Leaders at the Oregon Investment Council will formally start integrating environmental, social, and governance factors (ESG) into their $107 billion state investment portfolio—so long as the consideration does not detract from their fiduciary duty to beneficiaries.
Trustees approved the amendment to the state investment policy at a September board meeting, the governing body said Tuesday. The OIC oversees allocations for the state trust funds, including the Oregon Public Employees Retirement Fund, the Common School Fund, and the State Accident Insurance Fund.
“By formalizing our expectations that ESG is an important facet to consider as we evaluate investment opportunities, we’re saying to the companies and managers we invest in that how you do your work matters,” Oregon State Treasurer Tobias Read said in a statement. “We’re also confirming to staff that improving our understanding of how ESG relates to the bottom line matters, too,” he added.
But the trustees also specified that the revised top-down policy should not interfere with the system’s fiduciary duty to its beneficiaries, in deference to advancing a social cause. That has been a sticking point in the discussion around sustainable investing, even as investors increasingly incorporate it into their investment decisions.
“This is a welcome evolution to our guidance from the Council. Over the next year, the Investment Division will work on integrating ESG into our investment process to help us make decisions that are beneficial to the long-term sustainability of our portfolio,” Rex Kim, Treasury chief investment officer, said in a statement.
Last year, Illinois passed legislation that required public investment leaders to insert ESG into their investment decisions, which was the most direct sustainable investing policy from a state until that point.
But factoring sustainability into a portfolio remains controversial. This year, the Department of Labor proposed a rule to choke off ESG corporate investments, arguing social objectives could run counter to a pension fund’s fiduciary duty to beneficiaries counting on investment returns for their retirement futures.
That proposal was met with fierce opposition from all corners of the ESG industry, including advocacy group Forum for Sustainable and Responsible Investment (US SIF). More than 1,500 comment letters were filed against the proposal from asset owners, managers, record keepers, and others. The objections suggest that many investors increasingly consider ESG material to returns.
Data for sustainable performance is also improving. Experts in a growing body of research suggest that ESG portfolios outperform during market downturns, as well as over the long term. According to a report from Harvard academics, “investors are becoming sophisticated enough to tell the difference between greenwashing and value creation.” Greenwashing is an insincere attempt to appear environmentally conscious without enacting anything meaningful.