CITY OF SAN MATEO
City Council Special Meeting
March 6, 2023
6:00 PM
City Hall Council Chamber
Entrance is on O’Farrell Street
COUNCIL MEMBERS
Amourence Lee, Mayor
Lisa Diaz Nash, Deputy Mayor
Rich Hedges
Adam Loraine
Rob Newsom Jr.
AGENDA
THIS MEETING CAN BE ATTENDED IN PERSON OR REMOTE BY JOINING ZOOM – SEE CODES BELOW.
PUBLIC COMMENTS WILL BE ACCEPTED BOTH IN PERSON AND REMOTEL Y.
SEE END OF AGENDA FOR OPTIONS AND INSTRUCTIONS ON HOW TO PARTICIPATE IN THE MEETING.
To join via Zoom – click here:
March 6, 2023
To join via telephone: (408) 638-0968
Webinar ID: 895 1377 9544 Passcode: 838746
Council Member Lisa Diaz Nash will teleconference into this meeting from:
364-1, Naoshima, Kagawa District, Kagawa 761-3110, Japan
CALL TO ORDER
Roll Call
STUDY SESSION
The public will have an opportunity to comment during the consideration of these items.
1. Investment Policy Environmental, Social, and Governance Considerations Receive a report and presentation on Environment, Social, and Governance (ESG) or Socially Responsible Investing (SRI) and provide feedback and guidance on the potential for adding either concept into the City's Investment Policy.
CEQA: This ESG/SRI study session is not a project subject to CEQA, because it is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. (CEQA Guidelines Section 15378(b)(5).)
ADJOURNMENT
----------------------------------------------------------------------------------------------------------------------------- AGENDAS:
Agendas and material are posted on the City’s website on the Friday preceding each Council Meeting and can be viewed on the City's website at
www.cityofsanmateo.org
. Any supplemental material distributed to the Council after the posting of the agenda will be made part of the official record.
WATCHING A MEETING ON TV:
City Council meetings are broadcast live on Comcast/channel 27, Wave/channel 26, or AT&T/channel 99.
For transmission problems during the broadcast, please call (650) 522-7099. For all other broadcast comments, call (650) 522-7040, Monday-Friday, 8 a.m. - 5 p.m.
WATCHING A MEETING ON A COMPUTER:
There are three ways to stream.
1) Public Meeting Portal
www.cityofsanmateo.org/publicmeetings
2) City YouTube channel and stream it on YouTube:
http://youtube.com/CityofSanMateo
3) Watch TV live stream:
https://www.cityofsanmateo.org/193/Channel-San-Mateo-Live-Stream
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PUBLIC COMMENTS/REQUEST TO SPEAK
Prior to the Meeting
Send comments to:
[email protected]
until 4 p.m. the day of the meeting.
During the meeting
By Zoom:
Click the link at the top of the agenda and you’ll be added to the meeting. All attendees are muted by default. When the item of interest is open for consideration, select the “Raise Your Hand” icon and you will be called on at the appropriate time.
By telephone:
Call (408) 638-0968 and enter the conference ID found at the top of the meeting agenda. When the item of interest is open for consideration, select *9 to raise your hand. When called upon, press *6 to unmute, state your name and provide your comments.
In Person:
At the meeting complete a “Request to Speak” form, submit a request at the speaker kiosk or scan the QR code.
ACCESSIBILITY:
In compliance with the Americans with Disabilities Act, those with disabilities requiring special accommodations to participate in this meeting may contact the City Clerk’s Office at (650) 522-7040 or [email protected]
. Notification 48 hours prior to the meeting will
enable the City to make reasonable arrangements to ensure accessibility to this meeting.
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CITY OF SAN MATEO
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CITY OF SAN MATEO
Agenda Report
City Hall
330 W. 20th Avenue
San Mateo CA 94403
www.cityofsanmateo.org
Agenda Number: 1 Section Name: STUDY SESSION Account Number: 10-2021 File ID: 22-6579 TO: City Council
FROM: Drew Corbett, City Manager
PREPARED BY: Finance Department
MEETING DATE: March 6, 2023
SUBJECT:
Investment Policy Environmental, Social, and Governance Considerations RECOMMENDATION:
Receive a report and presentation on Environment, Social, and Governance (ESG) or Socially Responsible Investing (SRI) and provide feedback and guidance on the potential for adding either concept into the City's Investment Policy.
BACKGROUND:
Strategic Initiative 34 of the City Council's 2022-23 Strategic Plan is to study the fiscal impact of adopting an Environmental, Social, and Governance (ESG) provision for the City’s investment policy. Chandler Asset Management (Chandler), the City's investment advisor, provided an ESG presentation to the Investment Advisory Committee on July 21, 2022.
While the Council’s initiative is to study the fiscal impact of ESG, it is important to distinguish it from Socially Responsible Investing (SRI), which is commonly confused with ESG.
SRI is the most common and straight-forward investment governance strategy, as it uses exclusion based on the investor’s ethical and moral values. If the City were to opt for SRI strategy, it would need to develop an exclusion list (i.e., no issuers whose principal operations are directly related to fossil fuels and guns).
ESG is less common and has become very subjective, as the investor proactively promotes its environment, social, and governance factors that drive the marketplace. ESG would need to develop a scorecard for the City’s investment entities to be evaluated based on selected criteria, which can include, but is not limited to the following considerations:
Environmental Social Governance
Climate Change & Carbon Emission Data Protection & Privacy Bribery & Corruption Air & Water Pollution Gender & Diversity Board Composition Energy Efficiency Human Rights Lobbying
If the City opted to implement an ESG strategy:
1. It would attempt to impact the specific ESG consideration and by extension, have a societal impact; or
2. The City would have a theme or trend by promoting issuers that fit the City’s criteria.
Of the two strategies, ESG is the most administratively burdensome, as the City would need to develop the criteria for each ESG consideration and evaluate based on a scale that makes sense. Many investors partner with third-party vendors
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that have already built their criteria, assigned a score, and set up criteria for the investor’s program to determine if the scores meet the investor’s needs/criteria for inclusion in the portfolio.
