DEALING WITH ESG (Socially Responsible Investing)

GIOA Conference 3/21/2019

David CarrAssistant City TreasurerCity of Santa Monica

Santa Monica Perspective

ESG/SRI Definition/Principles

Fiduciary and Political Considerations

Implementing ESG/SRI into Investment Decision Making

Measuring/Benchmarking ESG-Related Performance

Slide 23/21/19

Areas of Focus

What is ESG/SRI?

E for Environment

S for Society

G for Governance

Slide 33/21/19

What is ESG/SRI?

Responsible investment is an approach to investing that aims to incorporate environmental, social, and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.

Source: UN Principles of Responsible Investment www.unpri.com

Slide 43/21/19

http://www.unpri.com/

SRI/ESG Considerations

Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals; Usman Hayat, CFA & Matt Orsagh, CFA, CIPM; Codes, Standards, and Position Papers; October, 2015. https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n11.1

“A critical factor in the financial performance of investments is the investor’s ability to

identify drivers of the expected risk and return of investments. Financial analysts and

portfolio managers are expected to be familiar with the financial factors that drive the

value of an investment. However, issues that are difficult to measure in monetary terms

and that do not form part of traditional financial metrics also affect the risk and return of

investments—at times, decisively. In general, they are referred to as environmental,

social, and governance (ESG) issues.”

Slide 53/21/19

https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n11.1

3/21/19 Slide 6

Environmental, Social, and Governance Issues in Investing: A Guide for Investment Professionals; Usman Hayat, CFA & Matt Orsagh, CFA, CIPM; Codes, Standards, and Position Papers; October, 2015. https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n11.1

https://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n11.1

Weight of ESG Factors

Source: Barclays Study on Sustainable Investing and Bond Returns 2018 Slide 73/21/19

3/21/19 Slide 8

Political/Fiduciary

Political Considerations for Public Agencies

ESG vs Traditional SRI

Impact of ESG on credit ratings/investment returns

Slide 93/21/19

Santa Monica Investment Policy

Slide 103/21/19

ESG Impact on Returns

Companies with higher ESG scores tend to have slightly higher returns

Governance scores the most highly correlated

Increase of 0.3% to 0.4% annually

Slide 113/21/19

ESG in Credit Analysis

CREDIT RATING AGENCY SIGNATORIES

Axesor Rating Liberum Ratings

Beyond Ratings Microfinanza Rating

China Chengxin International Credit Rating Co., Ltd Moody’s Corporation

Dagong Global Credit Ratings Group RAM Ratings.

Fedafin AG Rating-Agentur Expert RA GmbH

Fitch Group, Inc Rating and Investment Information, Inc

Golden Credit Rating International Co., Ltd.. Scope Ratings

Japan Credit Rating Agency Spread Ratings

JCR Eurasia Rating S&P Global Ratings

Slide 123/21/19

Source: UN Principles of Responsible Investment www.unpri.com

http://www.unpri.com/

ESG in Credit Analysis

Country: US

Sector: Banking

Date: 7 February 2018

ESG factor: Social and governance

Action: Credit rating downgraded from A to A-; outlook stable

Key rationale: Asset growth capped until the company further enhances its governance

and compliance and risk management to the standards required by the regulator; the

downgrade also reflects ongoing ramifications of its retail sales practices issues.

Source: S&P Global Ratings

Slide 133/21/19

https://www.capitaliq.com/CIQDotNet/CreditResearch/SPResearch.aspx?DocumentId=38226758&From=SNP_RES

ESG Implementation

One component of investment analysis/decision making

Typically relates to corporates but can be applied to other asset classes

Variety of tools

Slide 143/21/19

3/21/19 Slide 15

Fed Agency (GSE)62%LAIF

8%

Corporate19%

Commercial Paper0%

Supranationals8%

Munis3%

SANTA MONICA PORTFOLIOAS OF 2/28/2019

3/21/19 Slide 16

ESG Metrics

3/21/19 Slide 17

3/21/19 Slide 18

3/21/19 Slide 19

Conclusions

Use of ESG/SRI increasing

Many sources/tools for information (Bloomberg, Sustainalytics, ISS, MSCI, brokers, etc.)

