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Illinois Is Going Broke, But The ESG Movement Is Here To "Help"

Forbes Online

Friday, March 2, 2018  |  Article  |  David Blackmon , Contributor Opinions

Pensions (70)
Don't look now, but the so-called ESG movement is now coming to Chicago.  As if the Windy City and State of Illinois didn't already have enough problems to deal with, the Wall Street Journal reports that Chicago's Treasurer, Kurt Simmons, who manages the city's various pension funds, is now "seeking permission from the city council to use environmental, social and governance (ESG) factors to inform investment decisions."

As I pointed out in early January, this approach to investing based on social issues rather than return on capital has worked so well in California and New York that it has played a significant role in pushing state and local retirement systems in those states to massive deficit situations.  As the Chicago Tribune recently reported,  Illinois' "unfunded pension liability is growing faster than taxpayers’ ability to keep up. With about a quarter of general fund revenues going to the pension system, other priorities get crowded out." 

The current situation with unfunded pension liabilities has the Illinois legislature searching for increasingly radical solutions, such as forcing local communities to start sharing in the funding of teacher' pensions.  Indeed, the state's predicament is so dire that it has some speculating that Illinois could become the first state to actually declare bankruptcy.

Into this breach steps the ESG movement, with its demands that pension fund managers de-emphasize anticipated rates of return as their main investment priority, and instead begin making investment decisions based on an array of social issues that the ESG movement prefers.  Where Chicago's public pension funds are concerned, doing this would create an entire new level of risk, as the funds have traditionally been conservatively invested in highly-rated government and corporate bonds.

For those who are unaware, the ESG movement is basically the second generation of what began as the "Divestment" movement.  That movement, pushed for the last decade by radical environmental activists like Bill McKibben, sought to convince cities, states, universities and pension fund managers to overtly divest any investments in fossil fuels stocks or other entities that the activists found to be objectionable.  That movement has suffered a long string of failures over the years, in places like Vermont, San Francisco, Seattle, and The University of Colorado, as responsible fund managers chose to continue basing investment decisions on returns on capital rather than engaging in virtue signaling exercises.

With the movement foundering, organizers settled on a more subtle, passive-aggressive approach.  ESG doesn't demand that fund managers overtly divest from fossil fuels, it just suggests they engage in a "strategy" to invest some significant portion of their capital in ESG-friendly funds that have been popping up in recent years to take advantage of this opportunity.  Indeed, Chicago City Councilman John Arena spent a year trying to build support for an outright divestment strategy, but ultimately decided to work with Simmons on the ESG proposal instead.

As the Wall Street Journal points out,  Mr. Summers proposes to "allow the city to invest in new types of fixed income such as green bonds, which typically finance environmentally friendly infrastructure, energy and real-estate projects, as well as bonds issued by foreign governments that are aimed at reducing poverty. The city would consider water and energy use, human and labor rights and executive compensation and shareholder rights when evaluating the new investments."  Nowhere in that description does the phrase "return on investment" appear.

Unfortunately, a recent report from the American Council for Capital Formation (ACCF) details how engaging in similar strategies has played a major role in taking the California Public Employees Retirement System (CalPERS) fund from a surplus in 2007 to a funding deficit of $138 billion.  That same report details how ESG has worked similar magic for New York's retirement funds.

If Mr. Simmons gets his way, Chicago will now embark down this same road.  It's hard to see how the largest city in a state that is already teetering on the brink of bankruptcy can afford to take on this kind of virtue-signaling "help."