The primary challenge between third-party ESG vendors is that there is a wide divergence between ESG ratings on the same issuers. As such, if the City prefers to implement one of these strategies, SRI would be the better option, as it is much more straightforward. The City Council would need to determine the City’s values (with respect to the City’s investment portfolio) and exclude issuers that do not align with those values. Part and parcel to the strategic initiative at hand, if the City Council opted to implement SRI, the change may have an impact on the City’s Investment Policy priorities, which are, in order: safety, liquidity, and yield.
For example, if the City were to implement SRI and exclude any issuers directly related to fossil fuels, there would be no impact to the City’s investment portfolio, as none of the investments are with issuers whose primary business is directly related to the oil and fossil fuels industry.
However, if the Council were to provide direction to exclude any issuers related to the auto industry, as shown in the City’s investment portfolio characteristics for January 2023 via Attachment 1, its holdings include a number asset-backed securities from car loans, which are permitted in the City’s Investment Policy, included as Attachment 2, as well as California Government Code Section 53600 et. seq. In addition to an impact on the City’s investment return, the potential SRI exclusion would also reduce the City’s investment portfolio diversity, which serves to address the financial impact of any economic ebb/flow in specific business sectors.
Some other actions that the City may want to consider with an SRI strategy implementation is:
1. Make the exclusion guidance implementable/straight-forward. For example, if the Council were to direct staff to exclude any issuer that has any direct or indirect relationship with fossil fuels, the direction would be unimplementable.
2. Actions should be verifiable with the compliance report. With an exclusion for issuers directly related to fossil fuels, the compliance report can either state that specific issuers were avoided or that all the issuers comply with the SRI guidance provided by the City.
One final consideration is fiduciary duty that is imposed by State law on policy makers, staff, and investment consultants – namely safety, liquidity, and yield, juxtaposed against any SRI or ESG considerations that the Council may want to implement.
The City’s Investment Advisory Committee (IAC) discussed ESG/SRI at its meeting on July 21, 2022, and recommend that the City not implement ESG or SRI strategies primarily due to:
1. The subjective and divergent nature of ESG.
2. The impact on the City’s ability to meet its priority of maximizing yield as noted in the Investment Policy and State code.
BUDGET IMPACT:
If the City were to opt for an SRI or ESG strategy, the limitations would impact the City’s ability to meet its fiduciary duty to prioritize safety, liquidity, and yield, as well as reducing its investment policy diversification.
ENVIRONMENTAL DETERMINATION:
This ESG/SRI study session is not a project subject to CEQA, because it is an organizational or administrative activity that will not result in direct or indirect physical changes in the environment. (CEQA Guidelines Section 15378(b)(5).)
NOTICE PROVIDED
All meeting noticing requirements were met.
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CITY OF SAN MATEO
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ATTACHMENTS
Att 1 – January 2023 Investment Portfolio Characteristics Att 2 – 2022 Investment Policy
STAFF CONTACT
Rich Lee, Director, Finance
[email protected]
(650) 522-7102
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Portfolio Characteristics
City of San Mateo Consolidated
01/31/23 10/31/22
Portfolio Portfolio
Average Maturity (yrs) 1.14 1.18
Modified Duration 1.01 1.05
Average Purchase Yield 2.58% 2.03%
Average Market Yield 3.60% 3.47%
Average Quality* AA+/Aa1 AAA/Aa1
Total Market Value 438,225,573 360,959,513
* Portfolio is S&P and Moody’s respectively.
As of January 31, 2023
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City of San Mateo Consolidated
Sector Distribution
ABS
2.9%
Agency
18.6%
Cash
6.5%
CMO
1.1%
Corporate
10.6%
LAIF
12.2%
Local Gov
Investment Pool
32.5%
Negotiable CD
0.1%
Supranational
0.9%
US Treasury
14.6%
January 31, 2023 October 31, 2022
ABS
3.8%
Agency
23.8%
Cash
0.1%
CMO
1.3%
Corporate
9.3%
LAIF
13.3%
Local Gov
Investment Pool
34.6%
Negotiable CD
0.3%
Supranational
1.1%
US Treasury
12.5%
As of January 31, 2023
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Issue Name Investment Type % Portfolio
CAMP Local Gov Investment Pool 19.08%
Government of United States US Treasury 14.60%
Federal Home Loan Bank Agency 14.27%
San Mateo County Pool Local Gov Investment Pool 13.41%
Local Agency Investment Fund LAIF 12.16%
Bank Cash Account Cash 6.49%
Federal Farm Credit Bank Agency 2.33%
Federal Home Loan Mortgage Corp CMO 1.11%
Federal National Mortgage Association Agency 1.05%
Federal Home Loan Mortgage Corp Agency 0.94%
Royal Bank of Canada Corporate 0.78%
Toyota Motor Corp Corporate 0.68%
Bank of America Corp Corporate 0.64%
Intl Bank Recon and Development Supranational 0.63%
Toronto Dominion Holdings Corporate 0.62%
New York Life Global Funding Corporate 0.62%
United Health Group Inc Corporate 0.58%
Caterpillar Inc Corporate 0.51%
Realty Income Corp Corporate 0.50%
American Express ABS ABS 0.47%
Mass Mutual Insurance Corporate 0.46%
Deere & Company Corporate 0.46%
Northwestern Mutual Glbl Corporate 0.45%
Paccar Financial Corporate 0.43%
Metlife Inc Corporate 0.43%
John Deere ABS ABS 0.39%
Morgan Stanley Corporate 0.36%
Honda ABS ABS 0.35%
Hyundai Auto Lease Securitization ABS 0.34%
Hyundai Auto Receivables ABS 0.32%
Inter-American Dev Bank Supranational 0.32%
JP Morgan Chase & Co Corporate 0.29%
GM Financial Automobile Leasing Trust ABS 0.28%
Wal-Mart Stores Corporate 0.26%
Charles Schwab Corp/The Corporate 0.25%
Amazon.com Inc Corporate 0.24%
US Bancorp Corporate 0.23%
Chubb Corporation Corporate 0.22%
Issuers
City of San Mateo Consolidated – Account #10720
