Social(K) BLOG
October 10, 2021

Embracing ESG in Investing and Retirement Savings

News flash! Incorporating environmental, social, and governance (ESG) factors into investments in retirement savings is not only allowed, but also encouraged by the Department of Labor (DOL)! Many people now believe that fiduciaries no longer have an option, but an obligation, to integrate ESG issues alongside financial screens when qualifying investments for a company plan.

Increased Appetite for ESG Funds

Asset flows into ESG funds have increased dramatically, and more product offerings have become available. From 2018 to 2020, the sustainable investing AUM in the United States grew 42 percent and now represents more than $17 trillion. This is $1 in every $3 of U.S. assets under professional management, and it has grown from a niche market to a mainstream offering (Figure 1).

The appetite specifically for ESG investments within retirement plans also continues to grow. Seventy-four percent of U.S. respondents to The Natixis 2016 Defined Contribution (DC) Plan Participant Survey said they wanted more socially responsible investments in their retirement plan and 82 percent said they wanted investments in their retirement plan that reflect their personal values. A study by Morgan Stanley showed that 90 percent of all Millennials want sustainable investing options as part of their 401(k) plans. Yet, in 2019, only 3 percent of all of 401(k) plans had an ESG option (Plan Council of America).

Social(k) started with only Calvert Funds, loads waived for plans under $1 million. Today, Social(k) offers funds from all ESG fund companies and adds new options each year as they qualify. Investment managers and the public realized the advantages of this strategy. More and more plans, platforms, and advisors began including additional screens when looking at investments.

Figure 1

Sustainable Investing in the United States, 1995–2020

Source: US SIF Foundation.

During this time, we saw the language change from socially responsible investing (SRI) to ESG investing. We have seen the DOL struggle with definitions and allowable practices over the years. One thing, however, has never changed. Adding additional screens that look at practices that affect the profitability of a business is a sound investment strategy. To ignore this research would only raise the risk of investments in companies that have not disclosed practices that will poorly affect the bottom line (see sidebar).

Two Companies Make Widgets …

…Company B does so with zero waste, Company A does not.

Company B pays a living wage, where Company A relies on the local community to provide social services to fill in the gap they leave with minimum wages. Company A churns through employees, and half its work force is always in training. Company B has a well-diversified board. Company A has a Board of Directors that rubber-stamps the CEO's calls, good or bad.

Which company represents the sound investment?

Sustainable and ESG investing research provides a deeper level of due diligence. Investment managers look for hidden risk. Finding these areas helps to identify extra costs or other drags on profits because of how a company behaves. Applying ESG screens to investments makes sense. The surprise is how long it took to figure out what seems obvious today.

In ERISA-qualified plans, the uptake of ESG options has been slower. As a rule, fiduciaries are cautious creatures. ERISA is a process statute. It only describes what a good or bad process is, and is not meant to be a tactical road map for plan sponsors. The process was slowed even more due to committees of laypeople and DOL audits, as well as guidance from President Trump’s administration that was not supported by 95 percent of the comments submitted to the DOL.1 However, President Biden has made it clear that he will not enforce the older guidance from the previous administration that was more cautious around ESG investing.

While the DOL has supported ESG, they have not fully embraced ESG options as Qualified Default Funds. The guidance does not prohibit either. As a fiduciary, you figure out what makes sense under your circumstances and leadership. Can you defend not screening for environmental risk? When the ESG target option from Natixis beats all other target-date funds, how can you choose not to pick that as QDIA?

Tendency Toward Inactivity

In addition to regulation, when you add in the tendency of many plan participants to set and forget, and the overall tendency of large plans toward indexing, you have a mix for inactivity. Behavior change is hard, even when there are compelling reasons for it. To create successful sustainable retirement plans, sponsors and participants need to be educated on their options. Often, changing a fund line up can take a long time. However, multiple voices are stronger than one. We are seeing new examples of coalition building, from employees meeting for “lunch and learns” to social media campaigns, which mobilize employees to lobby for, then move assets to, new ESG options in the company plan.

