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HomeMy WebLinkAbout09-24-2020 IOC Agenda PacketCity of San Luis Obispo, Agenda, Planning Commission Agenda INVESTMENT OVERSIGHT COMMITTEE Thursday, September 24, 2020 Based on the threat of COVID-19 as reflected in the Proclamations of Emergency issued by both the Governor of the State of California, the San Luis Obispo County Emergency Services Director and the Investment Oversight Committee (IOC) of the City of San Luis Obispo as well as the Governor’s Executive Order N-29-20 issued on March 17, 2020, relating to the convening of public meetings in response to the COVID -19 pandemic, the City of San Luis Obispo will be holding all public meetings via teleconference. There will be no physical location for the Public to view the meeting. Below are instructions on how to view the meeting remotely and how to leave public comment. Additionally, members of the Investment Oversight Committee are allowed to attend the meeting via teleconference and to participate in the meeting to the same extent as if they were present. Using the most rapid means of communication available at this time, members of the public are encouraged to participate in Committee meetings in the following ways: 1. Remote Viewing - Members of the public who wish to watch the meeting can view: ➢ View the Webinar: ➢ Registration URL: https://attendee.gotowebinar.com/register/2733678786285715723 ➢ Webinar ID: 345-744-123 ➢ Phone: +1 (562) 247-8422 ➢ Access Code: 170-759-068 2. Public Comment - The Investment Oversight Committee will still be accepting public comment. Public comment can be submitted in the following ways: • Mail or Email Public Comment ➢ Received by 10:00 AM on the day of meeting - Can be submitted via email to advisorybodies@slocity.org or U.S. Mail to City Clerk at 990 Palm St. San Luis Obispo, CA 93401 ➢ Emails sent after 10:00 AM and up until public comment is opened on the item – Limited to one page emailed to cityclerk@slocity.org, which will then be read aloud during the public comment period on the item specified. • Verbal Public Comment ➢ Received by 10:00 AM on the day of the meeting - Call (805) 781-7164; state and spell your name, the agenda item number you are calling about and leave your comment. The verbal comments must be limited to 3 minutes. All voicemails will be forwarded to the IOC and saved as Agenda Correspondence. ➢ During the meeting – Comments can be submitted up until the Public Comment period is opened for the item when joining via the webinar (instructions above). Once you have entered the webinar/meeting please type your name and the Item # in the questions box. Your mic will be unmuted when Public Comment is called for the item you indicated. All comments submitted will be placed into the administrative record of the meeting. Investment Oversight Committee Agenda for September 24, 2020 Page 2 1:30 p.m. REGULAR MEETING TELECONFERENCE Broadcasted via webinar CALL TO ORDER: Chair Brigitte Elke ROLL CALL : Committee Members Heidi Harmon, Natalie Harnett, Daniel Humphrey (Public Member) Derek Johnson, Debbie Malicoat, and Chair Brigitte Elke OTHERS PRESENT: Monique S. Spkye, Managing Director for PFM Asset Management LLC, and Serenity Whorley, Recording Secretary PUBLIC COMMENT: At this time, people may address the Committee about items not on the agenda. Persons wishing to speak should come forward and state their name and address. Comments are limited to three minutes per person. Items raised at this time are generally referred to staff and, if action by the Committee is necessary, may be scheduled for a future meeting. CONSIDERATION OF MINUTES 1. Minutes of the Investment Oversight Committee of May 14, 2020 BUSINESS ITEMS 2. Presentation of the Quarterly Investment Report on Portfolio Performance Recommendation: Approve and confirm investment policy compliance. 