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Albany committee reviews ESG screening options; public urges divestment from Caterpillar and Lockheed Martin
Summary
PFM presented ESG screening approaches (industry exclusions, revenue-based filters, Sustainalytics ESG risk scores) and estimated impacts on the city's approved buy list; multiple public commenters urged divestment and criticized recent changes at Morningstar/Sustainalytics; committee directed staff to return with additional information.
PFM Asset Management presented options for incorporating environmental, social and governance (ESG) criteria into the City of Albany's investment strategy, describing a menu of approaches that includes industry or sub-industry exclusions, revenue-based screens, third-party ESG risk ratings and targeted environmental-risk filters.
Justin Nocello (PFM) told the Audit and Fiscal Sustainability standing committee that the firm's approved buy list for corporate holdings is about 300 names and that excluding whole industries such as oil and gas or aerospace and defense would eliminate a relatively small share of that buy universe. He said a sample ESG risk threshold (Sustainalytics score under 30) would leave roughly 78% of approved issuers available to the city. PFM estimated the additional fee to implement an ESG screening overlay at about 1'to'2 basis points depending on complexity (PFM's example: 1 basis point on a $30 million portfolio equals about $3,000 per year).
Why it matters: any change to the city's investment policy that narrows the eligible universe could reduce diversification and affect yield and liquidity; it also formalizes how the city's investments align with community values.
Options PFM outlined and salient points from the presentation:
- Industry / sub-industry exclusions: remove entire industry categories (for example, energy services, integrated oil and gas, refiners, pipelines, or aerospace/defense sub-industries). - Revenue-based screens: exclude firms that derive a specified share of revenue from particular activities (direct/indirect involvement thresholds). - ESG risk ratings: use a third-party provider (PFM cited Sustainalytics, a Morningstar subsidiary) to set a cut-off (example: exclude issuers rated as high or severe ESG risk). - Environmental-risk overlays: additional filters focused on carbon, land or water risks.
PFM's illustrative impact: industry/sub-industry exclusions would eliminate less than 10% of the firm's approved buy list; applying an ESG risk threshold of 30 would leave about 78% of issuers available.
Public commenters urged a more aggressive approach. Lucia, identifying herself as a member of Bay Area Divest and an Albany resident, urged the committee not to rely on Sustainalytics and said, "they actually watered down their ratings method to remove human rights as a meaningful consideration for risk." Peter Bernhardt, an Albany resident, proposed a hybrid approach combining industry exclusions with targeted company-level divestments and named Caterpillar as an example. Additional callers raised similar concerns about weapons manufacturers and human rights implications.
Committee members and staff discussed trade-offs:
- Administrative burden: several members said a company-by-company divestment process could be administratively onerous and suggested a policy built on industry and score thresholds would be more manageable. - Data vendors: Nocello and staff acknowledged multiple providers (Sustainalytics and MSCI were discussed) and noted periodic revisions to vendor methodologies can change issuer scores. Nocello said some providers review rated companies annually and that changes in methodology can move many issuer scores at once. - Cost and diversification: PFM noted modest historical impacts to annualized return from ESG-constrained fixed-income strategies in their examples, and reiterated the 1'to'2 basis-point implementation fee range; PFM warned that narrowing the universe reduces diversification and can alter portfolio characteristics.
Next steps and committee direction: Committee members requested additional data, including the underlying list of approved corporate issuers and their ESG risk/environmental scores where licensing allows, and asked PFM and staff to return with more detailed options. Councilmember Jordan suggested a possible threshold (mentioned during the discussion as an example) that would exclude specific high-profile contractors; staff agreed to bring a follow-up to a future meeting. The chair took the committee's statements as direction for staff to return with further information and options.
No formal policy change or vote to divest was taken at the meeting; the committee asked staff and PFM to provide additional information for a future agenda.
