ESG investing is a hot subject in the corporate retirement plan investing world right now. Attracting the attention of individual investors, fund managers, and regulatory bodies, ESG has shaken up conventional ways of looking at and evaluating plan investment strategies and generated both positive responses and criticism from many in the field. Today we’ll break down all the major things you should know.
Let’s start with the basics. What are ESG investments and why are plan sponsors requesting more ESG investments for their corporate retirement plans?
ESG funds are comprised of carefully-selected assets that are assessed on three categories of factors—environmental, social and (corporate) governance. These considerations help to form a more holistic view of the company and the investment. When paired with traditional stock valuation strategies, the analysis of these factors is referred to as ESG integration.
Environmental: Environmental factors look at the impact to the planet of the company and its practices. This can include such efforts as recycling and safe disposal practices, greenhouse gas emissions goals, and environmental benefits for employees. As sustainability continues to be a front-of-mind issue for many investors, environmental factors significantly impact their investment decisions.
Social: The social part of the equation examines the people-focused parts of the business. What is the company’s mission? How does the company treat and compensate its employees? What stance does the organization take on social justice issues? These questions and many more help to inform the impact that the company has on people.
Governance: As their name would suggest, corporate governance factors are all about the oversight of the company. Investors are looking at indicators such as diversity among the executive board, executive pay, and how well the company balances the needs of all relevant stakeholders. Governance factors are important as they allow greater insight as to where the company is and where it may be headed.
Analyzed in conjunction with one another, these three ESG factors help to inform investors about areas of company health that can’t be captured in financial statements. They add more dimension to the traditional numbers-based approach to develop an investing strategy that is profitable, ethical, and sustainable. Classified as “intangible assets,” trends show that environmental, social and governance factors are making up an increasingly large percentage of asset value in the eyes of investors.
But it’s more than just feeling good about where you’re investing, it can be financially advantageous too.
According to an article in PlanSponsor Magazine, an S&P Global Market Intelligence study analyzed 17 exchange-traded and mutual funds with more than $250 million in assets under management (AUM) that selected ESG-related stocks and found that 14 of those posted higher returns than the S&P 500, with outperformers rising between 1.8% to 20.1%.
In the article Michelle Dunstan, who leads responsible investing at AllianceBernstein there may be good reason for this. In her philosophy, ESG factors are not simply accessory, but integral to the value of an asset and how its value will evolve over time. “Think about an industrial company that builds widgets, it has a factory and emits carbon. Ask yourself, is carbon taxed on the jurisdiction in which it’s currently operating? Could that become taxed at some point in the future? If so, include that in cash flows and take that into account when considering investment decisions…ask yourself whether new potential regulations could require a company to upgrade its equipment and thereby cost money.”
In addition to being a hot-button topic among individual investors and fund managers, ESG has also been under the scrutiny of bureaucratic groups including the Department of Labor (DOL) in recent months. Regulations proposed in June 2020 held defined-contribution plan sponsors accountable for keeping financial factors as their primary criteria for selecting assets. The move essentially undermined the ability of ESG investing to bring about financial gains on its own merit, resulting in confusion and some backlash from the fiduciary community. Many feared that with implementation of the proposed rules, they might face trouble for including ESG factors in their asset analysis at all.
The DOL has since changed its tone regarding the issue. In an updated statement released in November 2020, the group announced more lax rules around ESG investing in retirement plans and neglected to explicitly mention ESG in its guidance entirely. In an article from Plan Advisor, Lisa Woll, CEO of US SIF, the Forum for Sustainable and Responsible Investment, this is more in line with mounting evidence now available to demonstrate the efficacy of ESG integration in producing favorable financial outcomes for investors.
With all the recent conversation lately surrounding ESG investing, there are some things to note for plan sponsors who wish to include it in their investment strategies. First, take a look at your current Investment Policy Statement. New and existing investments should be able to meet the criteria for inclusion in the plan before the consideration of ESG factors. To foster more comfort among plan participants, it may also be worthwhile to offer ESG funds as a separate asset class in addition to a more traditional one. This allows you to adequately serve investors at a wide variety of confidence levels surrounding ESG. Even with the recent DOL rulings, ERISA rules will still apply to all final investment decisions.
ESG has already begun making waves in the financial world, and that trend is only expected to continue as investors become more aware of and concerned about the non-financial impacts of the companies they invest in. The professionals at the Segrust Group have vast knowledge of this unique investment type and can advise you on if and how it should be included in your retirement plan. Reach out to us via phone or on our website for a no-obligation consultation.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
There can be no guarantee that strategies promoted will be successful and no guarantee of positive results.
Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.
This information was developed as a general guide to educate plan sponsors, but is not intended as authoritative guidance or tax or legal advice. Each plan has unique requirements, and you should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations.
SOURCES
Benson, Alana. “ESG Investing: A Beginner’s Guide.” NerdWallet, 9 June 2021.
Barney, Lee. “Bill Would Clear a Surer Path for Plans to Offer ESG Funds.” PLANSPONSOR, 20 May 2021.
“Environmental, Social and Governmental (ESG) Fund Best Practices for Plan Sponsors.” Innovative Benefit Planning, 19 Apr. 2021.
Umpierrez , Amanda. “The Future for ESG Investing in Retirement Plans.” PLANSPONSOR, 27 Aug. 2020.
| This information is not intended as authoritative guidance or tax or legal advice. You should consult your attorney or tax advisor for guidance on your specific situation. In no way does advisor assure that, by using the information provided, plan sponsor will be in compliance with ERISA regulations. |