3. ESG Investment Criteria The Committee will review applicable ESG investment criteria and define the goals and parameters for the new investment strategy per Council direction. Investment Oversight Committee Agenda for September 24, 2020 Page 3 ADJOURNMENT The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday , November 12, 2020 at 1:30 p.m., in the Council Hearing Room, 990 Palm Street, San Luis Obispo, California. The City of San Luis Obispo wishes to make all of its public meet ings accessible to the public. Upon request, this agenda will be made available in appropriate alternative formats to persons with disabilities. Any person with a disability who requires a modification or accommodation in order to participate in a meeting should direct such request to the Finance Department at (805) 781-7125 at least 48 hours before the meeting, if possible. Telecommunications Device for the Deaf (805) 781-7107. Meeting audio recordings can be found at the following web address: http://opengov.slocity.org/WebLink/1/fol/61037/Row1.aspx Minutes - Draft Investment Oversight Committee Thursday, May 14, 2020 Regular Meeting of the Investment Oversight Committee CALL TO ORDER A Regular meeting of the Investment Oversight Committee was called to order on Thursday, May 14, 2020, at 1:30 p.m. in the Council Hearing Room at 990 Palm Street, San Luis Obispo, California, by Chair Brigitte Elke. ROLL CALL Present: Committee Members Heidi Harmon, Derek Johnson, Debbie Malicoat, and Chair Brigitte Elke Absent: Committee Member Daniel Humphrey (Public Member) Others Present: Monique Spyke, Managing Director for PFM Asset Management LLC, David Reeser Managing Director for PFM Asset Management LLC, Natalie Harnett, Staff, and Serenity Whorley, Recording Secretary Note: Due to Covid-19 “Shelter at Home” orders, the meeting was held via Webinar. PUBLIC COMMENT ITEMS NOT ON THE AGENDA None. --End of Public Comment-- APPROVAL OF MINUTES 1. Review of Minutes of the Investment Oversight Committee Meeting of February 13. 2020: ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON, SECONDED BY COMMITTEE MEMBER MALICOAT, CARRIED 4-0-1 (Committee Member Humphrey absent), to approve the February 13, 2020 minutes, as presented. PUBLIC COMMENT None --End of Public Comment-- City of San Luis Obispo, Title, Subtitle Minutes - Investment Oversight Committee Minutes of 14, May 2020 Page 2 BUSINESS ITEMS 2. Presentation of the Quarterly Investment Report on Portfolio Performance Monique Spyke, Managing Director for PFM Asset Management LLC, provided a PowerPoint presentation and responded to Committee inquiries. Public Comment None. --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER MALICOAT, SECONDED BY COMMITTEE MEMBER HARMON, CARRIED 4-0-1 (Committee Member Humphrey absent), recommendation to approve and confirm investment policy compliance. 3. Presentation for ESG (Environmental, Social, and Governance) Investment Solutions Monique Spyke and David Reeser provided a PowerPoint presentation on ESG Investments and responded to Committee inquiries. Public Comment Kelsey Zazanis Jane Swanson --End of Public Comment-- ACTION: UPON MOTION BY COMMITTEE MEMBER JOHNSON, SECONDED BY COMMITTEE MEMBER HARMON, CARRIED 4-0-1 (Committee Member Humphrey absent), recommendation to approve the investment philosophy and make a recommendation to the City Council to adopt a policy for ESG investments. COMMENT AND DISCUSSION Finance Director Elke provided an agenda forecast. ADJOURNMENT The meeting was adjourned at 3:08 pm. The next Regular Meeting of the Investment Oversight Committee is scheduled for Thursday, August 1 3, 2020, at 1:30 p.m., in the Council Hearing Room, 990 Palm Street, San Luis Obispo, California. APPROVED BY INVESTMENT OVERSIGHT COMMITTEE: XX/XX/XXXX Quarterly Investment Report AS OF JUNE 30, 2020 September 24, 2020 This report presents the City’s investment portfolio for the quarter ending June 30,2020.It has been prepared to comply with regulations contained in California Government Code Section 53646.The report includes all investments managed by the City on its own behalf as well as for other third- party agencies on a fiduciary basis such as the Whale Rock Commission.It also includes all City- related investments held by trustees for bond debt service obligations.As required,the report provides information on the investment type, issuer,maturity date,cost,and current market value for each security. Market Themes Effects on the Financial Markets Yields remain very low and are not expected to move meaningfully over the near term Fed support stabilized the bond market and returned liquidity Equity markets