DC Plan Sponsors See Reason for Caution in ESG

Retirement plan advisers expect a steady stream of new ESG/SRI investment products in 2017, but it is less clear that sponsor clients are interested. 

By Amanda Umpierrez | December 30, 2016
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2016 was an effective year for providers and recordkeepers searching to incorporate socially and environmentally conscious investment themes; yet fear of fiduciary risk and industry jargon are slowing progress among defined contribution (DC) plans.

Within impact investing comes Environmental, Social and Governance (ESG) investing; Socially Responsible Investing (SRI); and Economically Targeted Investing (ETI); several terms that can cause enough confusion for sponsors to turn their heads.

Sri Reddy, senior vice president and head of full service investments at Prudential Retirement, explains that each word offers a different foundational way for people think about the broad category of impact investing.

“Within these labels there are investments that are exclusionary, meaning they won’t invest in certain industries, practices or types of companies,” he says. “There are investments that are more inclusionary, in that they seek out companies with certain behaviors, standards or causes.”

While the high-level terms ESG, SRI and ETI do share a connection, their meanings hold differences that are absolutely crucial for plan sponsors to understand. For example, according to labels used in a study by Prudential, SRI may involve avoiding certain businesses or sectors out of political or social concerns. ESG investing turns to the environmental, social and governmental stance within businesses; and ETIs are investments selected for the benefits they create, and the investment return to the employee benefit plan investor. According to The Case Foundation’s recent publication, “A Short Guide to Impact Investing,’ impact investments were traditionally made with the hopes of achieving a social or environmental impact, but increasingly these strategies are all being touted for their potential to boost financial return.

Financially beneficial or not, one can see how different perspectives and beliefs among plan participants may make it tougher for DC plans to move down the path of impact investing, especially within ESG and socially responsible investing, says Matt Cirillo, senior analyst for retirement at Strategic Insight in Boston. (Strategic Insight is the parent company of PLANADVISER.)

“There’s so many different viewpoints on what it is, and it varies with individual investors—what sort of impact they may want to have. So, a plan sponsor almost needs to balance two different competing priorities here,” he says. “If you’ve got an initiative to try and streamline a plan menu and provide the most effective lineup for your participants, how do you balance that with all of these options out there? How do you balance the desire of each individual participant with the overall goals of the plan?”

NEXT: Impact investing requires balance