Making Prudent Choices. Investing means making choices. For the investment officers at the Illinois State Treasurer’s Office, it means choosing investments that are risk-appropriate, high-performing, and meet or exceed the benchmark. It means making investments that reflect our commitment to sustainability, inclusion, and sound corporate governance, given that these factors boost our investment returns and strengthen the economic well-being of Illinois citizens and institutions.
The Illinois Sustainable Investment Act. In 2019, sustainable investment practices were codified into law. The Illinois Sustainable Investing Act (PA 107-473) provides that all state and local government entities that hold and manage public funds, including the Illinois Treasurer, “shall prudently integrate sustainability factors into its investment decision-making, investment analysis, portfolio construction, risk management, due diligence and investment ownership in order to maximize anticipated financial returns, minimize projected risk, and more effectively execute its fiduciary duty.” The Office maintains a standalone Sustainable Investment Policy Statement and also incorporates sustainability language and processes within each of its investment portfolios’ Investment Policy Statements to further fulfill its fiduciary duties to the people of Illinois.
Sustainability Factors. In order to fulfill that fiduciary duty and maximize returns, we need to focus on more than just short-term gains and traditional indicators. Additional risk and value-added factors that may have a material and relevant financial impact on the safety and performance of our investments need to be integrated into the decision-making process. These material sustainability factors include (1) environmental; (2) social capital; (3) human capital; (4) business model and innovation; and (5) leadership and governance factors.
Sustainability is a key component of long-term value creation. For investments made on behalf of college savers and retirement account holders, the Office of the Illinois Treasurer looks for companies that have a strong potential to generate long-term, sustainable value, meaning that they will be profitable not just in the next fiscal quarter, but throughout the next quarter century. Companies will struggle to create sustainable value if they do not build resilient relationships with stakeholders and address material risks driven by environmental, social, governance, human capital, and business model factors. Companies should develop strategic plans, identify and mitigate material risks, have adequate board oversight, and recognize emerging growth opportunities to their businesses to better position themselves to generate consistent sustainable value. It is possible for companies to capture short-term profits through practices that do not adequately consider all stakeholders, but that approach will not garner long-term growth.
Our engagement strategy. Our office engages with companies that we believe may not be properly addressing financially material risks. These could be related to the company’s governance structure, the safety and accessibility of its products, its treatment of its workforce, or the diversity of its leadership. We firmly believe that engaging with companies through constructive dialogue can help them provide greater transparency to investors, improve their risk management processes, and ultimately help ensure long-term, sustainable value. We also encourage company best practices through our proxy voting activities. When engagement is not effective, we may file a shareholder proposal at a company’s annual general meeting, or we may vote in favor of other shareholder proposals aimed at improving a company’s risk management processes. More information on this can be found in our Proxy Voting Policy Statement.
That’s how the Treasurer’s Office is raising the bar. We endeavor to take investment standards to a new level, one that recognizes that environmental, social, human capital, business model, and governance practices are strongly related to resilient, more innovative, better-performing companies. As a long-term investor, we believe we can help raise the bar for the entire industry. That's why we're promoting an investment philosophy that fuses traditional investment objectives – optimal risk-adjusted returns, low expenses, and diversification – with a focus on sustainability, corporate responsibility, and risk management. By doing so, not only do we position ourselves to protect shareholder value and maximize returns, but we can also help foster a business culture that is more attentive to structural trends, societal impacts, and long-term growth.