investment-oriented | PLANADVISER January/February 2017

Investing in Harmony

DOL guidance and Millennial interest spur plans to consider ESG.

By Lee Barney | January/February 2017
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Art by Lars Leetaru

While environmental, social and governance (ESG) investment options may not be very common among retirement plans in general, they are growing more prevalent among large and mega plans. Because trends that begin at the large end of the market tend to move downstream—and also because of keen interest in ESG among Millennials, Generation X and women—experts expect demand to increase, leading more sponsors to offer these types of investment options in the years to come.

The 2016 PLANSPONSOR Defined Contribution (DC) Survey found that among plans of all sizes, only 11.8% offer socially responsible funds. Among micro plans, it is a mere 9.0%. However, the percentage spikes to 15.1% among both large and mega plans. Keith Clark, a partner at DWC ERISA [Employee Retirement Income Security Act] Consultants in St. Paul, Minnesota, thinks the reason large plans offer ESG funds is because they are “feeling the ESG heat at the corporate level, even before it is raised as a possibility for their 401(k) plan.”

For plan sponsors interested in such an investment direction, but unclear how to integrate the considerations into their due diligence,

Department of Labor (DOL) Interpretive Bulletin (IB) 2015-01 was a welcome resource. According to Nicole Crum, a partner in the investment management group at Sullivan & Worcester LLP in Washington, D.C., the document says, “ESG factors may have a direct relationship to the economic and financial value of an investment, as long as its performance is on par with similar investments.”

This guidance helped convince Natixis Global Asset Management to file a registration statement with the Securities and Exchange Commission (SEC) this past December to launch the industry’s first ESG-oriented target-date funds (TDFs): the Natixis Sustainable Future Funds. Because surveys Natixis has conducted indicate that over 70% of people of all ages are interested in ESG investing, Ed Farrington, Natixis executive vice president of retirement, expects more SRI and ESG funds to find their way onto retirement plan lineups in the coming years. “The conversation [about] ESG is an important one for advisers and plan sponsors,” he says.

Certainly, in the investment community at large, ESG and socially responsible investing (SRI) are growing at a significant rate, according to US SIF: The Forum for Sustainable and Responsible Investment. U.S.-domiciled assets under management (AUM) had grown to $8.72 trillion at the start of 2016, a 33% increase since 2013. Today, ESG investments account for one out of every five dollars under professional management in the U.S.

Chartered financial analysts (CFAs) have been trained in ESG investing since 2009, notes Matt Orsagh, director of capital markets policy at the CFA Institute in Charlottesville, Virginia. “The 200,000 people around the world who have taken the CFA exams have all gotten the same message about the importance of ESG,” he observes.