; total financial assets, 2016. Assessed May 5, 2019. “2016 Annual Survey of Public Pensions: State- and Locally-Administered Defined Benefit Data Summary Brief.” U.S. Census Bureau. Page 2.

[2] US SIF Foundation, “Report on U.S. Sustainable, Responsible and Impact Investing Trends 2016.”