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Markkula Center for Applied Ethics

Trends in the Implementation of ESG Policies in State and Local Governments

City Hall Building

City Hall Building

John P. Pelissero

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John Pelissero (@1pel) is a senior scholar in government ethics with the Markkula Center for Applied Ethics at Santa Clara University. Views are his own. 

Environmental, social, and governance (ESG) policies are being adopted by state and local governments at a steady pace. Leaders of states, counties, cities, and school districts are recognizing the ethical importance of such policies, and the residents and taxpayers of these entities are calling on their governments to pay attention to ESG. Governments’ adoption and implementation of ESG is becoming an important ethical value in jurisdictions across the country.

There are three primary ways in which governments may promote ESG in their jurisdictions: (1) adopting ESG goals within government operations and services; (2) implementing ESG policies and regulations; and (3) incorporating ESG factors into decisions on government assets and liabilities. In each area, governments seek to promote the public interest in its policy decisions.

In this essay, we look at state and local governments and the implementation of ESG practices. Whereas it is clear that the national government has been a leader in making decisions that affirm the importance of environmental and social factors in advancing the common good of the nation (Pelissero 2022), progress on ESG at the state, county, and city level in the United States is growing.

States and ESG Policies

Establishing and enforcing standards that will serve the public interest is an important ethical role of state governments. The national government establishes many social and environmental policy standards to which state and local governments must comply and may emulate. However, in recent years it is state governments that are being more active in regulating practices that promote the goals of ESG in their states. Although there is no national database on state ESG policies, trends are emerging.

Zaidi (2019) noted that more states are becoming leaders on regulating how capital is managed to increase sustainable investments in “pension systems, trust funds, and board composition…” According to Joshua Lichtenstein and Michael Littenberg, “Californa is at the forefront of what is considered ‘ESG regulation,’…” (Los Angeles Times, 2021). California is often cited as a leader in integrating ESG factors into California’s Public Employees’ and Teachers’ Retirement Systems (see Jones, Lamm and Elkind, 2020).

This approach to achieve sustainable investments in pension systems is growing in other states, including Connecticut, Illinois, New Jersey, New York, Oregon, and Washington. According to Zaidi, Illinois’ new law in 2020, the Sustainable Investing Act (Illinois State Treasurer, 2022), could become a national model for ESG policy. It mandates that “all public or government agencies involved in managing public funds …’develop, publish, and implement sustainable investment policies applicable to the management of all public funds under its control” (Zaidi, p. 2).

Oregon is another state to embrace greater ESG standards. According to (Minn 2020), “Leaders at the Oregon Investment Council will formally start integrating environmental, social, and governance factors (ESG) into their $107 billion state investment portfolio—so long as the consideration does not detract from their fiduciary duty to beneficiaries.”

Significantly, research by the U.S. SIF: the Forum for Sustainable and Responsible Investment, shows that in 2019 state and local governments increased to $2.9 trillion the assets involved in sustainable investment portfolios (Woll 2019).

States governments are expected to continue the trend of focusing on ESG factors in investments of public funds and in government operations. From an ethical standard, continuing to adopt ESG policies in the states would benefit the common good.

Local Governments and ESG Initiatives

Whereas a national database on ESG policies in local governments, including cities, counties, and school districts, does not exist at that time, some emerging trends are becoming apparent.

An increasing number of cities and counties are following the lead of their states when it comes to managing its public pensions. Zaidi (2019) cites the examples of Boston, Chicago, New York, and Seattle among large cities that are advancing sustainable investment practices in public pension funds.

The National League of Cities (2022) is reporting on the trends in “sustainability and resilience” programs and policies being adopted in U.S. cities. The approach to sustainability covers a wide range of city actions from electric vehicle charging stations to waste management to climate resilience. The examples and case studies are providing best-practice cases for all cities to consider when promoting the public interest in their policies and programs. 

The U.S. Conference of Mayors (2022) has a number of national initiatives to promote the values of environmental and social factors in cities’ governing processes. It has formed an Alliance for a Sustainable Future to facilitate cities working with the private sector “to accelerate carbon reduction programs and sustainable development, as well as to strengthen partnerships toward mutual sustainability and climate goals.”

A few large cities are taking strong actions to promote ESG in their portfolios and operations. Chicago’s city treasurer committed to principles for responsible investment and developed a model for ESG investments that were aligned with city residents’ social interests (Woll 2019). This was adopted as the official investment policy of Chicago, with specific language on “sustainable factors” in decision-making (City of Chicago 2021).

Boston’s policy on investments calls for ESG factors to be used whenever possible with the city’s cash funds. In fact, Boston provides a useful overview of its broad approach to addressing non-financial ESG factors into investment decision-making:

  • Environmental factors include green buildings, smart growth, climate change, clean technology, pollution/toxics, sustainable natural resources, and water use and conservation.
  • Social factors may include human rights, avoidance of tobacco/harmful products, community development, diversity, workplace safety, and labor relations.
  • Governance factors cover board independence, anti-corruption, board diversity, executive compensation, and corporate political contributions (City of Boston 2019). 

Many cities were directly involved in the global climate change conference (COP 26) in Glasgow in 2021. A subset of these cities has emerged as demonstrating climate leadership (“A List” cities) including Chapel Hill, Cincinnati, Dallas, Fayetteville, Iowa City, Louisville, St. Paul, and Washington, D.C. In addition, several U.S. counties have earned the A List rating from CDP Global, including Dane County, WI; Boulder County, CO; and Cuyahoga County, OH. (CDP, 2022).

School districts, another form of local government, are promoting ESG in their curriculum, operations, and programs, too. The case for more school districts to adopt ESG is slowly growing, as parents, teachers, and students are increasingly demanding more attention to social responsibility and care for the planet in their schools (Johnson 2020).

We can expect that the evolving ESG landscape in local governments will continue to be reported on by organizations, such as the National League of Cities, U.S. Conference of Mayors, and the CDP Global, as these governments pursue ESG as an ethical pathway to justice, fairness, and the common good. 

References

Boston, City of (2019). “Cash Investment Policy.” 

CDP (2022). “Cities A List 2021.” 

Chicago, City of (2021). “City of Chicago Investment Policy.” 

Illinois State Treasurer (2022). “Sustainable Investing Act.”  

Johnson, Lin III (2020). “School Districts Must Embrace Social Responsibility.” Philanthropy News Digest (December 30). 

Jones, Dave, Ted Lamm, and Ethan Elkind (2020). Fiduciary Duty in the 21st Century: California Roadmap. Berkeley, CA: UC Berkeley School of Law, Center for Law, Energy and Environment.

Los Angeles Times (2021). “Q&A: Social & Environmental Governance (ESG) Panel.” Los Angeles Times (November 16). 

Minn, Sarah (2020). “Oregon Integrates ESG Formally into Investment Policy.” (September 15).

National League of Cities (2022). “Sustainability and Resilience.” 

Pelissero, John P. (2022). “The federal government and the ethical value of ESG policy.” Markkula Center for Applied Ethics (January 26). 

U.S. Conference of Mayors (2022). “Alliance for a Sustainable Future.” 

Woll, Lisa (2019). “State and Local Governments Eye ESG Investing Strategies for Returns and Impact.” (June 25). 

Zaidi, Ali (2019). “Insight: States take lead on ESG investment regulations while Feds stand still.Bloomberg Law. 

 

Feb 8, 2022

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