Planadviser, January/February, 2017, Lee Barney- Investing in Harmony


Investing in Harmony

DOL guidance and Millennial interest spur plans to consider ESG.

While environmental, social and governance (ESG) investment options may not be very common among retirement plans in general, they are growing more prevalent among large and mega plans. Because trends that begin at the large end of the market tend to move downstream—and also because of keen interest in ESG among Millennials, Generation X and women—experts expect demand to increase, leading more sponsors to offer these types of investment options in the years to come.

The 2016 PLANSPONSOR Defined Contribution (DC) Survey found that among plans of all sizes, only 11.8% offer socially responsible funds. Among micro plans, it is a mere 9.0%. However, the percentage spikes to 15.1% among both large and mega plans. Keith Clark, a partner at DWC ERISA [Employee Retirement Income Security Act] Consultants in St. Paul, Minnesota, thinks the reason large plans offer ESG funds is because they are “feeling the ESG heat at the corporate level, even before it is raised as a possibility for their 401(k) plan.”

For plan sponsors interested in such an investment direction, but unclear how to integrate the considerations into their due diligence,

Department of Labor (DOL) Interpretive Bulletin (IB) 2015-01 was a welcome resource. According to Nicole Crum, a partner in the investment management group at Sullivan & Worcester LLP in Washington, D.C., the document says, “ESG factors may have a direct relationship to the economic and financial value of an investment, as long as its performance is on par with similar investments.”

This guidance helped convince Natixis Global Asset Management to file a registration statement with the Securities and Exchange Commission (SEC) this past December to launch the industry’s first ESG-oriented target-date funds (TDFs): the Natixis Sustainable Future Funds. Because surveys Natixis has conducted indicate that over 70% of people of all ages are interested in ESG investing, Ed Farrington, Natixis executive vice president of retirement, expects more SRI and ESG funds to find their way onto retirement plan lineups in the coming years. “The conversation [about] ESG is an important one for advisers and plan sponsors,” he says.

Certainly, in the investment community at large, ESG and socially responsible investing (SRI) are growing at a significant rate, according to US SIF: The Forum for Sustainable and Responsible Investment. U.S.-domiciled assets under management (AUM) had grown to $8.72 trillion at the start of 2016, a 33% increase since 2013. Today, ESG investments account for one out of every five dollars under professional management in the U.S.

Chartered financial analysts (CFAs) have been trained in ESG investing since 2009, notes Matt Orsagh, director of capital markets policy at the CFA Institute in Charlottesville, Virginia. “The 200,000 people around the world who have taken the CFA exams have all gotten the same message about the importance of ESG,” he observes.

In addition, the number of investment vehicles that use ESG or SRI screens is increasing, notes Meg Voorhes, deputy director and research director at US SIF. In recent years, a number of retirement industry trade groups such as the Plan Sponsor Council of America have asked US SIF officials to speak at their annual conferences, she says.

Thus, Orsagh says, it is inevitable that retirement plan advisers will increasingly be paying heed to the phenomenon.

Investors’ interest in sustainable investing cannot be ignored, according to the Morgan Stanley Institute for Sustainable Investing’s 2015 report “Sustainable Signals.” Seventy-one percent of investors are interested in sustainable investing, and 65% expect it to become more prevalent in the next five years. Millennials and Gen X are twice as likely as the investing population at large to invest in companies or funds that target specific social or environmental issues, Morgan Stanley reports.

As investors’ retirement plan assets are their biggest holding, it makes sense for sponsors and advisers to consider adding ESG options to the lineup, says George Walper, president of Spectrem Group in Lake Forest, Illinois. The reason for Millennials’ and Gen Xers’ interest in ESG investing, he says, is a desire to “give something back to society and, in the case of environmental investing, protect the planet for their children and grandchildren,” he says. “Clearly, this is a sound way for advisers to attract younger clients.”

ESG can be a powerful motivating factor to get younger people to join their plan, Crum agrees. “If you were to tell a young person that he has an ESG option in his retirement plan, he would very likely be willing to part with his money.” And engaging young people at an early age is important, she adds.

Paul Hilton, partner and portfolio manager in the Boston office of Trillium Asset Management, a firm that has been using ESG factors to invest since 1982, says the single biggest ESG issue that resonates for Millennials and Gen X is the environment, due to concerns about climate change. “We have never seen as much interest in ESG as in the past five years,” Hilton says. “It’s growing much faster than the broader market, and advisers are finally beginning to understand the demand. We are at a tipping point.”

In the past, SRI and ESG investing were viewed as compromising performance, Voorhes says. Today, it is quite the opposite: Socially responsible corporations are viewed as having solid long-term strategies that can deliver returns on-par or even higher than companies that do not employ these principles, she says. For example, the Brown Advisory Sustainable Growth Fund invests in companies whose environmental strategies are generating tangible business results, in the form of revenue growth, cost improvement or enhanced franchise value, says David Powell, co-portfolio manager of the fund, in Baltimore.

In fact, this is precisely why Voya Investment Management employs ESG screens for all of its investments, says Drew Schechtman, vice president and ESG integration leader at the firm, in New York City. In the past three years, inquiries about ESG investing among Voya’s clients, which include retirement plan sponsors, has increased 300%, he says.

For all of these reasons, advisers may want to understand the ESG offerings and be prepared to explain IB 2015-01 to plan sponsors and investment committee members who are interested, or are seeing indications of participant interest, in such investment offerings.

Key Takeaways

·         Assets in socially responsible investments have grown 33% between 2013 and 2016, to $8.72 trillion.

·         Millennials and Generation X are twice as interested as the general population in environmental, social and governance investing.

·         Natixis is the first investment management firm to launch ESG-oriented target-date funds.


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