substantially recovered in second quarter Effects on the Economy Significant negative impact of lockdowns apparent in first and second quarter economic data Early signs of rebound have appeared as some states start to reopen COVID-19 Impact Update Health Pandemic Confirmed cases exceed 10 million worldwide U.S. is leading the world with roughly 25% of cases and deaths Recent surge in new U.S. case numbers threatens economic reopening Limited Capacity Market Considerations •At its two meetings over the quarter, the Federal Open Market Committee left the target range for the federal funds rate unchanged at 0% to 0.25%. •The Federal Open Market Committee’s updated economic projections now anticipate a long, slow recovery. Source: Bloomberg. Market Projection as of June 30, 2020. 0.1%0.1%0.1% 2.5% 0% 1% 2% 3% 2020 2021 2022 Longer Run Federal Funds Rate 0.13%0.29% 0.66% 1.41% 0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3 M 1 Y 2 Y 3 Y 4 Y 5 Y 10 Y 30 YYieldMaturity June 30, 2020 March 31, 2020 December 31, 2019 U.S. Treasury Yield Curve Market Considerations •In stark contrast to the first quarter, returns on Treasuries were muted while yield spreads in all other sectors significantly retraced their first quarter widening, resulting in strong, positive excess returns •Allocations to corporates and asset-backed securities (ABS) were strongly additive to performance in the second quarter. Source: Bloomberg as of 6/30/2020. 0.13%0.37% 2.39% 3.33% 5.85% 0% 2% 4% 6% 8%U.S.TreasuryAgencyABS 0-3Corp A-AAACorpBBB1-3 Year Indices Second Quarter Returns Year-to-Date 0.29%0.49% 2.76% 4.34% 7.66% 0% 2% 4% 6% 8%U.S.TreasuryAgencyABS 0-5Corp A-AAACorpBBB1-5 Year Indices Second Quarter Returns Year-to-Date What we are watching… •A return to normalcy will require the introduction of an effective vaccine, and the development of one is being viewed with continued optimism. The recent surge in new COVID -19 cases hindered reopening plans and threatens to erase payroll gains and suspend economic activities. •Given the extraordinary amount of monetary and fiscal stimulus that has been injected into the economy, a long-term development worth watching is the potential for higher inflation, interest rates, and taxes when the economy fully recovers. Source: Bloomberg as of June 30, 2020. -6.5% 5.0% 3.5% 1.8% -10% -5% 0% 5% 10% 2020 2021 2022 Longer Run Change in Real GDP 0.8% 1.6%1.7% 2.0% 0% 1% 2% 3% 2020 2021 2022 Longer Run PCE Inflation Current Cash & Investment Summary The following is a summary of the City’s cash and investments based on market value, as of June 30, 2020, compared with the prior quarter. Investment Entity June 30, 2020 March 31, 2020 Percent of Total** City Held Cash & Investments $43,648,304 $44,416,108 29% LAIF Held Investments $23,775,399 $23,656,340 16% PFM Managed Investments*$83,233,029 $82,306,379 55% Trustee Held Investments $72,113 $71,752 <1% TOTAL $150,728,845 $150,450,579 100% *Figures shown exclude accrued interest. **Details may not add up to total due to rounding. Current Cash & Investment Summary There are several factors which result in changes in cash and investment balances from month-to-month and quarter-to- quarter, dependent on the receipt of revenues or a large disbursement. •Some major City revenues are received on a periodic rather than a monthly basis. Property Tax is received in December, January, April, and May of each year. Transient Occupancy Tax is received monthly but varies considerably due to seasonality. •Payments for bonded indebtedness or large capital projects can reduce the portfolio substantially in the quarter in which they occur. •The City pays its CalPERS obligation in a lump sum at the beginning of the fiscal year to achieve interest savings. Factors Securities Securities in the City’s portfolio are priced by IDC, an independent pricing service at the end of every month. In some cases, the City may have investments with a current market value that is greater or less than the recorded value. These changes in market value are due to fluctuations in the marketplace having no effect on yield, as the City does not intend to sell securities prior to maturity. Nevertheless, these market changes can impact the total value of the portfolio. Security Type Market Value % of Portfolio % Change vs. 3/31/20 Permitted by Policy In Compliance U.S. Treasury $32,439,910 39.0%-6.3%100%✓ Federal Agency $22,614,241 27.2%+7.6%100%✓ Municipal Obligations $1,074,053 1.3%-30%✓ Negotiable CDs $8,076,328 9.7%-1.7%30%✓ Corporate Notes $14,690,199 17.6%+0.3%30%✓ Asset-Backed Securities $4,301,901 5.2%+0.2%15%✓ Securities Sub-Total $83,196,631 Money Market Fund $36,398 <0.1%-0.1%20%✓ Accrued Interest $452,692 Securities Total $83,685,721 Socially Responsible Investment Policy The City’s Investment Policy restricts issuers from the portfolio who generate revenue from tobacco, electronic cigarette, or tobacco-related products, or who support the direct production or drilling of fossil fuels. The City’s portfolio is in compliance with SRI restrictions. The tables to the right show the Bloomberg Industry Classifications (“BICS”) for all the portfolio’s holdings. Issuer Sector (BICS) Toyota Motor Credit Corp Automobiles Manufacturing American Honda Finance Automobiles Manufacturing Hyundai Auto Receibles Trust Automobiles Manufacturing Ally Auto Receivables Trust Automobiles Manufacturing Copart, Inc.Automobiles Manufacturing CarMax, Inc Automobiles Manufacturing Nissan Auto Receivables Automobiles Manufacturing Bank of Montreal Chicago Banks Westpac Banking Corp NY Banks Swedbank NY Banks Wells Fargo & Company Banks Nordea Bank AB NY Banks Skandinav Enskilda Banken NY Banks Societe Generale NY Banks Apple Inc Communications Equipment Mastercard, Inc Consumer Finance San Diego Community College District Education Issuer Sector (BICS) Walt Disney Company Entertainment Content BNY Mellon Financial Services DNB Bank Financial Services Hershey Company Food & Beverage California State General Government FHLMC Government Agencies FNMA Government Agencies FHLB Government Agencies FFCB Government Agencies Wal-Mart Stores Mass Merchants Pfizer Inc.Pharmaceuticals Amazon.com, Inc.Retail -Consumer Discretionary Home Depot Retail -Consumer Discretionary Intel Corp Semiconductors IBM Software & Services Adobe, Inc Software & Services U.S. Treasury Sovereigns Source: Bloomberg. BICs is an industry classification system developed and utilized by Bloomberg that classifies securities b ased on business, economic function, and other characteristics. Total Return Total return is calculated based on interest and both realized and unrealized changes in market value; this is expressed as a rate of return over a specified period of time based on cost and is backward-looking. •Focused on long -term performance and growth •Affected by both yield and market value fluctuations •Reflects “true value” of the portfolio •Recommended approach by the Government Finance Officers Association PFM Managed 06/30/2020 03/31/2020 Average Maturity (Years)2.55 2.28 Effective Duration1 2.29 2.11 Average Market Yield 0.43%0.90% Total Rate of Return 3 Months 1 Year 3 Years Since Inception City of SLO 1.18%4.79%3.16%2.24% 0–5 Treasury Index 0.23%4.59%2.97%2.06% Variance +0.95%+0.20%+0.19%+0.18% 1Effective duration is the approximate percentage change in price for each 1% change in interest rates. Summary of Activity for the Quarter & Future Liquidity As of June 30, 2020, the investment portfolio was in compliance with all State laws, the City's Statement of Investment Policy, and the City’s Investment Management Plan. Cash receipts and disbursements are consistent with past trends for the quarter. The cash management program contains enough liquidity to meet at least the next three months of expected expenditures by the City as well as by related parties. If you have any questions concerning this report, or require additional information, contact Brigitte Elke, Finance Director at (805) 781-7510. Investment Portfolio Benefits All Funds The City’s cash and investment portfolio represents money from all City funds, including the General Fund, enterprise funds (Water, Sewer, Parking, Transit), special revenue funds (Tourism, Downtown Assessments), capital projects funds, and other funds which are restricted to specific purposes. In general, monies held by the City are either allocated by the City Council for spending or are purposefully retained in reserve. For example, the money in the Capital Outlay Fund has been identified to provide