Saddled with significant debt and a long record of getting less than full contributions from state government, New Jersey’s public-employee pension system seems to be in no position right now to be picky about its investments.
Yet there are many who believe the state pension system and others like it should adopt a finance strategy that focuses not just on investment returns, but on the types of companies that are being invested in.
Such a practice would use pension-system dollars to reward companies that are doing something worthwhile, like following sustainable environmental practices or implementing policies that treat their employees better.
And even as the panel that sets policy for New Jersey’s $70 billion pension system has attempted to justify hefty fees it has been paying Wall Street managers of hedge funds and other controversial alternative investments as being good for the overall portfolio, there’s some evidence that investing in a socially responsible way can also benefit the bottom line for those who are doing the investing.
Gregg Sgambati, a Mahwah resident, came to Trenton for a recent meeting of the New Jersey State Investment Council to make an in-person pitch for socially responsible investing, or what’s known as ESG investing. (The three letters are stand for environmental, social and governance)
“It is an investing approach that encapsulates Wall Street’s non-financial evaluation of a company or investment fund in the days before it invests in the company or fund,” Sgambati told NJ Spotlight in a subsequent interview.
“It helps the investment professional explore the breadth and depth of a company’s corporate social-responsibility agenda and say just how good a corporate citizen it is,” he said.
Sgambati is managing director and head of ESG solutions at Manhattan-based S-Network ESG Solutions, which provides ratings and indexes covering corporate responsibility. But he said his appearance before the investment council was simply as a concerned citizen with some “knowledge of the industry.”
The concept of investing for more than just the biggest financial return is not a new one, but it has gained new interest in recent years as investors have sought to reward companies for adopting policies that line up well with their own views on issues like climate change or employee relations.
In fact, New Jersey already has adopted some policies that trade off possible investment returns for broader policy reasons. In 2005, New Jersey was among the first of many states to enact pension-fund divestment laws in response to the brutal actions of Sudan’s Khartoum regime against villagers in the Darfur region.
And New Jersey, beginning in 2008, also prohibited the investment of state-pension system assets in foreign companies that do business with Iran. That action followed Iran’s decision under then-Pres. Mahmoud Ahmadinejad to restart its nuclear program, and it also came at a time when the former Iranian leader was making a series of inflammatory public statements, including threatening to “wipe Israel off the face of the map.”
But investing with altruistic intentions doesn’t mean good returns have to be sacrificed, Sgambati and others say, because ESG investing can help to lower a portfolio’s overall risk. In fact, a recent post on The New York Times’ DealBook blog delved into the way some firms have been using robotic analytics to find investments that are both profitable and socially conscious.
Still, fully adopting an ESG investment strategy could be a difficult fit for New Jersey’s pension system because its managers have a fiduciary duty to maximize investment returns for the roughly 770,000 current public employees and retirees whose retirements are funded by the pension system.
And their job has become increasingly difficult as governors from both political parties over the past two decades have provided only a fraction of the state contributions that actuaries say should be going into the pension to keep it in good health. In fact, in some years there have been no state pension contributions made at all.
[related]That’s left the overall pension system with an unfunded liability of roughly $44 billion. Some experts have also predicted that several individual funds that make up the larger pension system could go broke within a decade.
To protect better against risky stock-market investments, the pension system for roughly the past decade has been stockpiling stakes in hedge funds, venture-capital funds and other alternative investments. And though state officials maintain those diversified investments have proven to be effective for the overall portfolio, the fees that are required to be paid to the private Wall Street money managers who handle those investments have soared into the hundreds of millions, including more than $700 million during the 2015 fiscal year.
The alternative investments have also brought the state into indirect relationships with some companies involved in what many consider to be unsavory business practices, including in one high-profile case a company that does payday lending, which is banned in New Jersey.
A spokesman for the state Department of Treasury declined comment when asked about a possible role for ESG investing strategies in the management of the pension system.
But Doug O’Malley, director of Environment New Jersey, made the case that a socially responsible investment strategy would be a winning one.
“Wall Street is finally figuring out that doing good can mean doing well — and so should New Jersey,” O’Malley said. “Sustainability is not just a catchphrase, but has started to revolutionize corporate America as companies have realized that a lighter carbon footprint can also mean long-term economic gain.”
“The New Jersey State Investment Council should consider socially responsible investments and move towards divestment of fossil-fuel companies both because it makes sense for the climate and for the long-term bottom-line of the pension fund,” he said.