The city of Pittsburgh’s pension fund has all but divested from fossil fuel companies – an accomplishment that Mayor Bill Peduto has touted in his bid for reelection.
“As of today, less than 1% of our pension fund is tied still to fossil fuels, and it will be down to zero by next year – not 2035, next year,” Peduto said during a meet-the-candidates forum held by 14th Ward Democratic Committee in early March.
But while the Democrat celebrates the milestone, the market had already been moving in that direction: In 2020 – months after Peduto asked the city’s seven-member pension board to withdraw investments from firms dealing with fossil fuels, firearms, and for-profit prisons – financial adviser Marquette Associates determined that those companies represented less than 2% of the fund’s investments.
At the end of last year, the fund’s invested assets totaled nearly $600 million.
As the city’s divestment initiative reaches completion, the pension board is exploring where it can instead move capital as part of a sustainability agenda. Pittsburgh’s chief resiliency officer, Grant Ervin, said it’s a matter of aligning the fund’s financial performance with social and environmental priorities.
“That alignment is just now starting to take shape,” Ervin said, “What we're doing is kind of setting a direction with regards to how we want to manage and invest our portfolio. And that's both to kind of encourage risk reduction, increase [the financial] return, but then also support a social and environmental-positive approach.”
This method is called “ESG investing” because it measures environmental, social, and corporate governance outcomes, along with financial results, in gauging the strength of an investment.
In September, the board adopted ESG guidelines for screening new investments and engaging in shareholder activism. In February, it began to solicit bids from “socially responsible” global equity investment managers to oversee a portion of the pension fund that is dedicated to ESG investing.
While Ervin noted that the city’s ESG investing program is still “nascent,” he said it could one day help to finance projects or sectors that “directly benefit communities,” such as “affordable housing development or renewable energy generation or energy efficiency projects.”
‘Freeing up’ capital for community investments
There’s a growing consensus that social and environmental outcomes should be a priority in allocating assets. Leaders of the U.S. Securities and Exchange Commission are seeking to meet growing demand for ESG-related disclosures. A 2018 report, meanwhile, found that ESG factors are considered across a quarter of the country’s $46.6 trillion in professionally managed assets – a 38% increase over 2016.
Some worry that ESG investing comes at the expense of financial returns. But in 2020, Larry Fink, who leads the major investment management firm BlackRock, warned business executives that the instability associated with climate change poses financial risks of its own.
In fact, “ESG funds have performed on par or even better than some traditional funds … especially last year,” noted Douglas Anderson, the director of Pittsburgh’s finance department. Studies show that, during the coronavirus pandemic, ESG stocks and bonds have been less risky and more resilient than their traditional counterparts.
Socially-responsible investing, however, is not a new idea. Swissvale-based Heartland Capital Strategies has worked with labor unions since 1995 to steer pension assets to firms and projects that would advance worker and community interests.
“Pension funds were investing in bad Wall Street houses, which were using those monies in a very negative way,” said Heartland’s managing director, Tom Croft.
“They were investing in things like really bad mergers and acquisitions. They were investing in sweatshops around the world,” Croft said. “And they were just in general … using workers’ money, essentially to try to [extract] very short term profits [that] were at the expense of workers and communities.”
Heartland has provided guidance to a national network of pension leaders, who Croft said have lobbied companies to develop climate action plans, reduce pay disparities between employees and executives, and increase gender diversity on corporate boards. They’ve also made “economically targeted investments” in local housing and industries, Croft noted.
Pittsburgh, too, could use its pension fund to eventually finance local affordable housing and renewable energy projects: “Really, the whole idea is to kind of free up capital to invest in things that are good for the region as a whole over the long run."
ESG investing: A magnet for investment?
Pittsburgh’s pension board consulted with Croft in developing its new ESG investing program. Croft said the initiative gives the city an opportunity to “build a powerful capital strategy” for ventures such as environmentally-friendly construction projects, renewable energy development, and vehicle electrification.
He noted that Pittsburgh’s effort could serve as a model for other parts of the country.
“There have not been a lot of cities in the United States that have jumped out in front of this. You do have the cities on the coast: You've got … New York City, you've got San Francisco,” Croft said. “But the city of Pittsburgh is one of the few in … middle America.”
Since the 1980s, New York City has dedicated 2% of its pension assets to economically targeted investments, with a focus on affordable housing. And the city comptroller’s office said ESG priorities inform decisions across all pension funds, which in February totaled about $250 billion.
New York City’s investment strategy has produced results that match or exceed industry benchmarks for similar assets, the comptroller’s office said in an email. For example, its affordable housing mortgage investments regularly outpace their benchmarks, the comptroller’s office said, with the benefit of bringing properties back onto city tax rolls and revitalizing neighborhoods.
The comptroller’s office noted, however, that ESG investing presents some challenges as it enters the mainstream. It still has a way to go, for instance, to ensure investors have enough data to measure and compare sustainability outcomes that differ across industries. Regulatory changes, along with more expertise among investment consultants,
could help to standardize the system, the comptroller’s office said.
But even as Pittsburgh makes its foray into ESG investing, Ervin, who oversees the city’s resiliency efforts, said the program promises to help draw fresh investments to the area. He said renewable energy and electric vehicle manufacturers have recently expressed interest in locating operations in Pittsburgh.
“They're like, ‘We saw what you guys are talking about, and we think this is revolutionary … How can we come to Pittsburgh and learn more?’” Ervin said, referring to the city’s sustainable investment initiative.
“That's one of the big opportunities I think that we're at the precipice of,” Ervin said. “And so, the region is well-poised for that with the things that we've been trying to do. It's just a matter now of starting to get economic development and policy makers in line with that. And I think we're on our way there.”
