Category:  Clients

Heartland Chicago Forum Shows Economic Impact of Responsible Investments In City’s Infrastructure

Chicago – “Sustainability is a critical part of the heritage of Chicago and the foundation for our city’s future,” Karen Weigert, the city’s Chief Sustainability Officer told investment fund executives meeting recently at the Heartland Capital Strategies’ Responsible Investment Forum in Chicago.

The Forum focused on the potential and the challenge involved in capitalizing Chicago’s new Infrastructure Investment Trust- and similar vehicles. It highlighted the significant economic impact on the city of the  participating pension funds that have put more than $2 billion of workers’ capital into the city’s built environment infrastructure, in compliance with the United Nation’s Principles for Responsible Investment (PRI).

The UN principles guide a comprehensive approach to investment management that considers the broader Environmental, Social and Governance (ESG) ramifications of developing and owning assets, going beyond the traditional investor and fiduciary goals of preserving or enhancing economic returns and mitigating risk.

The forum was sponsored by Heartland Capital Strategies (HCS),  which fosters a community of practice through a capital network that promotes investments and projects utilizing the UN ESG principles.  The forum drew upwards of 70 private and pension investors, labor and business leaders, and public officials, representing hundreds of billions of dollars.

Doing Well by Doing Good

Herb Kolben, Senior Vice President of the Union Labor Life Insurance Company (ULLICO), highlighted the added value achieved by ULLICO through using PRI in their investments, pointing out that ULLICO’s $1.4 billion of investments in metropolitan Chicago’s built environment have “generated over 88 million labor hours resulting in over 44,000 full-time union construction jobs.” He noted that ULLICO hopes to make a similar impact with infrastructure investments in the future as the city moves forward with its new Infrastructure Investment Trust.

The Heartland forum brought Ms. Weigert and Chicago’s Chief Financial Officer Lois Scott together with capital stewards of four funds that are major investors of workers’ pension savings: ULLICO, the AFL-CIO Housing Investment Trust (HIT), the AFL-CIO Investment  Trust (BIT), and the Multi-Employer Property Trust (MEPT).

The forum was also joined by private investors and advisors, such as Citi, Impact Investments, and the Potomac Energy Fund, to discuss the sustainable economic impact that workers’ pension savings may have as capital  resources helping to finance the city’s Infrastructure Investment Trust.  Adding their voices to the day were speakers on behalf of public pension funds and community investors, notably the Illinois State Board of Investment (ISBI), the New York City Energy Efficiency Corporation (NYEEC), the West Coast Infrastructure Exchange and Living Cities, a national foundation consortium.

“Chicagoland has always been a good market for us, with good, solid projects that are aligned with UN PRI,” said Ted Chandler, HIT’s Chief Operating Officer. “We've invested $478 million of HIT capital here, helping us achieve competitive returns for our investors while also enabling Chicago to address some urgent local housing needs.”

Moving Forward on Chicago Infrastructure

Ms. Scott reported that the city’s new Trust would try to raise billions in new infrastructure investments over the next several years, including $200 million devoted to the Chicago Retrofit Corporation.  She said the city needs federal leadership in this arena, including a need to recapitalize the recently expired Build America Bonds program.

“Language has been an impediment to developing infrastructure,” she also said. “We haven’t created the language that can move us forward for investing in infrastructure. Yet, in Canada almost everything that’s being developed is being done through public-private partnerships.”

Tessa Hebb, Heartland’s Canadian Director, and Director of the Carleton Center for Community Innovation at Carleton University, observed that currently “the demand for infrastructure development in the U.S far exceeds the supply of public dollars, which is stimulating ideas about innovation in this space.”

“Even before the financial crisis of 2007-2008,” explained Impact Investment’s Chairman and CEO John Williams,” stakeholders were asking, ‘What does this mean?  Does this mean higher taxes?’ We saw that we were heading straight toward a brick wall.”

Public private partnerships – known colloquially as “P3” – were anathema in the first decade of this century because they were seen as “the thin edge of privatizing public goods and dollars, and not in a good way,” Hebb noted.  She also said that many public private partnerships often used the so-called “2-and-20” financing model, primarily a private equity investment approach that can result in higher management fees (which reduces returns for pension investors).