particular capital projects for the community, and there is a plan for spending down the cash balance as the projects progress. Balances held in reserve per the City’s financial policies equate to 20% of the operating budget. For the fiscal year 2019-20, they are listed in the chart to the left. Fund FY 2019–20 General $ 10,230,000 Water $ 4,572,000 Sewer $ 2,844,000 Parking $539,000 Transit $820,000 Tourism $100,000 Investment Objectives The investment objectives of the City of San Luis Obispo are first, to provide safety of principal to ensure the preservation of capital in the overall portfolio; second, to provide sufficient liquidity to meet all operating requirements; and third, to earn a commensurate rate of return consistent with the constraints imposed by the safety and liquidity objectives. The City follows the practice of pooling cash and investments for all funds under its direct control. Funds held by outside fiscal agents under provisions of bond indentures are maintained separately. Interest earned on pooled cash and investments is allocated quarterly to the various Quarterly Investment Report funds based on the respective fund’s average quarterly cash balance. Interest earned from cash and investments with fiscal agents is credited directly to the related accounts. It is common for governments to pool the cash and investments of various funds to improve investment performance. By pooling funds, the City can benefit from economies of scale, diversification, liquidity, and ease of administration. The City uses the services of an investment advisor, PFM Asset Management, to manage a portion of the City’s portfolio. The City’s strategy is to retain approximately 25% of the portfolio to manage its day- to-day cash flow needs, while PFM’s focus is on longer-term investment management. In addition, the City has retained direct control of several investments that had been acquired before the City began to use investment advisors. All investments are held by the City in a safekeeping account with Bank of New York Mellon, except for investments held by trustees related to bond financings, which are held by either US Bank or Bank of New York Mellon. Distribution List City Council Heidi Harmon Mayor Andy Pease Vice Mayor Aaron Gomez Council Member Erica A. Stewart Council Member Carlyn Christianson Council Member Investment Oversight Committee Heidi Harmon Mayor Daniel Humphrey Public Member Derek Johnson City Manager Brigitte Elke Director of Finance Debbie Malicoat Accounting Manager/Controller Natalie Harnett Principal Financial Analyst—Budget Independent Auditor Badawi & Associates PFM Asset Management LLC Monique Spyke Managing Director © PFM 1 City of San Luis Obispo Environmental, Social, and Governance Investment Criteria PFM Asset Management LLC 50 California Street Suite 2300 San Francisco, CA 94111 415.982.5544 pfm.com September 2020 © PFM 2 Agenda ESG Investment Criteria Appendix –PFM’s Fixed Income ESG Investment Solution ESG: Environmental, Social, and Governance Measuring ESG Risk Exposure © PFM 3 Where We Are Introduction to ESG Investment Determine ESG investment parameters. Incorporate ESG investment criteria into the Investment Policy Statement Execute an amended investment advisory agreement Integrate ESG into the management of the City’s investment portfolio Identify eligible investments based on the City’s ESG investment parameters Monitor ESG risk Review, discuss, and refine ESG investment criteria as needed © PFM 4 SLO Portfolio as of August 31, 2020 Constituent ESG Risk Ratings and Subindustry Rankings Source: Sustainalytics. Based on ESG risk assessments on August 31, 2020. Low ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Adobe Systems Inc 13.3 2% The Home Depot Inc 13.4 14% CarMax Inc.13.5 31% Intel Corp 15.5 2% Walt Disney Co 16.3 40% Mastercard Incorporated 16.6 15% DNB ASA 16.9 3% International Business Machines Corp 17.6 9% Medium ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Nordea Bank AB 21.2 8% Bank of New York Mellon Corp 21.5 6% Federal National Mortgage Association 22.3 8% Apple Inc 23.6 45% Ally Financial Inc.23.9 20% Skandinaviska Enskilda Banken AB 24.0 16% Federal Home Loan Mortgage Corp 25.1 18% The Hershey Company 25.3 4% Sumitomo Mitsui