A Tipping Point for Investing

Fortunately, many across the public and private sector are incorporating ESG funds into their retirement options. Millions of federal workers will soon have the option to invest in ESG funds in their retirement plans.2 By next summer, The Thrift Savings Plan, the largest DC retirement plan in the world, will offer the plan’s 6.3 million participants the option to invest their $762 billion in ESG investment options.

Public companies are embracing sustainability, and boasting about it. This presents us with a chance to push these companies to increase ESG options in company retirement plans. Plan participants, in addition to plan sponsors, are realizing the tools they have available to them. As You Sow has created a Corporate Retirement Plan Sustainability Scorecard. This brings investment policy around ESG straight to the participants. Employees will be able to see the good, the bad, and the ugly of what they own (see sidebar).

As You Sow: Corporate Retirement Sustainability Scorecard

This initiative will empower the 110 million U.S. employees holding $9.2 trillion in retirement assets to align their retirement investments with their values. Many employees across the nation are unaware that their retirement plan investments are invested in climate change, prisons, weapons, and companies that score poorly on gender equality.

We are using our expertise in mutual fund sustainability analysis and our extensive database of ESG-screened companies to compare company sustainability goals to their retirement plan funds. Those investment options have been graded across seven environmental and social issues, including deforestation, climate, and gender equality.

Most employees assume the default option in their retirement plan is a safe choice. But if the fund manager does not incorporate climate risk and other sustainability issues into the portfolio composition, employees could be exposed to financial risks from unsustainable investments. Asset managers recognize they have a fiduciary duty to mitigate the systemic risks of climate change: In 2020, major asset manager BlackRock announced, “We intend to make sustainable funds the standard.”

We have selected Amazon and Comcast to be the pilot companies for this website, and plan to add more companies from the S&P 500 throughout the year. These companies have the unique opportunity to become industry leaders and help shift billions of dollars away from climate destruction and into companies that define the new economic paradigm in a safe, just, and sustainable world.

We have reached a tipping point with climate change. We are seeing human rights abuses go unchallenged, the media has lost credibility, and businesses seem to think paying a fair tax rate is unpatriotic. Businesses are telling us they are becoming good corporate citizens. Employees now have a way to hold these companies accountable. This could mean an economic revolution — one that will benefit the industry as well as the consumer.?

Megan Morrice, M.B.A. is head of Operations for ValuesAdvisor, a match-making platform for clients to find advisors who specialize in sustainable investing. She previously led client and partnership development at HIP Investor, a global leader in impact investing. She holds an M.B.A. in Sustainable Management from Presidio Graduate School. Morrice is passionate about helping individuals and organizations understand their financial options, align their money with their values, and creating financial products that best serve the needs of people.?

Robert (Rob) Thomas is the president of Springfield, MA-based Social(k), the most diverse socially responsible retirement investment platform in the United States. Independently and in conjunction with ExpertPlan, a paperless New Jersey-based 401(k)/403(b) recordkeeper, Thomas in 2005 created Social(k) to offer socially conscious investors the same breadth and depth of investment options available in conventional retirement programs. The platform offers most of the screened socially responsible funds as well as conventional funds and has been welcomed by the socially responsible community. Currently Social(k) works with an assortment of recordkeepers, TPAs, 3(38) and 3(16) fiduciaries, and advisory firms offering flexibility in products and services.

1 “Deep in the Agencies, Trump Officials Targeted ESG Investors. A Rollback Won’t Be Easy,” Barron’s, January 14, 2021.

2 “Federal workers to gain access to ESG in retirement portfolios,” Roll Call, July 15, 2021.

This post originally appeared in Issue 2 of Secure Retirement Institute's SRI Review, Oct 2021

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Social(k) offers hundreds of investments using Environmental, Social, and Governance, (i.e. ESG screened investments) backed by a plethora of Financial research. Structured into traditional Mutual Funds, Social(k) helps you sleep at night knowing that you’re pursuing the brightest possible future for your retirement and our planet.

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