New Jersey moves toward formalizing ESG standards

  • New Jersey formed ESG working group in February
  • Plans to hire outside consultant to help score ESG factors
  • Pension previously exited a JLL fund over concerns with payday lending company

New Jersey State Investment Council plans to hire an outside firm to help guide the retirement system through environmental, social and governance issues faced by the companies in its $76.7 billion investment portfolio.

The State Investment Council formed a working group to discuss ESG issues following its Feb. 1 meeting. A staff presentation at the Council’s March 28 meeting included a framework for developing an ESG policy, including plans to retain an outside firm to help the retirement system score its myriad investment holdings for adherence to ESG guidelines.

The Council’s long-term goals include establishing formal policies it can use to review and monitor the activities of its investment managers and publicly traded companies, taking the evolving legal and political environment into account, according to the presentation. The Division of Investment, which manages the state’s investment portfolio, identified ESG standards as a way to capture additional returns.

“Incorporation of an analysis of ESG issues may improve investment returns and reduce investment risk,” according to the presentation.

A number of public pensions, including California Public Employees’ Retirement System and Maine Public Employees Retirement System, have incorporated ESG components into their investment processes. California State Teachers’ Retirement System famously divested from its stakes in a Cerberus Capital Management fund after discovering it held a stake in Freedom Group, which manufactured the assault rifle used in the Sandy Hook Elementary School shooting in Newtown, Connecticut.

Investments in firearms, specifically, have been targeted in recent weeks in the aftermath of the school shooting at Stoneman Douglas High School in Parkland, Florida, which left 17 students and teachers dead.

“One thing I’m proud of is our heightened focus on ESG investing, which happened before the tragedy in Parkland, Florida,” said SIC Chairman Tom Byrne during the meeting. The Parkland shooting brought those efforts “into sharper focus,” he added.

While ESG considerations weren’t a formalized factor in New Jersey’s investment processes previously, the council did sell a stake in a JLL Partners fund after Council discovered the vehicle had exposure to a payday lender that had run afoul of the Consumer Financial Protection Bureau. Payday lending is illegal in New Jersey.

“As we demonstrated in the case of payday lending, if something is illegal in New Jersey, we will divest,” Byrne said.