Defining good governance: Why investors should look to data-driven cities

Environmental, social and governance (ESG) investing is a go-to framework for asset managers focused on making investments that generate both financial returns and positive societal impact. However, investors are overlooking significant opportunities when evaluating municipal portfolios against this framework because a common definition of ESG still does not exist and, therefore, cannot be uniformly applied by firms that manage these investment strategies.

This is particularly true when it comes to defining what good governance looks like. Many investors review a city’s financial disclosure practices, pension and budget management, ability to repay debt or other qualitative factors, but city financials don’t paint the full picture of good governance. In our work with more than 150 cities through Bloomberg Philanthropies’ What Works Cities initiative, we have seen that, when cities improve the way they leverage data for decision-making, they deliver higher-quality services, maximize resources, and are more resilient in the face of challenges.

The willingness and ability of city leaders to use data effectively to drive better outcomes for residents must become part of how the investment community evaluates cities. There are two things to look for when making this determination.

First, investors should consider whether cities align their budgets to priorities and hold themselves accountable for achieving results. When Mayor Eric Garcetti took office in Los Angeles, he worked with the city’s general managers to develop key metrics that align departments’ work with overall strategic goals around delivering quality services for every resident. Departments were also expected to use data to track their performance, and residents can see this progress for themselves via updates on an online dashboard. Now, as part of the annual budget process, all funding requests must be tied to one or more citywide strategic goals and lay out a plan for quantitatively tracking progress. In addition, the city has added an additional requirement that select initiatives be rigorously evaluated for effectiveness as a condition of funding.

Second, investors should reward cities that are using a data-driven approach to make progress in areas that matter most to residents. Take Kansas City, Missouri, which regularly uses data on city performance and resident satisfaction as tools of governance in managing municipal finances. When residents identified aging infrastructure as a primary concern, Mayor Sly James and the City Council worked with the community to create a plan of action. In 2017, more than 60% of voters approved the $800 million general obligation (GO) bond needed to put that plan into action. Now that projects are underway, residents are seeing progress — and the impact of their tax dollars — in more than revitalized streets, sidewalks, and bridges. The DataKC team in the City Manager’s Office is also providing up-to-date information to residents on the three bonds they approved using the GO KC Project Explorer on the city’s open data portal.

We took these and other best practices into account when creating What Works Cities Certification, a national standard of excellence that evaluates how well cities are managed by measuring the extent to which leaders incorporate data and evidence in decision-making. Across the country, nearly 200 cities have stepped up to have their practices benchmarked against the national standard so they understand how to improve. In the past year, nearly 38% of these cities have used data to align their budgeting process with their strategic priorities. Thirteen cities, including Los Angeles and Kansas City, have been recognized as leaders in this field and achieved our Certification award.

The effective use of data should be the basis for a common definition of good governance that drives ESG investment in cities. With America rapidly urbanizing, cities are on the front lines of some of our nation’s most critical issues — from decaying infrastructure to the affordable housing crisis to cybersecurity threats — and insufficient municipal revenue leaves many cities struggling to respond to these growing needs. Public investments are vital to turn the tide, but equally important is investors’ trust that cities can fulfill projects with fiscal responsibility and with long-term impact on economic growth and quality of life. Data-driven cities are showing that they can deliver on their end of the bargain.