News From The Chicago City Treasurer's Office

– Setting the record straight on Chicago's investing strategy – CityOfChicago

As Chicago's treasurer, I have always encouraged a robust public debate concerning the city's finances to ensure we make decisions that secure Chicago's long-term vitality. That's why it was so unfortunate to read yesterday's piece in the Crain's Opinion section that spread misinformation and outright falsehoods about my office's efforts to incorporate environmental, social, and governance (ESG) factors into our investment decisions. While the piece was almost too offensively inaccurate to merit a response, I wanted to make sure that Chicagoans have the real facts and can form their own opinions—so let me set the record straight.

 

 Unfortunately, not only was yesterday's opinion piece—by someone with no significant investment expertise—blatantly wrong; it was also mistaken on the basic facts of my office's responsibilities and investment parameters. First, it claims that our efforts would impact pension funds—that's false, our office only has full authority to implement this investment strategy within the city's operating portfolio. Second, it claims that our office purchases stocks—that's false, our portfolio is entirely fixed-income. And third, it claims that our efforts involve divestment strategies—that's false, ESG is entirely unrelated to divestment. These fundamental errors should call into question whether the opinion piece intended to make a serious contribution to the public debate, or simply to spread propaganda.

So let us look seriously at the facts. My primary concern as Chicago's treasurer has been—and will always be—my fiduciary responsibility to protect and grow the city's nearly $8 billion investment portfolio. As part of my commitment to this responsibility, I have implemented a number of investment strategies that, together, have led to roughly $75 million in additional investment returns per year. And all of us—as residents and taxpayers—stand to benefit.

Recently, my office announced plans to introduce the evaluation of ESG issues into our portfolio. This strategy continues to prioritize core financial factors—credit quality, duration, yield, and others—and expands to include a comprehensive evaluation of thousands of other factors including data security, consumer protection, CEO compensation, financial transparency, livable wages, and many more.

These issues have a direct impact on financial performance—and on people's lives. But for too long, they've been ignored, leading to unintended risks that shouldn't be placed on the people of Chicago. That's why we are engaging in this rigorous process of evaluating all available factors to achieve our objective of producing better long-term, risk-adjusted returns. It is indisputable that this process is consistent with my fiduciary duty—in which I need to take into account all factors that are material to financial performance.

Make no mistake—ESG factors are material to financial performance, and don't just take my word for it. Barclays has found that, between 2009 and 2016, portfolios with high ESG ratings noticeably outperformed their counterparts. Similarly, Morningstar has found that similar funds performed better than their peers in 2017. Even the U.S. Department of Labor—under the current Administration, no less—has stated that fiduciaries can incorporate ESG factors because, in many situations, they “present material business risk.”

Indeed, there's a reason why investors are increasingly relying on ESG to maximize financial performance—with 84% of asset owners surveyed by Morgan Stanley either considering or actively using ESG factors. As of year-end 2015, more than $8.72 trillion of U.S.-domiciled assets were invested according to similar strategies. To date, more than 2,000 investment managers, asset owners, and service providers have joined the United Nations-supported Principles for Responsible Investment, representing roughly $70 trillion in global assets under management.

To be clear, considering ESG variables does not constitute divestment from the energy sector or from any one sector for that matter. In my view, as I have stated publicly on many occasions, less sophisticated strategies like divestment are ineffective because they fail to provide an incentive for companies to change their behavior, and because they ignore hundreds of other factors that also have a tremendous impact on the long-term viability and value of companies. The data breach at Equifax and the misrepresentation in incentive structure at Wells Fargo are just a couple of examples proving that we need to look at a full range of factors, rather than just carbon emissions.

The city of Chicago has an opportunity to simultaneously generate higher returns and drive change on so many issues that Chicagoans care about, whether it be consumer protection, labor rights, board diversity, climate change, and more. Our efforts cannot be derailed by falsehoods—and I am confident that a healthy public debate will produce broad support for the comprehensive and thoughtful approach that we will continue to champion.

Again, as a fiduciary, it is incumbent upon me to consider all material factors when making investment decisions with public funds. It is clear that considering additional data—data that can predict long-term company viability—lowers risk and improves returns for the people of Chicago. So, contrary to the musings of some political commentators, our work is at the heart of fiscal prudence.

Kurt Summers

Chicago City Treasurer

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