Limited alternatives to poor stewardship performers, warns Illinois treasurer

Michael Frerichs says the state is not afraid to pull money from managers and discusses BlackRock's ESG commitments.

The Illinois treasurer has revealed that the state is engaging its largest managers on voting and stewardship, but warned that there is a limited pool of low-cost managers in the US to pick from.

Speaking at a media briefing on stewardship, Michael Frerichs said Illinois was in frequent communication with its asset managers and was continuously assessing them. The treasurer oversees an investment portfolio of around $50 billion in public money.

“We score them, we’re in regular communication with them,” he said. “It’s one thing to put forward a policy initiative, to put something in a statement that’s delivered once and put on a shelf, but we’re in communication with them frequently.”

Asked by Responsible Investor how Illinois viewed potential misalignments on stewardship, Frerichs said it was important that managers bought into the state’s understanding of ESG. He added that the state was not afraid to end relationships if necessary, including over stewardship.

“We integrate [ESG] throughout our investments, and we want our asset managers to do the same thing… If they don’t see the world the same as us, if they don’t follow up with companies like we want them to, then we replace them.”

However, he said the choice available to US asset owners was limited. “We like to engage before looking at other options [for managers]. Unfortunately in the US if you’re looking as a fiduciary at lower-fee investment firms, we don’t have as many options.”

State pension funds in Republican-controlled jurisdictions have run into a similar problem when asked to pull funds from managers under anti-boycott laws.

The Oklahoma Public Employees Retirement System got into a dispute with the state treasurer last year when it exercised a fiduciary exemption to avoid pulling funds from BlackRock and State Street. The system said that an RFP process had failed to turn up managers which were better from a pricing and performance standpoint.

Manager stewardship and voting have become points of contention for asset owners in the UK, with a number of firms pulling mandates over the issue and the country’s largest pension providers warning of increasing frustration.

This has also come up in the US, where New York City comptroller Brad Lander has warned that the city’s pension funds may re-evaluate manager relationships over climate performance.

Asked specifically about BlackRock, which has become a lightning rod for dissent on both sides of the ESG debate, Frerichs said that he had engaged directly with CEO Larry Fink on the issue.

“We think that Larry Fink has spoken well on a lot of these issues. I’ve reached out, I’ve thanked him for that. He has also become a target from the right,” he said.

“That being said, their actions in terms of both voting and engagements don’t always live up to his rhetoric. I’ve travelled to New York, I’ve met with them, we’ve explained what we expect.

“We know that there is a fight and there’s pushback out there. Just as others are dumping them for a supposed activist investor approach, if they decide to pull back that’ll be a problem for us in Illinois. So we’re actively monitoring and engaging with them.”