Before Adding ESG Investments
The US SIF Foundation has launched a guide for defined contribution (DC) plan sponsors interested in sustainability. US SIF says sponsors of private-sector DC retirement plans are just beginning to meet participant demand for sustainable funds. A 2020 analysis for the US SIF Foundation, performed by ISS Market Intelligence’s BrightScope* platform of 58,590 401(k) plans, found that less than one-fifth had assets in funds that BrightScope considered “socially conscious.”
Other surveys find that employers worry about risking their fiduciary status, should they add environmental, social and governance (ESG) options to their plan. US SIF, therefore, suggests sponsors take these steps:
1) Learn more about sustainable investing and related performance and fiduciary matters. A 2020 Freshfields study, including interviews with policymakers, lawyers and senior investment professionals, says integrating ESG policies into investment practice and decisionmaking is increasingly part of regulatory and legal requirements for institutional investors, which are also asked to consider clients’ sustainability-related preferences and to report on how they meet these obligations.
2) Gauge participants’ interests. Sponsors should survey participants as to ESG investing, first clearly explaining it.
3) Discuss implementation with a consultant and/or plan administrator. The sponsor can start by asking its current plan administrator and any external advisers about their capabilities regarding ESG funds.
4) Choose a fund or funds, and monitor performance. Later, when the fund manager or consultant begins evaluating the fund’s financial performance, ask him to ensure that the fund meets return expectations, net of fees, in relation to its benchmark and peers; that it is maintaining its stated investment style and approach to sustainability; and that it keeps the fees comparable to the fund’s peer group.
5) Educate participants about ESG investments and the employer’s decision. Plan administrators, sustainable fund managers and/or consultants should be able to provide information about a lineup’s sustainable funds.
*BrightScope is an ISS Market Intelligence business and is part of Institutional Shareholder Services Inc. (ISS), which owns and operates PLANADVISER.