The Largest U.S. Retirement Plan Will Offer ESG Funds. Why It’s a Big Step for Sustainable Investing.

“This is a sea change,” says Matt Patsky, CEO of Trillium Asset Management, a sustainable investing specialist. “We’ve opened the floodgates to people feeling safe to select ESG options for retirement plans broadly.”

The federal government’s Thrift Savings Plan will begin offering environmental, social, and governance funds in 2022, the latest sign of the growing acceptance of sustainable investing by retirement plans.

The ESG funds will be available in a new “mutual fund window,” similar to a brokerage option, for the plan, a Thrift Savings Plan spokesperson told Barron’s.

The move is “huge” for the plan, the spokesperson said, but it is also significant for sustainable investing—and for the asset management industry, which is betting on growth in ESG. After all, the TSP is the U.S. largest retirement plan: It has about $760 billion in assets and covers about 6.3 million federal employees and service members. The window, which will include 5,000-plus funds, and will be run by Alight, will go live in summer 2022. 

Last year, the TSP hired Accenture Federal Services as its new record-keeper for the plan. The plan currently has a limited menu of offerings: 10 Lifecycle target-date funds, and five individual funds: government securities, fixed income, a large- and mid-cap stock index fund, a small-cap index fund, and an international index fund. BlackRock and State Street Global Advisors manage the funds.

In other defined-contribution plans, between 5% and 10% of participants use the brokerage option, the spokesperson said. She speculated that more TSP participants could use the mutual fund window to access ESG plans: “We have generally fewer funds than most 401(k) plans, so it’s possible more participants will go through the window.”

Lisa Woll, CEO of US SIF, the trade group for the sustainable investment industry, said the group has been in talks with TSP about adding sustainable offerings for more than a decade. “We’re really really pleased. The [participants] can’t get ESG options until they have that platform.”

Retirement plans have been reluctant to adopt ESG, partly because of last year’s controversial Trump administration rules that would have hindered the adoption of sustainable-investing practices. One, for instance, regulated the inclusion of sustainable investments in 401(k) plans, and a second would make it harder to push for ESG-related initiatives in proxy voting. 

The Labor Department—which administers and enforces the Employee Retirement Income Security Act, protecting the interests of employee-benefit-plan participants and their beneficiaries—has already said it wouldn’t enforce the rules. The Biden administration, in an executive order, also instructed federal bodies to consider how global warming affects the financial system and instructed the government to bolster savings and pensions, specifically mentioning ESG investing. It asked the Labor Department to report on measures that could “protect the life savings and pensions of U.S. workers and families from climate-related financial risk, and to assess how the Federal Retirement Thrift Investment Board,” which runs TSP, “has taken environmental, social, and governance factors, including climate-related risk, into account.” 

Across America, ESG retirement plan options are limited. According to the Plan Sponsor Council of America, just 2.9% of plans that it surveys annually offer an ESG/socially responsible fund option, and only about 0.1% of total plan assets are in those funds. McKinsey believes the defined-contribution market will be about $11.5 trillion in 2022.

Meanwhile, the appetite for sustainable investments is strong. Last year saw a record $50 billion-plus inflows into sustainable mutual funds and exchange-traded funds, or nearly a quarter of all the money that went into funds in 2020, according to Morningstar. 

This post originally appeared on Barrons, June 25, 2021 authored by Leslie P. Norton.

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