Ron Cohen, Wells Fargo Asset Management’s head of defined contribution investment only (DCIO) sales, took on his current role back in 2015, moving over from J.P. Morgan’s national accounts team for defined contribution investment services.

While that was just four years ago, Cohen says the retirement industry’s conversation around the subject of environmental, social and governance (ESG) investing has evolved remarkably quickly in the time since. Cohen points to the growth in his own firm’s ESG-focused staff, including the hiring of Fredrik Axater as an executive vice president and head of strategic business segments—of which ESG is one of the most promising. Cohen also points to the influence of Nate Miles, who joined the firm in 2017 as head of DCIO, for whom ESG is a significant topic.

“When you look more broadly at the industry, what we as DCIO managers provide to advisers as value-add service has evolved a lot,” Cohen observes. “Back in 2015 we were talking about, for example, helping advisers do surveys of their clients and really understand what their clients wanted versus what advisers think their clients wanted. Today, we are now talking about ESG capabilities as a big part of the value-add conversation, among some other areas.”

Cohen adds that, five years ago, the retirement plan arena was only just starting to think about the ESG topic, whereas today it is a frequently addressed subject at conference events and in trade publications. The subject increasingly comes up in formal requests for proposals circulated by plan sponsor clients and prospects, as well.

According to Timothy Calkins, director of fixed income at Nottingham Advisors, client expectations are indeed evolving rapidly around the question of how environmental, social and governance-focused investment approaches fit into the world of institutional asset management.

“I’ve been working on and alongside the topic of ESG for some time now,” Calkins says. “Back, say, 10 years ago, the consensus was still that you had to give up some performance by ‘doing good’ in the markets. But more recently, especially since some big meta-studies published in 2015, the conclusion around ESG integration has moved to being either neutral or more often positive from the performance perspective.”

In practical terms, Calkins’ firm is already using separately managed accounts (SMAs) as a way to deliver ESG strategies to clients. Some clients choose to really engage with risk management and return-boosting opportunities having to do with the environment, he explains, while others may choose to utilize a gender lens when reviewing the fund managers they use or the companies they invest in. As opposed to mutual funds or collective trusts, the SMAs can be customized to allow clients to uniquely implement their ESG perspective.

“Being able to offer customized ESG solutions is a big part of our future, we feel, as is finding new ways to clearly demonstrate the performance benefits of these strategies,” Calkins says. “Especially when it comes to serving clients under the Employee Retirement Income Security Act, we know the performance conversation is always going to be critical.”  

Cohen agrees that there exists strong, objective evidence there to show that ESG utilization is at a minimum neutral from a performance standpoint. In fact, he says, the majority of the evidence actually shows ESG can be a positive from the performance perspective.

At this stage, Cohen highlights, Wells Fargo Asset Management has not rolled out any funds with an ESG label meant for retirement plans. Instead the firm is taking “an education-first approach” and creating a value-add ESG investment review program that advisers and sponsors have already eagerly embraced.

“Now let me be clear, we’re on the road to have ESG-labeled product, but at this point it’s not about selling products,” Cohen notes. “What I’m really excited about is the scorecard component we have recently rolled out in partnership with Morningstar. We felt from the beginning that, at a minimum, plan sponsors would want their advisers to be able to talk with them about what the existing fund options look like from an ESG perspective.”

Advisers can use Wells Fargo’s scoring service to analyze a plan sponsor’s exiting menu to ensure the plan is using funds that perform well not only from an absolute return perspective, but also from an ESG perspective and a risk mitigation perspective.

“Sponsors can and should promote this among their participants. We have seen the data that shows employees have more favorable views of the employer organization when ESG is offered,” Cohen says. “The scorecard is an opportunity for the adviser to sit down and talk about all this. It’s important to point out that this ESG framework is something that can be applied across the market, it’s not just about ESG-labeled funds. We can see the individual scores of funds on an ESG basis and run very informative comparisons of risk, performance and ESG scores.”

Cohen warns that, if an adviser is not having these conversations with clients today, somebody else is.

“It is way too big of a topic to ignore,” he says. “Especially for advisers working in certain regions of the U.S., this is really an important topic. I was recently talking with a group of advisers in Austin, which is known as a pretty progressive city, and they were very excited about the ESG scorecard. The employers in that region are really embracing this topic. And then naturally there are areas where advisers don’t hear about ESG as much, but even in those regions, the polling shows the participants are pushing for ESG.”

At this stage Cohen cannot offer more specific detail about Wells Fargo’s plans for ESG-labeled products in the retirement plan space, nor could he speculate whether ESG will be more conspicuously included in the firm’s asset-allocation solutions or target-date funds (TDFs).

Reflecting on what comes next with ESG investment opportunities, Calkins says ESG can only become more mainstream and more accepted by investors, even under ERISA.

“The consensus is that this is a material conversation and that ESG can positively impact returns,” he says. “With younger people and Millennials growing to be a larger part of the investing population, this topic is not going to diminish. That’s why we are moving enthusiastically into this space.”

Cohen and Calkins agree that product development will heat up in this area in the coming years. At Nottingham, for example, the firm plans to roll out additional ESG products to complement its two existing ESG-labeled strategies. Next will come ESG approaches to global equity and global income.

“We have seen a lot of activity in terms of launching mutual funds and ETFs that are ESG focused, but these funds are actually mostly limited in their scope, perhaps focusing just on the S&P 500 or small-cap funds,” Calkins explains. “This is a hurdle from the plan sponsor perspective because you don’t want to have to include 50 or 100 funds to cover the market in both an ESG and non-ESG way. So we expect ESG to evolve to really be applied in asset-allocation solutions. In our case, we have developed risk-based ESG asset-allocation strategies that hit just about every participants’ needs.”