Financial Group Inc 26.4 26% Capital One Financial Corporation 26.6 43% Swedbank AB 27.6 32% Walmart Inc.28.4 68% Toyota Motor Corporation 29.5 45% Pfizer Inc 29.7 6% High ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Honda Motor Co Ltd 30.0 48% Amazon.com Inc 30.0 100% Wells Fargo & Company 30.8 45% Credit Suisse AG 32.6 53% Societe Generale SA 32.7 54% Nissan Motor Co Ltd 34.3 80% Hyundai Motor Company 38.3 97% © PFM 5 Measuring ESG Risk Exposure © PFM 6 Who is Sustainalytics & What is the ESG Risk Rating? A firm dedicated to independent ESG and corporate governance research, ratings, and analysis •Supports investors around the world with the development and implementation of responsible investment strategies, as it has done for over 25 years •Continuously conducts in-depth research and analysis on over 16,000 public and private companies Sustainalytics’ ESG Risk Ratings enable investors to evaluate different organizations, using a consistent methodology, by quantitatively defining a company's material ESG risk on a scale of 0 -100 Lower scores = lower ESG risk Negligible Low Medium High Severe 0-9.99 10-19.99 20-29.99 30-39.99 40-100 ESG Risk Rating Scale © PFM 7 How is the ESG Risk Rating Determined? The ESG Risk Rating measures economic value at risk based on exposure to unmanaged ESG Risks An organization’s ESG risk assessment is based on two primary factors: •ESG Risk Exposure –Determined at the subindustry level with adjustments for company-specific risk exposure levels •Management of ESG Risk Exposure –Based on policies, programs, quantitative performance, controversies, and corporate governance Source: Sustainalytics ESG Risk Rating = Unmanageable ESG Risk + Management Gap Unmanageable Industry-specific risks (carbon for oil companies) Manageable ESG Risk that is not being managed © PFM 8 ESG Risk Rating Decomposition Source: Sustainalytics Total Exposure Unmanageable Risk Manageable Risk Management Gap Managed Risk Managed Risk Unmanaged Risk ESG Risk Rating Total Exposure is the starting point for a company’s exposure to material ESG issues Some companies have Unmanageable Risks, e.g. an oil company will always face risks related to carbon until it changes its business model Of the , a portion is managed through a company’s policies, programs, management services, etc.; the remainder is considered unmanaged (Management Gap) The ESG Risk Rating measures unmanaged ESG risk © PFM 9 ESG Risk Rating Example Calculation –Apple Inc. Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale. Manageable Risk 36.5 Management Gap 20.6 Managed Risk 15.9 Managed Risk 15.9 Total Exposure 39.5 Unmanageable Risk 3.0 Total Possible Rating = 100ESG Risk Rating 23.6 (Medium ESG Risk) Unmanaged Risk 23.6 © PFM 10 Unmanaged Risk 34.9 ESG Risk Rating Example Calculation –3M Co. Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale. Manageable Risk 54.8 Management Gap 29.1 Managed Risk 25.6 Managed Risk 25.6 Total Exposure 60.6 Unmanageable Risk 5.8 Total Possible Rating = 100ESG Risk Rating 34.9 (High ESG Risk) © PFM 11 Governance 8.2 (23%) Social 13.6 (38%) Environment 13.2 (39%) ESG Risk Rating Decomposition Example Calculation Source: Sustainalytics. Last updated August 31, 2020. Illustration not drawn to scale. MEI scores might not add up to ESG breakdown scores due to rounding. Apple Inc. ESG Risk Rating 23.6 (Medium) Governance 10.6 (45%) Social 11.8 (50%) Environment 1.2 (5%) Material ESG Issue ScoresESG Breakdown Data Privacy and Security 5.2 Human Rights -Supply Chain 1.1 Human Capital 5.3 Product Governance (S)0.2 Corporate Governance 3.5 Business Ethics 7.1 Carbon -Own Operations Product Governance (E) 0.5 0.7 3M Co. ESG Risk Rating 34.9 (High) Material ESG Issue ScoresESG Breakdown Data Privacy and Security 3.3 Human Capital 2.7 Occupational Health and Safety 1.9 Product Governance 5.7 Corporate Governance 3.4 Business Ethics 4.8 Emissions, Effluents and Waste 2.9 Carbon -Own Operations 3.4 Carbon -Products and Services 1.4 Resource Use 2.6 E&S Impact -Products and Services 2.8 © PFM 12 Aerospace & Defense Construction & Engineering Electrical Equipment Industrial Conglomerates Precious Metals Technology Hardware Auto Components Construction Materials Energy Services Insurance Real Estate