At the start of 2022, so-called “sustainable” or “impact” investment assets totaled $8.4 trillion in the U.S.,1 and much higher globally.2 And although these environmental, social and governance (ESG) investments are not new, they are now viable investment options in retirement plans.
If plan sponsors aren’t thinking about ESG options, it appears that plan participants certainly are considering it: About three-quarters of retirement plan participants would increase their contribution rate if offered ESG options. Nearly nine out of 10 want investments aligned with their values and 78% feel ESG investments can be a driver of strong performance.3
What are ESG investments, exactly?
They are investments that operate like any other mutual fund, but managers also incorporate ESG criteria into their decision making on investments. Each element refers to specific ways that a company affects or influences the following:
- Environment: Climate change, greenhouse gas emissions, deforestation
- Social: Working conditions, local communities, employee relations
- Governance: Executive pay, corruption, board diversity4
Retirement plan sponsors may feel as if offering ESG funds in their defined contribution plans investment lineup has risk. There’s the fear that such funds may underperform market indexes, don’t actually reflect ESG principles or that ESG investments could inject politics into the plan.
But those fears are usually overblown, as long as plan sponsors and their advisors approach ESG investing in a thoughtful manner using data to support their decisions.
Here’s five things to remember when investigating or implementing ESG investment options into a retirement plan:
1. ESG investing is imperfect. Plan participants will have different ideas about what which parts of “ESG” are most important. There is no perfect fund that meets everyone’s needs.
2. ESG investment options require due diligence. Just because a fund has “ESG” in its name or says it uses ESG criteria to select companies doesn’t mean it’s a good option. Plan sponsors need to adhere to the same rigorous fiduciary investment selection and monitoring process as any other potential investment.
3. An ESG investment has to be considered on its investment merits. As with any other fund or investment, an ESG-oriented fund must have an economic rationale before inclusion. It’s not enough for a fund to simply invest in “virtuous” companies, but that these companies perform as well or better than its peers.
4. Determine the most important factors for your participants. Consider surveying plan participants to help determine what’s important to them, then choose investments that are aligned with survey results. To that end, fund managers need to demonstrate how the fund is selecting companies and if they’re including or excluding specific products and industries.
5. Educate plan participants on ESG options. When developing ESG investment options, plan participants should receive education on ESG investing — what it is, the reasons it might make sense for individual investors and the effect on participants’ portfolios. In addition, plan sponsors should include the reasoning behind ESG in their investment policy statement.
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.
HUB Retirement and Private Wealth offers institutional and retirement services to for-profit and not-for- profit organizations and customized private wealth management services to individuals and families. HUB Retirement and Private Wealth employees are Registered Representatives of and offer Securities and Advisory services through various Broker Dealers and Registered Investment Advisers, which may or may not be affiliated with HUB International. Insurance services are offered through HUB International, an affiliate.
1 The Forum for Sustainable Investing, 2022 Report on US Sustainable Investing Trends, December 13, 2022.
2 Global Sustainable Investment Alliance, Global Sustainable Investment Review 2022, accessed January 20, 2023.
3 Schroders, 2022 Retirement Survey: ESG Report, April 2022.
4DCIIA, Incorporating ESG in DC Plans, June 2021.
