The United States has the largest retirement plan market in the world. With more than 700,000 private sector workplace retirement plans, it covers 136 million participants and, as of the end of 2019, held assets of more than $11 trillion. For some investors, their only exposure to mutual funds is through their retirement plans.
According to the recently released “Report on US Sustainable and Impact Investing Trends 2020,” more than $17 trillion of professionally managed assets in the United States use one or more sustainable investment strategies. Yet, the report found that fewer than one-fifth of private sector retirement plans offer funds that consider environmental, social and governance (ESG) criteria as part of their investment analysis. This is despite the fact that there is strong interest among individual investors—such as retirement plan participants—in sustainable investing options.
Individual investors want sustainable investing options: According to a 2019 survey by Natixis Investment Managers of 1,000 U.S. employees, including 700 participants in 401(k) and other defined contribution (DC) plans:
- 61% said they would be more likely to contribute, or increase contributions, to their workplace retirement savings plan if they knew their investments were doing social good, and
- 74% indicated they believe that companies that provide clean water and clean energy present significant growth opportunities.
Similarly, a 2019 study by the Morgan Stanley Institute for Sustainable Investing of 800 U.S. individual investors with assets of $100,000 or more found that 85% of all respondents—and 95% of Millennials—were interested in sustainable investing, up from 75% and 86%, respectively, in a survey the institute conducted two years earlier.
Large majorities in the Morgan Stanley survey said they believe their investment decisions could help improve the world.
- Seventy-one percent of all survey respondents—and 85% of Millennials— agreed that “it is possible for my investment decisions to influence the amount of climate change caused by human activities.”
- More than 80% agreed that “it is possible for my investment decisions to create economic growth that lifts people out of poverty.”
Asset managers recognize the value that ESG analysis can offer. Numerous studies confirm that companies with good ESG policies and records tend to deliver better financial performance. Not surprisingly, seven of the 15 investment management firms that constitute the top 10 defined benefit (DB) and the top 10 DC plan managers in the United States are signatories to the Principles for Responsible Investment and thus pledge to “incorporate ESG issues into investment analysis and decisionmaking processes.”
In US SIF’s 2020 survey of sustainable investing trends in the United States, we identified 384 U.S. money managers that consider ESG criteria in portfolio selection and investment analysis across $16.6 trillion of assets managed on behalf of both institutional and individual clients. In the survey, 113 money managers with aggregated assets of $3.6 trillion responded to a question on their motivations for incorporating ESG criteria into their investment process. More than 80% of these managers cited the desire to improve returns and to minimize risk over time. Seventy-two percent cited their fiduciary duty obligations as a motivation.
So why are so few sustainable investing options offered in U.S. private sector retirement plans?
The inconsistency in the Department of Labor (DOL)’s guidance and rulemakings governing Employee Retirement Income Security Act (ERISA) plans is a major barrier. In 2008, at the end of the George W. Bush administration, the DOL issued poorly crafted guidance discouraging fiduciaries for private sector retirement plans from considering environmental and social factors in their investments. It was a major departure from the department’s 1994 guidance, which had essentially stated the opposite.
In October 2015, the DOL, under then-Labor Secretary Tom Perez, rescinded the 2008 bulletin and issued Interpretive Bulletin 2015-01, which made clear that “fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social or other such factors.” The guidance also stated that “environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment,” and thus these issues “are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
However, the DOL, in the final days of the Trump administration, once again left the impression that considering ESG factors as part of fiduciary due diligence is somehow wrong. Over the summer, it issued a proposed rulemaking that suggested, without evidence, that fiduciaries considering ESG options for a retirement plan may make investment decisions for purposes that do not align with providing benefits to participants and beneficiaries. It cited no empirical data for this claim—just two newspaper columns.
The proposal received overwhelming opposition, including from such major investment firms as BlackRock, Fidelity and Vanguard. In response, the DOL’s final rule, which went effect last month, leaves the door open to including sustainable options, but a lack of clear definitions will continue to concern plan fiduciaries. However, on January 20th, President Joe Biden directed the DOL to review this Trump-era rule in one of his earliest executive orders.
It’s time to move forward and ensure that all plan participants have the opportunity to invest in funds that consider critical environmental and social issues. We are hopeful that the upcoming review of the rule will end up with policy that clearly states consideration of ESG factors is permissible within ERISA plans.
Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment.
This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
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