What is Sustainable Investing?
“The investment decisions we make today will have a profound, lasting impact on our economy, our environment, and our quality of life for generations to come.”
Michael Frerichs
Illinois State Treasurer
Letter from Michael Frerichs, the Illinois State Treasurer
My approach to sustainable investment is grounded in fiduciary duty. As a fiduciary, my primary goal is to maximize financial returns. Integrating sustainability is not in contradiction to this goal. Fiduciary duty, in my view, calls for active oversight, prudent risk management, and responsible governance. Consequently, it requires consideration of material risks and long-horizon opportunities, including those related to sustainability.
The widespread attack on sustainable investment and diversity, equity, and inclusion lacks substance and conviction. While opponents are working to force their own values into the way we make investment decisions, they have failed to make a convincing argument for why their approach is financially beneficial or material. We know that workers are an important asset to companies and should be treated as such, we know that diverse teams are in an enhanced position to make better decisions, and we know that climate change is already and will continue to impact the economy and environment. That’s why I expect companies to manage sustainability risks that have the potential to hinder their long-term profitability, rather than ignoring them to appease political whims.
My staff and I continue to look past the noise and focus on the things that truly matter. Our goal is to achieve sustainable and durable investment returns over the long term. My team incorporates sustainability factors into our decision-making, particularly because that approach can improve investment performance and lead to a more resilient, inclusive, and sustainable global economy. Our office considers it a key part of our fiduciary duty to assess all material risks that may have an impact on companies’ long-term value.
Sustainability Factors Assessed by the Office
Leadership and Corporate Governance Factors
Leadership factors address how a company manages issues tied to its business model or common industry practices that may conflict with the interests of stakeholders, including government, communities, customers, and employees. If these issues are not managed well, they can create legal, regulatory, reputational, or operational risks. The Treasurer supports strong corporate governance practices that promote accountability, transparency, fair executive pay, shareholder rights, and ethical behavior. The Treasurer encourages policies and practices that reflect these principles.
These factors include compliance, ethics, political influence, and supply chain oversight.
Environmental Factors
Environmental stewardship is a shared responsibility. Environmental and climate-related issues can also affect the financial performance of the Treasurer’s investment portfolio. For that reason, the Treasurer considers environmental factors important when evaluating a company’s long-term value and risk.
Social Capital Factors
Social factors focus on how a company manages its relationships with customers, communities, the public, and government. These relationships can affect investment returns, especially when controversies harm a company’s reputation or weaken public trust.
Important social factors include human rights, access and affordability, customer welfare, data security, consumer privacy, fair disclosure and labeling, responsible marketing, and community reinvestment.
Human Capital Factors
Companies that view their workforce as essential to long-term success should manage human capital with the same care they give to financial and physical assets. Human capital factors include the policies and practices that affect employee productivity, engagement, recruitment, retention, compensation, and advancement.
They also include how employers support workplace health and safety and respect workers’ rights, including the right to organize and bargain collectively.
Business Model and Innovation Factors
Sustainability issues can affect a company’s strategy, innovation, operations, and long-term performance. A company’s ability to identify risks and opportunities and adapt its business model is an important part of creating long-term shareholder value.
The impact of sustainability issues on innovation and business models including corporate
strategy and other innovations in the production process are integral to a company’s financial and
operating performance. The ability of a company to plan and forecast viable opportunities and
risks
