Illinois legislature makes it mandatory for state investments to consider ESG factors

The Illinois state legislature has passed a law which would require asset managers of all state and local government investments to “develop, publish, and implement sustainable investment policies applicable to the management of all public funds under its control”, including a list of “authorized investments”.

The Sustainable Investing Act, which will come into force in January 2020, stops short of prescribing how Illinois public institutions should consider ESG factors, only that they have “a duty to recognize and evaluate these materially relevant factors”.

Public agencies and local governments now have until the end of the year to demonstrate how sustainability factors are integrated “into the investment decision-making, investment analysis, portfolio construction, due diligence, and investment ownership of public funds to maximize anticipated financial returns, minimize projected risks, more effectively execute fiduciary duties, and contribute to a more just, accountable, and sustainable State of Illinois”.

The bill was first tabled by Illinois State Treasurer Michael Frerichs, who oversees a $32bn public investment portfolio, and signed into law in August of this year. Under the law the Office of the Treasurer will publish its investment policy – including which sustainability factors are considered “in evaluating investment decisions” – annually in a local newspaper.

In a statement, Treasurer Frerichs said that while sustainability factors do not replace traditional financial analysis, it enhances understanding of “the risk profile and return potential of individual investments”.Separately, a wide-ranging federal bill which would require listed companies to disclose, in their proxy filings, how their long-term business strategy relates to ESG considerations has been introduced into the US Congress

The ESG Disclosure Simplification Act, tabled by the House Financial Services Committee, will also establish a permanent Sustainable Finance Advisory Committee. In the event the bill is passed, the Committee is to submit a report to the Securities and Exchange Commission detailing the challenges and opportunities associated with sustainable finance, and recommended policy changes to encourage its scaling up, “in particular environmentally sustainable investments”. The report will be due within 18 months of the Committee’s first meeting.
However, it is unclear whether the Democrat-sponsored legislation can gain the support it will require to pass through a hostile Republican-controlled Senate.

Elsewhere are encouraging signs that ESG considerations are being taken seriously by state lawmakers.

In Delaware, where more than 60% of Fortune 500 companies are incorporated, the state legislature recently passed a law which clarifies that “sustainable investment strategies” are compatible with fiduciary duty.

The New Jersey state treasury also recently tendered for a service provider to assist with the “implementation and application” of the ESG policy which it adopted last year.