Telecommunication Services Automobiles Consumer Durables Food Products Machinery Refiners & Pipelines Textiles & Apparel Banks Consumer Services Food Retailers Media Retailing Traders & Distributors Building Products Containers & Packaging Healthcare Oil & Gas Producers Semiconductors Transportation Chemicals Diversified Financials Homebuilders Paper & Forestry Software & Services Transportation Infrastructure Commercial Services Diversified Metals Household Products Pharmaceuticals Steel Utilities Sustainalytics Industry Categories Sustainalytics has categorized each rated organization into 42 different industries and 138 subindustries ESG criteria may include an exclusionary component with exclusions based on specific industries and subindustries Source: Sustainalytics. The highlighted industries are part of the industry exclusion approach. © PFM 13 ESG Investment Criteria © PFM 14 SLO Portfolio as of August 31, 2020 Constituent ESG Risk Ratings and Subindustry Rankings Source: Sustainalytics. Based on ESG risk assessments on August 31, 2020. Low ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Adobe Systems Inc 13.3 2% The Home Depot Inc 13.4 14% CarMax Inc.13.5 31% Intel Corp 15.5 2% Walt Disney Co 16.3 40% Mastercard Incorporated 16.6 15% DNB ASA 16.9 3% International Business Machines Corp 17.6 9% Medium ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Nordea Bank AB 21.2 8% Bank of New York Mellon Corp 21.5 6% Federal National Mortgage Association 22.3 8% Apple Inc 23.6 45% Ally Financial Inc.23.9 20% Skandinaviska Enskilda Banken AB 24.0 16% Federal Home Loan Mortgage Corp 25.1 18% The Hershey Company 25.3 4% Sumitomo Mitsui Financial Group Inc 26.4 26% Capital One Financial Corporation 26.6 43% Swedbank AB 27.6 32% Walmart Inc.28.4 68% Toyota Motor Corporation 29.5 45% Pfizer Inc 29.7 6% High ESG Risk Issuer Name ESG Risk Score Subindustry Percentile Honda Motor Co Ltd 30.0 48% Amazon.com Inc 30.0 100% Wells Fargo & Company 30.8 45% Credit Suisse AG 32.6 53% Societe Generale SA 32.7 54% Nissan Motor Co Ltd 34.3 80% Hyundai Motor Company 38.3 97% Please note that no issuers in City’s portfolio are in the recommended industry exclusion list, as detailed on page 16. © PFM 15 Our Understanding of the City’s SRI & ESG Objectives Approach #1 (SRI) Current Investment Policy Requirement –Policy restrictions •Issuers that produce tobacco, electronic cigarette, or tobacco-related products •Issuers involved in the direct production or drilling of fossil fuels Approach #2 (Expanded SRI) Additional exclusions under consideration. Issuers directly involved in •Weapons/guns manufacturing •Deforestation •Private Prisons Approach #3 (SRI & ESG) Additional ESG Investment Objectives •Gender equality (Social) •Clean energy (Environmental) •Water (Environmental) •Clean transportation (Environmental) •Organic Products (Environmental) SRI Approach #1 SRI Approach #2 SRI & ESG Approach #3 © PFM 16 ESG Investment Approach Summary Approach #3 ESG Investment Criteria ESG Risk Rating Limit Issuer ESG Risk Rating < 30 (medium or better risk category) ESG Risk Rating Exception: Top ESG Performers Within Subindustry Peer Groups Issuer ESG Risk Rating is between 30-39.99 and the Issuer subindustry ranking is in the top 25th percentile Industry Exclusions Energy Services Oil &Gas Producers Refiners & Pipelines Aerospace & Defense Paper & Forestry Sub-Industry Exclusion Tobacco Authorized and Suitable Investments subject to ESG Investment Criteria Banker’s Acceptances Commercial Paper Negotiable Certificates of Deposit Corporate & Bank Notes Asset-Backed Securities © PFM 17 Example Application of ESG Investment Parameters The example below assumes both issuers meet the City’s investment policy requirements Applying the example ESG investment parameters, only one issuer below is an eligible investment ESG Investment Parameters Maximum ESG Risk Rating = 39.99 Subindustry Rating Requirement = Top 25% (Subindustry rating is <= 25%) Industry & Subindustry Exclusions Issuer Coca-Cola Co.Amazon.com Inc.Chevron Corp S&P / Moody’s Credit Ratings A+ / A1 AA-/ A2 AA / Aa2 ESG Risk Rating (As of August 31, 2020)24.2 30.0 40.26 Subindustry Ranking (As of August 31, 2020)38.0%100.0%38.6% Industry Food Products Retailing Oil & Gas Producers Eligible Investment YES NO NO Sources: PFM Approved Issuer list as of 12/31/19. Sustainalytics; based on ESG risk assessments on or prior to August 31, 2020. © PFM 18 ESG Portfolio Investment Universe Eligible Issuers 105/124 PFM Approved Issuers1 1. As of April 2020. Excludes issuers in the Treasury, Supranationals, Federal Agency sectors, and “BBB” rated issuers. 