Chicago is set to become the first US city to integrate environmental, social and governance (ESG) issues into the management of all its $8bn (€6.8bn) treasury assets, City Treasurer Kurt Summers has revealed — adding that the city’s pension funds, with assets of $25bn, may also follow suit.
The city’s new ESG strategy – which comes into effect from July – will apply to the city’s entire treasury assets, consisting of an $8bn fixed income portfolio.
Summers told RI in an interview that “as of the beginning of the next quarter…100% of our assets will go through ESG screening”, adding that “once we’ve proven this model to be successful with our treasury assets we will look at pension fund assets as well”.
The third largest US city has also set a target to have a “carbon neutral portfolio by 2020”, as part of its ESG push, and has announced that it will become a signatory to the UN-supported Principles for Responsible Investment (PRI) next month.
Its Treasurer’s Office – headed up by Summers since 2014 – acts as custodian and manager of all cash and investments for the city, its four employee pension funds, and the Chicago Teachers’ Pension Fund.
Summers, a former Senior Vice President at alternatives firm Grosvenor Capital Management, was appointed to the position by Chicago Mayor Rahm Emanuel, the former chief of staff to President Obama. He was speaking at a US SIF: The Forum for Sustainable and Responsible Investment event in Washington DC.
RI was told that the city’s in-house investment team has developed its own “ESG scoring metric”, as part of the new strategy. The new metric, which draws on a “number of existing data services”, will be used to “create a minimum high grade ESG score” – akin to a credit score – that the portfolio must abide by with its investments.The incorporation of ESG considerations into a fixed income portfolio is “more difficult to do” than for equities, according to Summers, who said: “traditional credit analysis doesn’t naturally lend itself to ESG, if you are not an equity owner you do not have the ability to take on a proxy fight or seek governance changes”.
But he argues that it has the potential to be more “impactful” due to the higher frequency in the issuance of debt than equities.
Chicago’s pioneering ESG strategy, which Summers described as “very sophisticated and complicated”, took over a year and a half to develop and RI was told that “every major data provider on this subject” was consulted during its construction.
The city has also created a database which includes information across a range of ESG sub themes for the portfolio to use, which, Summers argues, makes its investment team “far more knowledgeable as investors about what the real risks are underneath some of these companies”.
Summers also spoke to RI of his collaboration with peers such as the City of San Francisco and the State of Illinois, on how to make the integration of ESG more “robust”. He also added that he was due to speak to the Comptroller of Houston in the coming weeks on how they “can work together and share learning”.
Last month, the San Francisco Employee Retirement System named State Street’s Andrew Collins as its Director of ESG and Responsible Investing.
In another first, the City of Chicago also became the first US city to become a member of US SIF, joining the US responsible investing association this month.
Chicago’s decision to join the PRI follows that of Employees’ Retirement System of the State of Hawaii – which manages assets of $17.31bn – which joined the global initiative last month.