No Evidence of Negative Impact on Returns

Different strokes for different folks

Slide 203/21/19

SOCIALLY RESPONSIBLE INVESTING

Presented by

David JonesTreasury Administrator

March 21, 2019

AGENDA

• OVERVIEW

• SOCIALY RESPONSIBLE INVESTING

• INVESTMENT POLICY

• PORTFOLIO COMPOSITION AND CHARACTERISTICS

• RESOLUTIONS AND ORDINANCES

• QUESTIONS AND ANSWERS

OVERVIEW

Oakland is the 8th largest city in California (population

426,074)

Unemployment rate for December 2018 was 3.2%

(below State 4.2% and U.S. 3.9%)

Port of Oakland fifth busiest container Port in the U.S., handling 99% of all

containerized goods in Northern California.

2017 was the busiest year in 97-year history ($2.42M containers)

Oakland International Airportranked 11th for cargo traffic in North America

over $13 million enplaned passengers for 2017

Bay Area Transportation Hub (Heart of BART system sit

in downtown Oakland, 5 freeways converge in Oakland

Amtrak trains, BNSF & Union Pacific)

Many new accolades2nd Most Ethnically Diverse Large City (WalletHub, Feb 2019)

Oakland Makes Best Trips List for 2019 (National Geographic

Travel, Nov 2018)

Socially Responsible Investing

Definition:

Socially Responsible Investing (SRI), also known as

sustainable, socially conscious, “green” or ethical

investing, is any investment strategy which seeks to

consider both financial return and social good.

• Oakland’s Approach to SRI

Investment Policy

• Updated yearly

• Resolution approval by Council

• Incorporates Socially Responsible Investing

Portfolio Composition and Characteristics

• Size of portfolio has been steadily growing

• Comprised of Federal Agencies, Medium Term Notes, Money Market Funds and

Local Agency Investment Fund (LAIF)

• Days to maturity – 307 days

• Effective rate of return for December 2018 – 2.24%

RESOLUTIONS/ORDINANCES

Nuclear Free Ordinance

Under the provisions of a voter-approved Measure, the Oakland City Council

approved Ordinance No. 11062 C.M.S. effective December 16, 1988, which

restricts the City’s investments in U.S. Government Treasuries. The Treasurer

shall make every attempt to invest in any available short-term option that

provides approximately the same level of security and return as Treasuries. In

the event that no reasonable alternatives exist, or to the extent that the City

may experience financial hardship as a result of investment in these

alternatives, the City Council may adopt a waiver for a period not to exceed 60

days, as authorized by the Ordinance, allowing the City to invest in U.S.

securities.

.

Linked Banking Ordinance

Pursuant to Ordinance No. 12066 C.M.S. adopted by

Council on July 14, 1998, the City has established a Linked

Banking Service Program. This reference applies to

depositories for both the City of Oakland and the Port of

Oakland banking needs. Depositories are defined within

the Ordinance as “all banking services utilized by the city

including the Port of Oakland operating fund, with the

exception of investments made through investment banks

and brokers/dealers.”

Tobacco Divesture Resolution

On February 17, 1998, Council adopted Resolution

No. 74074 C.M.S., which prohibits investment in

businesses deriving greater than fifteen percent of

their revenues from tobacco products.

Fossil Fuel Divestiture Resolution

On June 17, 2014, Council adopted Resolution No. 85053

C.M.S. which prohibits the investment or ownership stake in

any companies that extract, produce, refine, burn or distribute

fossil fuels.

Firearm or Gun Manufacturer Divestiture Resolution

On March 5, 2013, Council adopted Resolution No. 84242

C.M.S. which prohibits investment or ownership stake in any

manufacturer of firearms or ammunition. Treasury Bureau

does not have any direct investment exposure to firearms or

ammunition manufacturer.

QUESTIONS AND ANSWERS