Paper Offers Tips for Incorporating ESG Investing in DC Plans

The Defined Contribution Institutional Investment Association (DCIIA) has published “Incorporating ESG in DC Plans: A Resource for Plan Sponsors,” which provides tips for plan fiduciaries considering how to incorporate environmental, social and governance (ESG) investing into a defined contribution (DC) plan.

“This comprehensive overview is the output from a cross-industry group of expert collaborators. It has been subject to extensive peer review and represents our industry’s best thinking on this topic from an educational, product-agnostic perspective,” DCIIA says.

Institutional investors have reported that ESG approaches will be a future focus, and individual investors, including retirement plan participants, are increasingly demanding ESG investments. However, retirement plan sponsors might still be cautious about offering ESG funds while regulatory guidance is stalled.

In its paper, DCIIA aims to provide plan sponsors with tactical steps that are consistent with their fiduciary obligations. Key recommendations include:

• Define “sustainability” and clarify investment beliefs on ESG considerations in relevant plan documents, such as a statement of investment beliefs or an investment policy statement (IPS);
• Examine key considerations and differences among three implementation options for DC plans to understand which path is most appropriate for the plan: material ESG factor integration across all investments, selective sustainable investing funds in the plan lineup, or self-directed brokerage windows;
• Measure and monitor sustainable investments in a manner consistent with the assessment of other investment options. Sustainable investing funds in alignment with pecuniary benefits, and other funds with goals or objectives independent of, but in alignment with pecuniary benefits, can be more deeply reviewed for intentionality and for the ESG attributes of the underlying holdings;
• Consult with legal counsel and investment consultants when assessing whether, when and how to implement sustainable investing; and
• Maintain clear documentation throughout the process to establish procedural prudence.

The paper also includes sections about participant communications and monitoring ESG investments.