As of January 31, 2023
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Issue Name Investment Type % Portfolio
National Rural Utilities Corporate 0.22%
BMW Vehicle Lease Trust ABS 0.20%
Guardian Life Global Funding Corporate 0.19%
Berkshire Hathaway Corporate 0.19%
Toyota ABS ABS 0.18%
Bank of New York Corporate 0.17%
Apple Inc Corporate 0.16%
Salesforce.com Inc Corporate 0.16%
Honeywell Corp Corporate 0.15%
Bank of Montreal Chicago Corporate 0.15%
Verizon Master Trust ABS 0.14%
BMW ABS ABS 0.12%
Royal Bank of Canada Negotiable CD 0.12%
Truist Financial Corporation Corporate 0.09%
Target Corp Corporate 0.09%
GM Financial Securitized Term Auto Trust ABS 0.07%
Verizon Owner Trust ABS 0.04%
Nissan ABS ABS 0.01%
Mercedes-Benz Auto Lease Trust ABS 0.00%
TOTAL 100.00%
Issuers
City of San Mateo Consolidated – Account #10720
As of January 31, 2023
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ADOPTED – January 18, 2022
BY CITY COUNCIL
THE CITY OF SAN MATEO
AND CITY OF SAN MATEO, ACTING AS SUCCESSOR AGENCY TO THE REDEVELOPMENT
AGENCY OF THE CITY OF SAN MATEO
I. SCOPE AND AUTHORITY
In accordance with the Charter of the City of San Mateo, (the “City”), the Finance Director/City Treasurer is responsible for investing the unexpended cash of the City and the Successor Agency to t
he Redevelopment Agency of the City of San Mateo (the “Successor Agency”) in the City Treasury. The authority governing investments for local agencies is set forth in the California Government Code Sections 41006 and 53600 et. seq.
This Investment Pol icy (the “Policy”) applies to all the investment activities of the City and the Successor Agency. The Policy will also apply to all other funds under the Finance Director/City Treasurer’s span of control unless specifically exempted by statute or ordinance . All the invested financial assets are accounted for in the City’s fund accounting system which includes: General Fund, Special Revenue Funds, Capital Project Funds, Enterprise Funds, Debt Service Funds ,
Int
ernal Service Funds, and Successor Agency Funds.
All cash shall be pooled for investment purposes. The investment income derived from the pooled investment account shall be allocated to the contributing funds based upon the proportion of the respective average balances relative to the total pooled balance. Investment income shall be distributed to the individual funds not less than annually.
II. OBJECTIVES
City and Successor Agency funds shall be invested in accordance with all applicable City policies and codes, State statutes, and Federal regulations, and in a manner designed to accomplish the following objectives, which are listed in priority order:
A. Safety of principal
Safety of principal is the foremost objective of the investment program. Investments will be undertaken in a manner that seeks to ensure the preservation of capital in the overall portfolio. To attain this objective, the City will diversify its investments by investing funds among a variety of securities with independent returns.
B. Liquidity Standard
The investment portfolio will remain sufficiently liquid to meet all operating requirements that may be reasonably anticipated.
2022
INVESTMENT POLICY
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C. Return on investment
The City’s investment portfolio shall be structured to attain a market-average rate of return through economic cycles, taking into account the investment risk constraints for safety and liq
uidity needs.
III. D
ELEGATION OF AUTHORITY
Authority to manage the City’s investment program is derived from California Government Code, Sections 41006 and 53600 et seq.
T
he City Council is responsible for the management of the City’s funds, including the administration of this investment policy. Management responsibility for the cash management of the City’s funds is hereby delegated to the Finance Director/City Treasurer (or his/her designee), who is appointed by the City Manager in accordance with the City Charter. Staff members of the Finance Department’s Treasury Division may be assigned to perform the day-to -day treasury activities related to the investment of City funds. No person may engage in an investment transaction except as expressly provided under the terms of this Policy.
The City may utilize the services of an investment adviser registered under the Investment Advisers Act of 1940, so long as it can be demonstrated that these services produce a net financial advantage or necessary financial protection of the City’s financial resources. The adviser shall follow this Policy and such other written instructions as provided. Use of professional investment advisers is subject to City review and overriding discretion which will be exercised as needed. External investment advisers may be granted discretion to purchase and sell investment securities in accordance with this investment policy.
T
he City’s overall investment program shall be designed and managed with a degree of professionalism that is worthy of the public trust. The City recognizes that in a diversified portfolio, occasional measured losses may be inevitable and must be considere d within the context of the overall portfolio’s return and the cash flow requirements of the City.
IV
. INTERNAL CONTROLS
The Finance Director/City Treasurer has established a system of internal controls to ensure compliance with the investment policies and procedures of the City, the Successor Agency, and the California Government Code. Such controls shall be designed to prevent losses of public funds arising from fraud, employee error, and misrepresentation bythird parties, or imprudent actions by employees of the City. Investment decisions are made by the Finance Director/City Treasurer or his/her designee and executed by staff of the Finance Department’s Treasury Division. All wire transfers initiated by Finance Department staff members must be approved and transmitted by the Finance Director/City Treasurer or his/her designee. Proper documentation obtained from confirmation and cash disbursement wire transfers is required for each investment transaction.
