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ESG Integration

Environmental stewardship is a shared responsibility.  Furthermore, corporations with poor or short-sighted environmental policies may face fines for environmental violations, supply-chain issues, or higher operating costs due to changes in environmental regulations.  As such, environmental and climate-related factors may have adverse impacts on the Treasurer’s investment portfolio.  Accordingly, we at the Treasurer’s Office recognize we must consider the following factors to mitigate our risk exposure.

 

  • Climate Change – Climate change has serious risk implications for investors and the businesses in which they invest.  Shifts in temperature, weather patterns, and rising sea levels impact supply chain, consumer demand, physical capital, and communities.  Extreme weather events are occurring on a more frequent basis and with increasing intensity.  Events such as droughts, floods, and storms may lead to scarce resources and disruptions in operations and workforce availability.
  • Sustainability – Companies should consider how the environment and related regulation will impact operations and vice versa.  Routine assessment of the nexus of operations, natural resource dependency, and the environment may be communicated to investors through sustainability reports.  Quantitative reporting on environmental risks, policies, performance, and goals assures investors that companies are aware of potential risks and seeking to mitigate them appropriately.
  • Environmental Innovation – A company’s awareness of environmental risks and opportunities may have a significant impact on its operational capacity, financial position, and long-term sustainability.  With new environmental technologies, regulations, and business strategies rapidly developing (e.g., carbon pollution regulations and energy efficiency opportunities), it is important that companies maintain the knowledge and innovation to capitalize on these evolving changes.  This may include, among other strategies, maintaining a board member or senior executive with expertise or ample experience with environmental science and technology.

An essential part of effective investment stewardship and risk management is identifying good governance practices.  Good governance mitigates investment risks and may provide collateral benefits to the beneficiaries of the assets under the Treasurer’s stewardship.  As such, the Treasurer’s Office recognizes and evaluates corporate investment opportunities by the following governance factors:

 

  • Board Accountability – The board of directors is elected by the company’s shareowners and is accountable to them. The role of the board is to represent shareowners’ interests in their oversight of management. Industry best practice recognizes that the board of directors must maintain a level of independence from management to exercise proper oversight. The Treasurer’s Office considers an independent director to be one who:  (1) is not an executive of the company, (2) does not have direct familial ties with executive management, (3) does not have significant business ties to the company, and (4) is not a significant shareholder.
  • Board Diversity – Research demonstrates that a board comprised of diverse directors is better equipped to ensure multiple perspectives are taken into account. Diversity is inclusive of skill sets, professional backgrounds, gender, race/ethnicity, and LGBT.
  • Transparency – With due respect to proprietary information, companies should strive to be transparent in their business operations. Disclosure concerning matters of shareowners’ interest, including ESG policies, provides useful information and mitigates risks inherent with undisclosed matters. 
  • Fee Transparency – Transparency and accuracy in the reporting of fees from service providers is also essential to secure competitive rates. The Treasurer’s Office endorses the Fee Reporting Template developed by the Institutional Limited Partners Association (ILPA). This reporting template captures greater detail on fees, expenses, and carried interest paid to General Partners and their affiliates. Not only does it enhance disclosures, but its broad endorsement helps increase uniformity in the field.
  • Sensible Executive Compensation Programs – Excessive executive compensation programs may signal board entrenchment and exacerbate income inequality. Executive compensation should be reflective of company performance and be within a reasonable range of compensation levels at peer companies. In addition, an annual vote on executive compensation is a better option than a biennial or triennial vote because it affords shareholders the opportunity to provide the company’s compensation committees more timely feedback about the appropriateness of executive pay levels. Finally, companies should have “clawback” policies in place that enable them to recoup compensation later found to be unwarranted because of fraudulent activity or financial restatements.
  • Robust Shareholder Rights – Shareholders should be given tools to convey their perspectives to the board of directors, which serves as their representative body. Tools that provide shareowners with the appropriate mechanisms for communication include the ability to (1) call a special meeting, (2) act by written consent, and (3) have access to the proxy to nominate their own candidate(s) for the board assuming certain threshold requirements. In addition, a majority voting standard for the election of directors ensures that directors have the confidence of their constituents. Boards of directors should also be declassified to enable shareholders to weigh-in on each director on an annual basis.
  • Ethical Conduct – Companies conducting business with or in receipt of investments from the Treasurer’s Office must comply with all laws and regulations under which they are governed. Further, the Treasurer’s Office expects companies to meet (if not exceed) all applicable ethical and professional standards of conduct.