Opinions June 25, 2019

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

US SIF’s Lisa Woll provides examples of strategies public pension funds are using to incorporate environmental, social and governance (ESG) investing with retirement funds and other assets.
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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.

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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.

 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.

[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.”

Data and Research June 25, 2019

Participants Lack Knowledge About Retirement Plan Rollovers

Forty-two percent don’t even know it is possible to keep assets in a plan once one leaves an employer.

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A survey by Financial Engines found that few Americans are knowledgeable about the ins and outs of rollovers from 401(k) plans. Forty-two percent of those between the ages of 35 and 65 who left a job where they had money in a 401(k) plan were unaware that they could leave their money in the plan.

Twenty-eight percent didn’t know that some retirement plan distribution choices trigger tax liabilities and penalties, and 51% didn’t know that it is possible to move money from an individual retirement account (IRA) into a 401(k) plan.

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“Employers spend large amounts of time and money providing employees with access to high quality and low cost investment options in their plan,” says Christopher Jones, chief investment officer at Edelman Financial Engines, noting that his firm has rolled out a new fiduciary distribution review program that provides departing employees private, on-on-one meetings about their options.

Ric Edelman, co-founder and chairman of financial education and client experience at Edelman Financial Engines, notes that 46% of respondents to the survey don’t know what they are paying in 401(k) fees, which could hinder their decision about what the right course of action is. In addition, 37% thought they did not pay any 401(k) fees.

“Not understanding your distribution options can harm your ability to reach your retirement goals,” Edelman notes. “Often, leaving the money with your old employer is the best choice.”

According to Edelman and Jones, rolling money out of a plan can result in higher, potentially less apparent costs, including taxes, IRS penalties and other costs. IRAs often feature proprietary investment options from the same provider, they say. IRA fees are often higher than 401(k) fees, and by exiting a plan, an investor is losing existing fiduciary and creditor protections, the survey report suggests.

“Big companies that employ hundreds or thousands of workers have better bargaining power to negotiate the lowest management and fund fees possible,” the survey report says. “That means more money stays in their employees’ accounts and compounds over time. Larger plan sponsors also typically offer more customized funds that are more closely monitored than individuals can access on their own through an IRA.”

Financial Engines estimates that a person who kept a $100,000 balance in a 401(k) plan rather than an IRA would have 4.7% more in their account after 10 years—or $4,600 in additional savings.

It is due to these reasons that a Callan survey this year found that 70% of plan sponsors want to retain assets in their plan. However, when switching jobs, only 26% of workers have rolled their money over to another employer-sponsored 401(k). Twenty-eight percent moved the money to an IRA, but 39% kept the money in the plan. Sixty-nine percent of workers have not consulted with an adviser about distribution options. Among those who withdrew money before retiring, 26% got no information from any source.

Financial Engines says it is important that people become more knowledgeable about rollovers, as they are changing jobs more often. Citing data from Mercer, the company notes that voluntary turnover among workers in 2018, excluding retirements, was 15.5%, up from 14% the year before. 

Among those who did work with an adviser on their distribution choices, 80% said they felt confident about their decision. Nearly 80% said it was extremely or somewhat important that financial advisers act as fiduciaries.

In conclusion, Financial Engines recommends that participants seek out advice from a financial planner before making a distribution decisions.

Edelman Financial Engines’ findings are based on a survey of 1,071 people conducted in February and March using the Qualtrics Insight Platform with a panel sourced from Lucid Marketplace.

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