Timely bank reconciliation is conducted to ensure proper handling of all transactions.
The investment portfolio and all related transactions are reviewed and balanced to appropriate general ledger accounts by senior finance staff on a monthly basis. An independent analysis by a n e
xternal auditor shall be conducted annually to review and perform procedure testing on the City’s cash and investments. The Finance Director/City Treasurer shall review and assure compliance with investment processes and procedures.
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V. ETHICS AND CONFLICT OF INTEREST
In accordance with California Government Code Sections 1090 et seq. and 87100 et seq., officers and employees of the City will refrain from any activity that could conflict with the proper execution of the investment program or which could impair their ability to make impartial investment decisions, and all investment personnel shall subordinate their personal investment transactions to those of the City. In addition, City Council members, the City Manager, and Finance Director/City Treasurer, shall comply with the reporting requirements of California Government Code Section 87203 and regulations of the Fair Political Practices Commission and file a Statement of Economic Interest annually.
V
I. PRUDENT INVESTOR STANDARD
The standard of prudence to be used for managing the City’s investments shall be California Government Code Section 53600.3, the prudent investor standard, which states that “When investing, reinvesting, purchasing, acquiring, exchanging, selling, or managing public funds, a trustee shall act with care, skill, prudence, and diligence under the circumstances then prevailing, including, but not limited to, the general economic conditions and the anticipated needs of the agency, that a prudent person acting in a like capacity and familiarity with those matters would use in the conduct of funds of a like character and with like aims, to safeguard the principal and maintain the liquidity needs of the agency. Within the limitations of this section and considering individual investments as part of an overall strategy, investments may be acquired as authorized by law.” The City recognizes that market prices of securities will vary depending on economic and interest rate conditions at any point in time. It is further recognized, that in a well -diversified investment portfolio, occasional measured losses may occur due to economic, bond market, or individual security credit events. These occasional declines in value must be considered within the context of the overall investment program objectives and the resultant long-term rate of return.
T
he Finance Director/City Treasurer and other individuals assigned to manage the investment portfolio, acting within the intent and scope of this Policy and other written procedures and exercising due diligence, shall be relieved of personal responsibility and liability for an individual security’s credit risk or market price changes, provided deviations from expectations are reported in a timely manner and appropriate action is taken to control adverse developments.
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II. AUTHORIZED INVESTMENTS
All investments and deposits of the City shall be made in accordance with California Government Code Sections 16429.1, 53600-53609, and 53630-53686. Within the investments permitted by the Code, the City seeks to further restrict eligible investments to the guidelines listed below. In the event a discrepancy is found between this policy and the Code, the more restrictive parameters wi ll
t
ake precedence. Percentage holding limits and minimum credit quality listed in this section apply at the time the security is purchased.
An
y investment currently held at the time the policy is adopted which does not meet the new policy gui
delines can be held until maturity, and shall be exempt from the current policy. At the time of the investment’s maturity or liquidation, such funds shall be reinvested only as provided in the current policy.
An appropriate risk level shall be maintained by primarily purchasing securities that are of high quality, liquid, and marketable. The portfolio shall be diversified by security type and institution t o
a
void incurring unreasonable and avoidable risks regarding specific security types or individual issuers. The authorized investments are described below.
A. United States Treasury notes, bonds, bills, or certificates of indebtedness, or those for which t
he full faith and credit of the United States are pledged for the payment of principal and
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interest. There is no limitation on the percentage of the portfolio that can be invested in this category. The maximum maturity shall not exceed five years.
B. Federal agency or United States government -sponsored enterprise (“GSE”) obligations, participations, or other instruments, including those issued by or fully guaranteed as to principal and interest by federal agencies or United States government-sponsored enterprises .
T
he aggregate investment in federal agency securities/GSEs shall not exceed 70 percent of the City’s total portfolio, and the securities of any one federal agency/GSE shall not exceed 40 percent of the City’s total portfolio. The maximum percent of agency callable securities in t
he portfolio will be 20 percent. The maximum maturity shall not exceed five years.
C. A
mortgage passthrough security, collateralized mortgage obligation, mortgage -backed or other pay-through bond, equipment lease-backed certificate, consumer receivable passthrough certificate, or consumer receivable -backed bond not defined in paragraphs A or B of the Authorized Investments section of this policy. Securities eligible for investment under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO a
nd have a maximum remaining maturity of five years or less. No more than 5 percent of the City’s total portfolio shall be invested in any one issuer. Purchase of securities authorized by this subdivision shall not exceed 20 percent of the City’s total portfolio.
D. M
edium-Term Notes issued by corporations organized and operating within the United States or by de
pository institutions licensed by the United States or any state and operating withi n t
he United States and rated in a rating category of “A” or the equivalent or better by a Nationally Recognized Statistical Rating Organization(NRSRO). The aggregate investment in medium-term notes shall not exceed 30 percent of the City’s total portfolio, and no more than 5 percent of the City’s total portfolio shall be invested in the medium-term notes of any one issuer. The maximum maturity shall not exceed five years.
E. Non-negotiable Certificates of Deposit with a maturity not exceeding three years from the date of trade settlement, in state - or nationally -chartered banks or savings banks that are insured by the FDIC, subject to the limitations of California Government Code Section 53638. Amounts in excess of FDIC insurance coverage shall be secured in accordance wit h
Ca
lifornia Government Code Section 53652. No more than 5 percent of the City’s total portfolio shall be invested in the deposits of any one bank. The aggregate investment in non- negotiable certificates of deposit shall not exceed 30 percent of the City’s total portfolio. The maximum maturity shall not exceed three years.