Canada’s Successful Approach

Ray Kljajic, Managing Director of Citi’s Public Finance Department suggested that in the U.S., “We need to go the way of the Canadian pension plans” in financing infrastructure.

While similar challenges obtained in Canada, more recent models for public-private  partnerships, Ms. Hebb averred, are based on a web of contracts, in which “the (PRI) principles that guide the investor can be imbedded in these contracts,” including responsible contractor policies which protect existing workers’ rights.

CalPERS, the largest pension fund in the U.S., she pointed out, “has integrated their responsible investment policies in a strong way into their partnership contracts.”

“We didn’t think the 2-and-20 model worked,” explained ULLICO Vice President Deborah Nisson.  “We thought those levels of return were way too high for those sorts of public assets. Project finance is what we’re really based on – the P4 model: public, private, pension partnerships.”  A number of investors also posited that experience has shown that traditional fixed income and bond investment approaches, along with project finance, had produced more positive results over the long run.

“If investors target the social of ESG – the worker component, “said Ms. Hebb, “you will see the dynamic of how the S [social component] comes to life in these large infrastructure deals.”

“It’s about additional commitments we make above and beyond Return on Investment,” explained MEPT Senior Vice President Michael Ibarra.  “We have two primary goals: to preserve or enhance returns and mitigate risk.  “And investing in sustainability is about lowering risk.”

Regulation Needed

Ms. Scott made clear the city of Chicago’s perspective: “Unless government sets the rules,” she said, “the private sector will default to the cheaper labor costs,”

a view amplified later in the forum by Potomac Energy Fund’s Chief Strategist Irving Mintzer’s assertion that “a completely unrestrained market has some cancerous effects.”

In contrast, HIT’s Ted Chandler pointed out that “union-friendly funds such as the HIT have a proven record of delivering competitive returns while creating union construction jobs and investing in the real economy. That’s why pension funds value the responsible investment strategy.”

HIT, for example, has leveraged more than $1 billion of development in 53 projects in Chicago and Cook County, representing some 10,886 housing units, including 7,360 units affordable to low- and moderate-income residents. These investments have created nearly 11,000 jobs, including 6,490 union construction jobs, and 4,450 secondary jobs in related industries.

“As investors of workers’ capital,” added Jim Lingberg, Chief Operating Officer of BIT, “we now have a collective wealth of experience with the dynamic economic impact that responsible investments can have through the returns they provide, the union jobs they create, and the sustainable, community-based growth they nurture.”

Similarly, since its inception in 1982, MEPT’s investment of $795 million in 33 commercial real estate assets in the Chicago area has generated 17.9 million job hours (or 9,925 jobs) and $1.3 billion in economic impact in the metro area. Additionally, MEPT’s Chicago investments have generated $19 million in personal income taxes and $17.2 million in sales taxes for State of Illinois.

Reinvigorating Manufacturing

Potomac Energy Fund’s Irving Mintzer concluded the forum by asserting that the nation’s financial institutions and pension funds face clear actuarial, demographic and climate change challenges that pose significant threats to the stability of their funds and to the health of our communities.

In a concluding panel, Mintzer pointed out the importance of a balanced and sustainable approach to economic growth, including the importance of manufacturing, especially in producing domestically the inputs needed to sustain vibrant infrastructure, energy efficiency, green construction, and renewable energy sectors in the U.S. economy.

Potomac, in fact, is an investor in Smith Electric Vehicles, a new electric vehicle firm that just struck a deal with the City of Chicago, FedEx, and Coca-Cola to convert and build electric delivery trucks.  Chicago Mayor Rahm Emanuel and Smith Electric Vehicles recently announced that they are working together to create an electric vehicle manufacturing facility in Chicago. This energy efficient vehicle will save money and reduce pollution in the city, making Chicago more livable while creating hundreds of good jobs.

“We need to reinvigorate manufacturing to build a viable society,” said Mintzer.  “That will require a return to traditional American values: to thrift; to concern for community; and a commitment to something other than a desire to always buy the best shiny new toy presented over the internet or on television.”

blog comments powered by Disqus