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A closer look at sustainable finance in the US: Oregon

Paul Hodgson looks at ESG developments in Oregon

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This is the first in a series of RI Snapshots dedicated to ESG in key US states. Each will explore the activities of local pension funds, policymakers and the wider investment community. This article focuses on Oregon, which – like its Californian neighbour further south – has become something of a hotbed of ESG.

Oregon is one of the country’s biggest renewable energy generators. The fourth largest, to be precise, with more than three quarters of its utility-scale electricity generation coming from hydro, wind or solar. So it makes sense that Oregon’s Senator, Jeff Merkley, is behind the recent Retirement Investments for a Sustainable Economy (RISE) Act of 2019 at the national senate, which enables federal employees to divest from fossil fuels through a “Climate Choice investment option” for their retirements savings – known as the Thrift Savings Plan (TSP).

The TSP is the largest DC pension plan in the world, so changes to investment allocations could have a significant effect on the market.

The bill is supported by the Sierra Club and Divest Invest. In April, Senator Merkley and Senator Maggie Hassan wrote to the US Government Accountability Office to address the need to “examine the risks to federal workers of continuing fossil fuel investments as climate chaos continues to intensify”. Federal pension plans currently offer investors choices about the “amount and risk allocation” of their savings, but not the types of industries in which their money is invested. The TSP has approximately 5.5 million participants with approximately $558bn in assets, and is the largest defined contribution plan in the world, so changes to investment allocations could have a significant effect on the market.

Governor’s legislative agenda
Oregon’s Governor Kate Brown approved the Oregon Environment Protection Act last month, adopting the federal environmental standards of the Clean Air and Clean Water Acts – in place before Trump took office – and ensuring they’re retained in Oregon regardless of whether the federal government weakens them. Governors in California, Colorado, Hawaii and Washington states have adopted similar legislation. In the same month, Oregon moved closer to adopting a statewide cap-and-invest programme to reduce Oregon’s greenhouse gas emissions and meet the state’s goals. The bill is called HB 2020 and passed out of the Joint Committee on Carbon Reduction on 17 May. In March, Governor Brown signed Senate Bill 256 into law, which banned offshore oil & gas drilling and made permanent a moratorium on oil & gas leasing in Oregon’s Territorial Sea, which would have expired in 2020. Also this year, the Governor took steps to strengthen Oregon’s gun laws, and asked the state legislature to pass two bills to help keep firearms out of the hands of children and domestic abusers. The proposed legislation, Senate Bill 978, includes policies on safe storage and retail sales of firearms. Finally, the Oregon Environmental Quality Commission adopted Cleaner Air Oregon rules in November 2018, closing the regulatory gaps left after the implementation of federal rules that ‘allow’ some release of toxic chemicals into the atmosphere.Treasurer and state pension fund investment policies
Like many other states, Oregon’s Public Employees Retirement Fund (OPERF) is controlled by the state Treasurer, Tobias Read, who recently spoke on an RI webinar on the future of ESG leadership at US public pension funds. The goals of the Treasury office in 2019 are: “to protect shareholder rights, improve corporate board diversity, enhance investor disclosure practices, especially regarding climate-related risks and opportunities, and seek to ensure executive compensation is aligned with shareholder objectives”. Its stewardship activities include direct engagement, proxy voting, securities litigation, empirical research, regulatory advocacy and raising public awareness. More specifically, a spokesman for the Treasurer says the state has engaged with companies about “ensuring safe workplace conditions, promoting alignment between performance and compensation, improving disclosure of climate risks, and improving board-level accountability and diversity.”
It has a proxy voting twitter feed, which announces its votes as they happen as well as tweeting about ESG issues. The Treasurer, for instance, backed proposals for an independent chair, a board matrix, a report on the risks of flooding on the Gulf coast and for lobbying transparency at the recent, controversial ExxonMobil annual meeting. Elsewhere, resolutions on diversity, climate risk and sustainability disclosure are regularly supported, while directors seen to have conflicts of interest, or particularly heavy CEO pay packages are opposed. And in November last year, OPERF joined the coalition behind a set of investor principles for the civilian firearm industry, calling for improved safety, education and background checks.
On diversity in particular, the state is taking what it calls “a national leadership role in advancing diversity both across the investment industry in general, and among the boards of companies in which it invests in particular”. In addition to its support of diversity initiatives in its investments, OPERF is also “invested with several highly successful minority and woman-owned managers,” according to corporate governance director Jennifer Peet. The Treasury has also served on the board of directors of the 30 Percent Coalition, which is dedicated to board diversity.
Treasury, at the direction of the Oregon Investment Council, has adopted a more activist approach to its investments, while remaining largely ‘buy and hold’. As part of this, it engages regularly with policymakers, corporates and regulators including the US Securities and Exchange Commission, often joining forces with other shareholders. “As a mid-sized fund, Oregon is able to engage more effectively in partnership with other institutional investors,” explains a spokesman.
As a last resort, it will file securities lawsuits. “We are involved as a class member in thousands of cases every year,” the spokesman says, pointing to its current role as lead plaintiff in a case against communications company CenturyLink. The case involves accusations that the firm has used similar tactics to Wells Fargo to add unauthorised services and lines to customer accounts. “Before that, we were lead plaintiff in cases against JP Morgan and Bank of New York,” he adds. On divestment, the state has divestment mandates for Sudan and Iran, which will “become effective when funded by the Legislature”. The Treasury does not publish its proxy voting policy because it includes strategy, though – as seen by its Twitter account – it does disclose its votes. Treasury has an ESG investment officer who leads efforts to obtain data on investment risk posed by ESG factors.