F. “
Prime” commercial paper with a maturity not exceeding 270 days from the date of trade settlement with the highest ranking or of the highest letter and number rating as provided for by an NRSRO. The entit y that issues the commercial paper shall meet all of the following conditions in either sub-paragraph A. or sub-paragraph B. below:
1) The entity shall (1) be organized and operating in the United States as a general corporation, (2) have total assets in excess of $500,000,000 and (3) have debt other than commercial paper, if any, that is rated in a rating category of “A” or the equivalent or better by an NRSRO.
2) The entity shall (1) be organized within the United States as a special purpose corporation, trust, or limited liability company, (2) have program -wide cred it
e
nhancements, including, but not limited to, overcollateralization, letters of credit or s
urety bond; and (3) have commercial paper that is rated at least “A -1” or the equivalent by an NRSRO.
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The City may purchase no more than 10 percent of the outstanding commercial paper of any one issuer, and the aggregate investment in commercial paper shall not exceed 25 percent of the City’s total portfolio. Under a provision sunsetting on January 1, 2026, no more than 40% of the portfolio may be invested in Commercial Paper if the Agency’s investment assets under management are greater than $100,000,000. Further, no more than 5 percent of the City’s total portfolio shall be invested in the commercial paper of any one issuer.
G. E
ligible Banker’s Acceptances with a maturity not exceeding 180 days from the date of trade settlement, rated at least “A -1” or the equivalent or better by an NRSRO, drawn on or accepted by a commercial bank, whose deposits are insured by the FDIC, and whose senior long-term debt is rated in a rating category of “A” or the equivalent or better by an NRSRO at the time of purchase. No more than 5 percent of the City’s total portfolio shall be invested in banker’s acceptances of any one issuer, and the aggregate investment in banker’s acceptances shall not exceed 40 percent of the City’s total portfolio.
H. Re
purchase Agreements with a final termination date not exceeding 90 days collateralized by obl
igations of the U.S. Treasury, federal agencies and/or government -sponsored enterprises (described in sections VII.A and VII.C above). For the purpose of this section, the term collateral shall mean purchased securities under the terms of the City’s approved Master Repurchase Agreement. The purchased securities shall have a minimum market value including accrued interest of 102 percent of the dollar value of the funds borrowed. All collateral must be delivered to the City’s custodian bank by book entry, physical delivery, o r
by
a third- party custodial agreement. The market value of the collateral securities shall be marked-to- the-market at least quarterly, and the value of the underlying collateral must be brought back up to 102 percent no later than the next business day. Market value must be calculated each time there is a substitution of collateral. No more than 10 percent of the City’s total portfolio shall be invested in repurchase agreements with any one counterparty, and the aggregate investment in repurchase agreements shall not exceed 10 percent of the City’s total port
folio.
T
he City or its custodian shall have a perfected first security interest under the Uniform Commercial Code in all securities subject to Repurchase Agreement.
T
he City may enter into Repurchase Agreements only with primary dealers of the Federal Reserve Bank of New York. Approved Repurchase Agreement counterparties shall have a short-term credit rating of at least “A -1”, or the equivalent or better, and a long-term credit rating in the rating category of “A”, or the equivalent or better, by a NRSRO. Repurchase agreement counterparties shall execute a City-approved Master Repurchase Agreement with the City. The Finance Director/City Treasurer shall maintain a copy of the City’s approved Master Repurchase Agreement along with a list of broker/dealers who have executed this agreement.
Reverse repurchase agreements will not be permitted.
I. LO
CAL AGENCY INVESTMENT FUND. The City may invest in the Local Agency Investment Fund (LAIF) established by the State Treasurer (per Government Code Section 16429.1) for the benefit of local agencies up to the maximum amount permitted byLAIF..
J. S
AN MATEO COUNTY POOL . The City may invest in the San Mateo County Pool established by the San Mateo County Treasurer for the benefit of local agencies (as established in California Code Section 53684). No more than 30 percent of the market value
of the City’s total portfolio may be invested in this category.
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K. CALIFORNIA ASSET MANAGEMENT PROGRAM. The City may invest in the California Asset Management Program (CAMP) a California Joint Powers Authority established to provide California public agencies with professional investment services (California Code Section 53601 (p)). No more than 20 percent of the market value of the City’s total portfolio may be invested in this category.
L. Shares of beneficial interest issued by a diversified management company that are money market funds registered with the Securities and Exchange Commission under the Investment Company Act of 1940 (15 U.S.C. Sec. 80a-1 et seq.). Provided that the money market funds are “no-load” (no commission or fee shall be charged on purchases or sales of shares); (2) have a c
onstant daily net asset value per share of $1.00; (3) have a rating of “AAA” or the equivalent by at
least two NRSROs or have retained an investment adviser registered or exempt from registration with the Securities and Exchange Commission with not less than five years’ experience managing money market mutual funds with assets under management in excess of five hundred million dollars ($500,000,000). No more than 10 percent of the City’s total portfolio shall be invested in any one issuer and the aggregate investment in money market funds shall not exceed 20 percent of the City’s total portfolio.
M. Obligations of the State of California or any local agency within the state, including bonds payable solely out of revenues from a revenue -producing property owned, controlled, or operated by the state or any local agency or by a department, board, agency, or authority of the state or any local agency.
Registered treasury notes or bonds of any of the other 49 states in addition to California, including bonds payable solely out of the revenues from a revenue-producing property owned, controlled, or operated by a state or by a department, board, agency, or authority of any of the other 49 states, in addition to California.
S
ecurities in this section must have a short-term rating of “A-1” or the equivalent or better by a
n NRSRO or a long-term rating in the category of “A” or the equivalent or better by an NRSRO. No more than 5 percent of the City’s total portfolio shall be invested in any one municipal issuer, and the aggregate investment in municipal bonds shall not exceed 20 percent of the City’s total portfolio. The maximum maturity shall not exceed five years.