2. Industries as defined by Sustainalytics. The chart only includes issuers in industries that are impacted by the application of the ESG investment criteria. 105 Eligible issuers based on the application of the ESG investment criteria Credit Quality Comparison (# of Issuers) A Rated AA Rated Money Market Securities 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% ESG Approach Eligible Issuers by Industry2 (# of issuers) Automobiles, 9 Banks, 46 Chemicals, 1 Diversified Financials, 11 Food Products, 4 Food Retailers, 2 Healthcare, 2 Household Products, 2 Industrial Conglomerates, 3 Insurance, 2 Machinery, 2 Pharmaceuticals, 6 Retailing, 3 Semiconductors, 2 Software & Services, 6 Technology Hardware, 2 Telecommunication Services, 1 Transportation, 1 © PFM 19 PFM’s Fixed Income ESG Investment Solution © PFM 20 What is ESG Investing? ESG investing is a sustainable investment approach •More inclusive than Socially Responsible Investing (exclusionary approach) •Broader in scope than thematic and impact investing Incorporates measurable non-financial ESG factors into an investment analysis Climate Change Air Pollution Deforestation Water Pollution Board Composition Bribery & Corruption Lobbying Executive Compensation ENVIRONMENTAL How a company limits its environmental impact and carbon footprint SOCIAL How a company treats its employees, customers, community, and other companies it interacts with GOVERNANCE How a company is led and managed, including executive pay and any internal controls Data Protection Human Rights Gender & Diversity Community Relations © PFM 21 A Customizable & Flexible Approach Investment strategies Investment management Measurement & Reporting + Sustainalytics is a leading independent ESG and corporate governance research, ratings and analytics firm that supports investors around the world with the development and implementation of responsible investment strategies. For more information, visit www.sustainalytics.com. PFM employs our proven investment process and leverages Sustainalytics’ ESG data and analytics to implement and manage ESG fixed income investment solutions ESG Risk Ratings & Rankings Alerts (“Controversies”) Screening Tools © PFM 22 Disclosures This material is based on information obtained from sources generally believed to be reliable and available to the public, however PFM Asset Management LLC cannot guarantee its accuracy, completeness or suitability. This material is for general information purposes only and is not intended to provide specific advice or a specific recommendation.All statements as to what will or may happen under certain circumstances are based on assumptions, some but not all of which are noted in the presentation. Assumptions may or may not be proven correct as actual events occur, and results may depend on events outside of your or our control. Changes in assumptions may have a material effect on results. Past performance does not necessarily reflect and is not a guaranty of future results. The information contained in this presentation is not an offer to purchase or sell any securities. Sample portfolio is provided for illustrative purposes only and is not a recommendation. As economic and market conditions may change in the future, so may PFM’s recommendations as to the sale and purchase of securities in the portfolio. There is no guarantee the investment objectives will be achieved as the investment portfolio will only include holdings consistent with the applicable Environmental, Social, and Governance (ESG) guidelines. As a result, the universe of investments available will be more limited. ESG criteria risk is the risk that because the investment portfolio ESG criteria excludes securities of certain issuers for nonfinancial reasons, the investment portfolio may forgo some market opportunities that would be available to investment portfolios that do not apply ESG criteria.