Callan: DC Plan ESG Use Drops in ’22 On Backlash, Rule Confusion

A potential backlash on ESG investing along with confusion over DOL guidance led to a 14% drop in ESG implementation by institutional investors, including large pension and DC plans, according to new research from Callan.

Pushback against ESG investing by state governments and some in the investing community led to a drop in use among institutional investors this year, according research released by fund consultant Callan.

In an annual survey of 109 institutional investors on environmental, social and governance implementation, Callan found just 35% of respondents incorporated ESG factors into investment decisions this year, down from 49% in 2021.

“Overall, we’ve never seen more interest in the topic of ESG, but at the same time there’s also a segment of the institutional population and the broader set of stakeholders that has a backlash against ESG,” Thomas Shingler, a senior vice president ESG practice leader for the Summit, New Jersey based firm said on a webinar.

This sentiment was also reflected in respondents who do not use ESG saying they will in the future, which fell to 20% this year, down from a peak of 24% in 2020, Callan said.

While the survey showed increased interest in ESG topics, it also showed confusion over differing ESG regulation by state as well as a lack of clarity from the Department of Labor and Biden administration, Shingler said while presenting the results.

“We’re in a bit of purgatory while we await the final word from the Biden Administration,” Shingler said on the call.

The DOL’s guidance on ESG drew over 20,000 comments since it was announced in October 2021. The DOL then called separately for more responses in a request for suggestions on how it could take “actions to protect life savings and pensions from threats of climate-related financial risk.” Finally, on Oct. 6 of this year, the agency sent the rule to the White House’s Office of Management and Budget for final review, with potential passage before the end of this year, according to Shingler.

Small Plans, Less Focus

The lack of ESG incorporation was most acute among smaller plans with fewer resources and guidance, Callan said.

ESG incorporation was lowest among plan sponsors with under $500 million in assets at 25%. That figure increased as asset size rose, with investors managing $3 billion to $20 billion at 47% of ESG incorporation.

“It’s typically the larger institutional investors who can commit resources to ESG focus,” Callan said, noting an example in which a large institutional investor has a dedicated ESG person on staff to attend plan management meetings.

Among those that incorporate ESG, public organizations were actually least likely to implement them at 24%, followed by corporate plans at 26%. Finally, endowments came in next at 47%, and foundations made up 53% of active ESG users.

Those institutional investors that did incorporate ESG into investment decisions were mixed in their reasoning, Callan said. About 42% said they incorporated ESG to address stakeholder concerns, 20% did so for higher long-term returns.

Those that did not incorporate ESG mostly noted that the results were unproven or unclear (47%), don’t believe there is good research tying ESG to better performance (34%), and another 28% said they only consider factors that are purely financial.

When asked if ESG can lead to improved investment results, Thomas said the debate is ongoing. There is a “slew of research” arguing it does, as well as those arguing it doesn’t, he said.

The survey was conducted in May and June of 2022 with a mix of public and private retirement plans (DB and DC), foundations, and endowments. The full research results will be available to clients in two to three weeks, a Callan spokesperson said.