N. N
egotiable certificates of deposit or deposit notes issued by a nationally- or state-chartered bank, a savings association or a federal association (as defined by Section 5102 of the Financial Code), a state or federal credit union, or by a federally -licensed or by a state - licensed branch of a foreign bank. Eligible negotiable certificates of deposit in amounts up t o
t
he FDIC insured limit do not require any credit ratings. Amounts above the FDIC insured limit must be issued by institutions which have long-term obligations rated in a rating category of
“A” or its equivalent or better by at least one NRSRO, or have short-term obligations rated “A-
1” or its equivalent, or higher by an NRSRO. No more than 5 percent of the City’s total portfolio shall be invested in the negotiable certificates of deposit of any one issuer, and the aggregate investment in negotiable certificates of deposit shall not exceed 30 percent of the City’s total portfolio. The maximum maturity shall not exceed five years.
O. United States dollar denominated senior unsecured unsubordinated obligations issued or unconditionally guaranteed by the International Bank for Reconstruction and Development ,
Int
ernational Finance Corporation, or Inter-American Development Bank, with a ma ximum re
maining maturity of five years or less, and eligible for purchase and sale within the United States. Investments under this subdivision shall be rated in a rating category of “AA” or its equivalent or better by an NRSRO and shall not exceed 30 percent of the City’s moneys that
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may be invested pursuant to this section. No more than 10 percent of the portfolio may be invested in one single issuer.
P. Collateralized bank deposits that are the City’s deposits with financial institutions. Bank deposits will be collateralized with pledged securities per California Government Code, Section 53651. There are no limits on the dollar amount or percentage that the City may invest in collateralized bank deposits.
The foregoing list of authorized securities and transactions shall be strictly interpreted. Any deviation from this list must be approved in advance by resolution of the City Council.
N
OTE 1: References throughout this document to “the City’s total portfolio” will be the market value of the portfolio at the time the specific security is purchased.
VIII. PROHIBITED INVESTMENT VEHICLES AND PRACTICES
State law notwithstanding, any investments not specifically described herein are prohibited, including, but not limited to futures and options. In accordance with Government Code, Section 53601.6, investment in inverse floaters, range notes, or mortgage de rived interest -only strips is prohibited. Investment in any security that could result in a zero interest accrual if held to maturity is prohibited. Under a provision sunsetting on January 1, 2026, securities backed by the U.S.
Government that could result in a zero- or negative-interest accrual if held to maturity are permitted.
Trading securities for the sole purpose of speculating on the future direction of interest rates is prohibited. Purchasing or selling securities on margin is prohibited. The use of reverse repurchase agreements, securities lending or any other form of borrowing or leverage is prohibited. The purchase of foreign currency denominated securities is prohibited. Local governments that are not Qualified Institutional Buyers (QIB) as defined by the Securities and Exchange Commission are prohibited from purchasing Private Placement Securities. The SEC defines a QIB as having at least $100,000,000 in securities owned and invested.
IX. INVESTMENT POOLS/MUTUAL FUNDS
The City shall conduct a thorough investigation of any pool or mutual fund prior to making an investment, and on a continual basis thereafter. The Finance Director/Treasurer shall develop a questionnaire which will answer the following general questions:
• A description of eligible investment securities, and a written statement of investment polic y
a
nd objectives.
• A description of interest calculations and how it is distributed, and how gains and losses are t
reated.
• A description of how the securities are safeguarded (including the settlement processes), a
nd how often the securities are priced and the program audited. • A description of who may invest in the program, how often, what size deposit and w
ithdrawal are allowed.
• A schedule for receiving statements and portfolio listings. • Are reserves, retained earnings, etc. utilized by the pool/fund? • A fee schedule, and when and how is it assessed.
• Is the pool/fund eligible for bond proceeds and/or will it accept such proceeds? X. SELECTION OF BROKER/DEALERS
The Finance Director/City Treasurer shall maintain a list of broker/dealers approved for investment purposes, and it shall be the policy of the City to conduct transactions only with those authorized firms. To be eligible, a firm must be licensed by the State of California as a broker/dealer as defined i
n Section 25004 of the California Corporations Code, and:
1. Be recognized as a Primary Dealer by the Federal Reserve Bank of New York, or
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2. Report voluntarily to the Federal Reserve Bank of New York, or
3. Qualify under Securities and Exchange Commission (SEC) Rule 15c3-1 (Uniform Net Capital Rul
e).
Each authorized broker/dealer shall be required to submit and annually update a City approved Broker/Dealer Information form. The Finance Director/City Treasurer shall maintain a list of the broker/dealers that have been approved by the City, along with each firm’s most recent Broker/Dealer Information Request form.
If the City has not engaged the support services of an outside investment advisor while in the process of executing a particular transaction, the authorized broker/dealer(s) shall provide certification of having received and reviewed this Policy. For transactions initiated through an investment advisor, the investment advisor may use their own list of approved broker/dealers and financial institutions, which it will maintain and review periodically.
The City may purchase commercial paper from direct issuers even though they are not on the approved broker/dealer list as long as they meet the criteria outlined in Item F of the Authorized Investments section of this Policy.
XI. COMPETITIVE TRANSACTIONS
Each investment transaction shall be competitively transacted with authorized broker/dealers. At least three broker/dealers shall be contacted for each transaction, and their bid and offering prices shall be recorded.
If the City is offered a security for which there is no other readily available competitive offering, then the Finance Director/City Treasurer will document quotations for comparable or alternat ive securities. When purchasing original issue instrumentality securities, no competitive offerings will be required as all dealers in the selling group offer those securities at the same original issue price.
XII. SELECTION OF BANKS
The Finance Director/City Treasurer shall maintain a list of banks approved to provide depository and other banking services for the City. To be eligible for authorization, a bank shall qualify as a depository of public funds in the State of California as defined in California Government Code Section 53630.5, shall be a member of the FDIC, and shall secure all deposits exceeding FD IC
i
nsurance coverage in accordance with California Government Code Section 53652.
