By Mark Olsen, Managing Director at PlanPILOT
As the world continues to recover from the effects of the COVID-19 pandemic, there has been an increasing movement in American society to look beyond just ourselves and consider the impact we’re making on the people and the world around us. This has gone beyond just individuals and has permeated corporate expectations as well.
So, what does this mean for retirement plan sponsors? As plan participants continue to demand morally conscious investments, plan sponsors have to be up to date and prepared for how to keep up with these requests.
Here at PlanPILOT, we can help plan sponsors navigate socially responsible investing. Here are three questions to consider to help you get started.
What Is ESG Investing?
ESG investing is a strategy that reviews the environmental, social, and governance practices of a specific company and assesses how those practices might impact the company’s performance in the stock market. ESG aims to examine the total ethical impact of an investment and align investors’ portfolios with their moral values. As a whole, it depends on a system of ratings based on each of the three identified areas:
- Environmental ratings: Takes into account factors such as management of greenhouse gas emissions, carbon footprint, waste disposal, and pollution.
- Social ratings: Includes a company’s involvement in building a stronger community, creating equal employment opportunities, ethical product sourcing, and human rights.
- Governance ratings: Looks at factors such as the pay structure and demographic makeup of a company’s leadership as well as its responsiveness to shareholders.
ESG is different from other socially conscious investment models in that its requirements are more specific. Other more generic terminology refers to investing styles that are sometimes similar in approach, such as “impact investing” or “socially responsible investing,” but do not place as much focus on maintaining investment returns.
How Interested Are Your Plan Participants?
A recent report by Natixis Global Asset Management found that 75% of employees said it was important to invest in socially conscious assets, and 61% said sustainable funds would increase their likelihood of investing in retirement plans. (1) Overall, the total assets under management involved in sustainable investment strategies jumped to $17.1 trillion, an increase of 42%, between 2018 and 2020. (2) This accounts for one third of all assets professionally managed in the United States. (3) Based on these numbers alone, it seems like the average participant is highly interested in making a change to ESG investing.
How Will ESG Impact Your Fiduciary Responsibility?
Despite the growth, many plan sponsors have been hesitant to add sustainable funds to their investment offerings due to concerns about their fiduciary responsibilities. They worry about investing in assets that don’t have a proven track record and therefore might affect the overall return received for the plan, potentially leading to fiduciary liability if left unchecked. These concerns are understandable. As a fiduciary, you are required to act in the best interest of your plan participants, which often means looking for the best return. But looking for the best return often means choosing morally questionable investments.
This catch-22 is a big question to tackle when considering if ESG is right for your employer-sponsored retirement plan. Nevertheless, the push for such investments has been gaining a lot of traction, and a new study conducted in 2020 states that “the integration of ESG issues into investment practice and decision-making is an increasingly standard part of the regulatory and legal requirements for institutional investors.” (4)
Additionally, a recent Morgan Stanley Institute for Sustainable Investing study examined the performance of more than 3,000 mutual funds and exchange-traded funds in 2020, and found that funds focused on “environmental, social, and governance (ESG) factors, across both stocks and bonds, weathered the year better than non-ESG portfolios.” The same study found that sustainable equity funds outperformed non-ESG peer funds by a median total return of 4.3 percent in 2020. (5) This means that plan sponsors do not have to sacrifice returns in order to include ESG in their investment offerings.
How Can We Help?
Adding socially conscious investment offerings to your retirement plan is a big step to take, and it can be hard to balance your fiduciary responsibilities against the desires of your plan participants. As an independent consulting firm that focuses on providing comprehensive advice to retirement plan sponsors, PlanPILOT has the tools and expertise to answer your questions about ESG investing. If you are interested in exploring your options, call us at (312) 973-4913 or email mark.olsen@PlanPILOT.com.
About Mark
Mark Olsen is the managing director at PlanPILOT, an independent retirement plan consulting firm headquartered in Chicago. PlanPILOT delivers comprehensive retirement plan advisory services to 401(k) and 403(b) plan sponsors. Drawing on more than two decades of experience, Mark provides institutional retirement plan consulting to 401(k), 403(b), and defined benefit plans. His specialties include plan governance, investment searches, investment monitoring, and plan oversight. Mark is recognized as a leader in the industry and speaks at national conferences, including those organized by Pensions & Investments, Stable Value Investment Association, and CUPA-HR.
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(1) https://www.plansponsor.com/us-sif-releases-tips-implement-sustainable-funds/
(2) https://www.ussif.org/blog_home.asp?Display=155
(3) https://www.ussif.org/blog_home.asp?Display=155
(4) https://www.plansponsor.com/us-sif-releases-tips-implement-sustainable-funds/
(5) https://www.morganstanley.com/ideas/esg-funds-outperform-peers-coronavirus