Chicago Treasurer writes to peers urging them to take advantage of ESG

Kurt Summers sees “enormous value proposition”

Outgoing Chicago City Treasurer Kurt Summers has written to every US state treasurer and comptroller urging them to take advantage of the “enormous value proposition” that ESG integration offers public sector investors.

The letter – which was also sent to the administrators of the country’s top 100 cities and counties – was accompanied by a white paper documenting Chicago’s own ESG journey and setting out three steps US cities, counties and states can take to develop their own approach.

Last year, under Summers’ leadership, Chicago, which has a $8bn investment portfolio, became the largest city in the US to integrate ESG factors into 100% of its corporate bond investment decisions and the first to create an overall portfolio ESG score and sign up to the UN-supported Principles for Responsible Investment (PRI).

The city’s pioneering approach appears to be paying off too. In the three quarters “post-ESG implementation” it has performed better than in any three-quarter stretch since Summers took office in December 2014.

“ESG integration presents an enormous value proposition to us as public-sector investors,” Summers wrote, “not only driving more favorable risk-adjusted returns but also empowering us to align our investments with our broader policy priorities”.

The three steps outlined in the white paper titled ‘Demystifying ESG in the Public Sector’ include:

Step 1: Evaluate status quo and identify opportunities to drive additional value with ESG.
Step 2: Identify and address barriers to ESG integration.
Step 3: Integrate ESG approaches into security selection and overall portfolio management.

The paper stresses the “tremendous collective power over the behavior of some of the world’s largest corporations” public treasuries could wield if they integrate ESG considerations into their investment decisions.State and local governments in the US manage $3.2trn in financial assets – greater than the annual gross domestic product of the UK – and have “influence” over $9trn in employee retirement funds.

“Despite the challenges”, the paper adds, public treasuries “must take a more active role in managing their portfolios, including but not limited to integrating ESG factors into their investment decisions”.

The push by Chicago on ESG followed a three-year “portfolio modernatization effort” initiated by Summers in 2015, which identified ESG integration as a “significant opportunity” in 2017.

Following this, Summers, who “strongly prefers ESG integration to divestment”, tasked his staff to “build a model that allowed for customized weight on ESG factors, thus creating ESG scores that better reflect the office’s unique mandate”.

The city elected to build its own model as no external provider offered the degree of customisation it required, according to the paper.

Chicago’s model, which currently identifies 170 ESG factors, uses MSCI as its primary source of “raw data” but also draws on data from Sustainalytics, RobecoSAM, Moody’s and “other specialty data providers”.

It is also revealed in the paper that Chicago has achieved a “carbon-neutral investment portfolio” – an ambition it set for 2020 – by offsetting every dollar invested in the “world’s top 200 coal and oil/gas reserve owners” with at “least one dollar in an environmentally-friendly security”, including $82m in green bonds issued by the African Development Bank and the State of Massachusetts.

Summers, who was appointed to the board of US responsible investment body US SIF in January, left his role at the US’ third largest city last Friday after opting not to run for re-election.

Democrat Melissa Conyears-Ervin was elected Treasurer last month in a run-off election.

A spokesperson for the former Treasurer told RI that Summers would be taking the summer off before announcing his next steps.

On May 28, Responsible Investor hosts a webinar exploring how US treasurers are responding to key ESG themes.