XIII. SAFEKEEPING AND CUSTODY
The Finance Director/City Treasurer shall select a bank to provide safekeeping and custodial services for the City, in accordance with the provisions of Section 53608 of the California Government Code. A City-approved Safekeeping Agreement shall be executed with the custodian bank prior to utilizing that bank’s safekeeping services. The custodian bank will be selected on the basis of its ability to provide satisfactory safekeeping services and the competitive pricing of them.
The purchase and sale of securities and repurchase agreement transactions shall be settled on a delivery-versus-payment basis. All securities shall be perfected in the name of the City. Sufficient evidence to title shall be consistent with modern investment, banking, and commercial practices.
Al
l investment securities will be delivered by either book entry or physical delivery and will be held by t
he City’s custodian bank, its correspondent bank or its Depository Trust Company (DTC) participant account.
XIV. MAXIMUM MATURITY
To the extent possible, investments shall be matched with anticipated cash flow requirements and known future liabilities.
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The City will not invest in securities maturing more than five (5) years from the date of trade settlement, unless the City Council has by resolution granted authority to make such an investment, either specifically or as a part of an investment program approved by the City Council no less than three months prior to the investment.
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RISK MANAGEMENT AND DIVERSIFICATION
M
itigating Credit Risk in the Portfolio
Credit risk is the risk that a security or a portfolio will lose some or all its value due to a real or perceived change in the ability of the issuer to repay its debt. The City will mitigate credit risk by adopting the following strategies:
• T
he diversification requirements included in the “Authorized Investments” section of this policy are designed to mitigate credit risk in the portfolio. • No more than 5 percent of the total portfolio may be deposited with or invested in securities issued by any single issuer unless otherwise specified in this policy. • T
he City may elect to sell a security prior to its maturity and record a capital gain or loss in orde
r to manage the quality, liquidity or yield of the portfolio in response to market conditions or City’s risk preferences.
• If the credit ratings of any security owned by the City are downgraded to a level below the quality required by this investment policy, it will be the City’s policy to review the credit situation and make a determination as to whether to sell or retain such securities in the portfolio.
o If a
security is downgraded, the Finance Director/City Treasurer will use discretion in determining whether to sell or hold the security based on its current maturity, the economic outlook for the issuer, and other relevant factors. o If
a decision is made to retain a downgraded security in the portfolio, its presence in t
he portfolio will be monitored and reported monthly to the City Council.
M
itigating Market Risk in the Portfolio
Market risk is the risk that the portfolio value will fluctuate due to changes in the general level of interest rates. The City recognizes that, over time, longer-term portfolios have the potential to achieve higher returns. On the other hand, longer-term portfolios have higher volatility of return.
The City will mitigate ma rket risk by providing adequate liquidity for short -term cash needs, and by making longer-term investments only with funds that are not needed for current cash flow purposes.
The City further recognizes that certain types of securities, including variable rate securities, securities with principal paydowns prior to maturity, and securities with embedded options, will affect the market risk profile of the portfolio differently in different interest rate environments. The City, therefore, adopts the following strategies to control and mitigate its exposure to market risk:
• T
he City will maintain a minimum of six months of budgeted operating expenditures in short term investments to provide sufficient liquidity for expected disbursements. •
• The maximum stated final maturity of individual securities in the portfolio will be five (5) y
ears, except as otherwise stated in this policy.
•
• The duration of the portfolio will generally be approximately equal to the duration (typically, plus or minus 20 percent) of a Market Benchmark, an index selected by the City based on the City’s investment objectives, constraints, and risk tolerances.
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XV. PORTFOLIO PERFORMANCE
The investment portfolio shall be designed to attain a market rate of return throughout budgetary and economic cycles, taking into account prevailing market conditions, risk constraints for eligible securities, and cash flo w requirements. An appropriate benchmark or benchmarks will be established against which portfolio performance shall be compared on a regular basis. Whe n c
omparing the performance of the City’s portfolio, its rate of return will be computed net of all fees and expenses.
XVI. MONTHLY REPORTING
Monthly, the Finance Director/City Treasurer shall submit to the City Council a report of the investment earnings and performance results of the City’s investment portfolio. The report shall include the following information:
1. Investment type, issuer, date of purchase and maturity, par value and dollar amount investedi n a
ll securities, and investments and monies held by the City;
2. A description of the funds, investments and programs;
3. A market value as of the date of the report (or the most recent valuation as to assets not value d m
onthly) and the source of the valuation;
4. A statement of compliance with this Policy or an explanation for non-compliance; and
5. A statement of the City’s ability to meet expenditure requirements for six months, and an e
xplanation of why money will not be available if that is the case.
6. A statement of transactions made during the month.
XVII. INVESTMENT POLICY ADOPTION
This Investment Policy shall be adopted by resolution of the City Council. The Policy shall be reviewed a
nnually by the Investment Advisory Committee and any modifications made thereto must be approved by the City Council.
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THE FOLLOWING PUBLIC
COMMENTS WERE SUBMITTED
FOLLOWING THE PUBLICATION
OF THE AGENDA PACKET
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From:
To: Clerk
Subject: Support ESG
Date: Thursday, March 2, 2023 3:37:23 PM
Honorable City Council,
It’s hard to understand why environmental, social and corporate governance factors are not already a critical key factor in every investment.
This is the fastest and most effective approach to push the needle forward for the desperate help the environment and middle and lower income classes need.
Shareholder gains at the expense of the environment and labor and other metrics of humanity and decency has gone on way too long.
Please do what you can to ensure all of San Mateo investments are morally and ethically compatible with progressive values.
Thank you.
Tom Lease
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CHANDLER ASSET MANAGEMENT, INC. | 800.317.4747 | www.chandlerasset.com
INVESTMENT REPORT
Period Ending January 31, 2023
City of San Mateo
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Socially Responsible Investing (SRI) vs. Environmental, Social, Governance Investing (ESG) SRI and ESG are often confused as both consider the
broader social and environmental implications of an
investment.
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Socially Responsible Investing (SRI) vs. Environmental, Social, Governance Investing (ESG) SRI - VALUES ALIGNED INVESTING
• Primarily uses an exclusionary screening process to align portfolios with investors moral and ethical values.
ESG - VALUE (PERFORMANCE) BASED INVESTING
• Primarily uses an inclusive evaluation process.
1. The primary objective is to mitigate ESG risks and achieve higher returns.
2. ESG rating systems are imperfect as many factors are based upon a subjective opinion.
3. ESG research breaks down the three metrics of Environmental, Social and Governance. The research outcome is typically reflected in a score or rating.
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Environmental Social Issues Governance
Climate change & carbon
emissions Customer satisfaction Board composition
Air & water pollution Data protection & privacy Audit committee structure Biodiversity Gender & diversity Bribery & corruption
Deforestation Employee engagement Executive compensation Energy efficiency Community relations Lobbying
Waste management Human rights Political contributions
Water scarcity Labor standards Whistleblower schemes
Sample ESG and SRI Considerations
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Exclusionary screening (SRI - oldest method)
• Exclusionary screening refers to avoiding securities of companies or countries on the basis of traditional moral values (e.g., products or services involving alcohol, tobacco, firearms or gambling) and standards and norms (e.g., those pertaining to human rights and environmental protection).
ESG Integration and Positive (Inclusive) Screening
• Incorporates ESG Data in conjunction with traditional financial/credit analysis with the goal of mitigating ESG risks and increasing returns. Best-in-class selection refers to preferring companies with better or improving ESG performance relative to sector peers. Over the long-term, companies that score well on ESG issues are often more efficient with lower environmental costs—for example, a lower electricity or water bill.
Methods for Implementing SRI and ESG Strategies
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ESG Strategies
Impact investing
Impact investing refers to investing with the disclosed intention to generate and measure social and
environmental benefits alongside a financial return.
Project specific investing is a common characteristic of Impact Investing.
Thematic investing
Thematic investing refers to investing that is based on trends, such as social, industrial, and demographic
trends. A number of investment themes are based on
ESG issues, including clean tech, green real estate,
sustainable forestry, agriculture, education, and health.
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ESG research requires a lot of work and presents a steep learning curve. It requires in-depth research into industries and companies to understand which factors are most relevant among the hundreds of KPIs.
Investors employ a variety of analytical approaches and typically use multiple data sources. There is not a standardized approach to the calculation, analysis or outcome of ESG metrics. Partial list of external ESG research providers to supplement in-house research staff:
• Bloomberg
• CDP (Carbon Disclosure Project)
• Creditsights ESG
• MSCI
• Oekom
• RepRisk
• RiskMetrics
• Standard and Poor’s
• Sustainalytics
ESG Research and external Data Providers
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Integrating ESG into Fixed-Income Investing
In fixed-income
investing, ESG issues are
mostly about risk. ESG
issues in fixed-income
considers how issues
such as carbon
emissions, labor relations
and corruption might
affect issuers’
creditworthiness
There’s need for more
comprehensive analysis
that includes the “extra”
financial factors, such as
ESG key performance
indicators (KPIs)
Poor management of
ESG factors can
contribute to defaults,
price volatility, credit
rating downgrades, and
widening credit default
swap (CDS) spreads
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ESG investing is based on a combination of fundamental, relative-value analysis and ESG research. The investment process begins with analyzing a company and then assessing creditworthiness and producing internal credit rating forecasts.
• A credit analysis includes examining balance sheets, profit and loss statements, cash flows, and ratios.
• Every bond is different, so it is important to assess instrument-specific risks by reading a bond’s prospectus; understanding its covenants, seniority, and structure; considering liquidity issues; and reviewing related documentation.
The ESG analysis is done along with the company analysis to develop an understanding of ESG shortcomings and if the company is able and willing to address the issues, improve weak ESG Key Performance Indicators (KPIs), and resolve controversial issues. For each issuer, ESG KPIs must be assessed for relevancy with regard to sector and industry.
Investors should ask themselves how the relevant ESG KPIs will affect a company’s earnings and future operating cash flows.
ESG Fixed-Income Strategies and the Investment Process
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Asking clarifying questions helps define what ESG investing means to the investor and where on the ESG spectrum is the best fit
• What areas they want to have impact?
• What do they care about?
• Is there agreement on the values priorities?
• How will they measure the results of ESG strategies?
• Do they weigh values higher than returns?
• Do they value returns, but want an ESG-friendly portfolio as well? • Do they want their investing to drive issues and change? • What are the agreed upon ESG filters for selecting approved issuers? • Are the filters exclusionary (negative) only or are they inclusionary (positive) or a combination of both?
SRI/ESG Investing - Getting Started
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City must have a clear decision-making process
• City council
• Subcommittee
• Staff
Directives must be “implementable”
Actions must be verifiable
How to Decide What Gets Included/Excluded?
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• Strong-enough terms to provide guidance, but simple yet specific enough to provide enforceability
• Flexible enough to ensure compliance with fiduciary duty ESG/SRI in
Investment
Policies: It’s all in
the language…
• Investment policy language should address issues at high level
• Actual implementation should be handled at functional level • Management directives
• Internal guidance documents
• Buy lists/exclusion lists
Actual
Implementation
How Does this Impact the Investment Policy
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Defining and Complying with Safety, Liquidity and Yield/Return (SLY) Objectives • Governing Laws
• Investment Policy
• Risk tolerances
• Market, credit and liquidity risks
• Cash flow needs
Does SRI/ESG investing comply with the primary objectives of the investment program? How will SRI/ESG considerations impact the primary objectives? Complying with Fiduciary Duty
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