While environmental, social and governmental (ESG) investing acceptance and application in the United States has trailed global trends, there are signs suggesting a scaling shift. Here we focus on three trends that sponsors should watch as early indicators that an ESG era is dawning.
Why Little Progress Has Been Measured So Far
ESG and retirement investing seem likea natural fit, because both disciplines view the world through a particularly long-focus lens. But many sponsors have yet to make the connection. A July 2018 study by New England Pension Consultants (NEPC) found that 88% of U.S. plan sponsors have yet to incorporate ESG into their defined benefit (DB) or defined contribution (DC) plans.1 This figure aligns with Callan’s DC Index™, showing that only 16% of U.S.DC plans offer a dedicated ESG option.2 In the NEPC survey, sponsors report several common concerns
- 84% say participants have not asked for ESG options.
- 38% consider only financial factors when evaluating plan investments.
- 27% need more data about ESG’s impact on performance.3
In addition, sponsors also seem to be waiting for clearer public policy guidance. In April 2019, an Executive Order (EO) directed the Department of Labor (DOL) to examine data filed by retirement plans under ERISA for any discernible trends in investing or proxy voting in the energy sector. The DOL was also ordered to revise or issue guidance in order to “promote energy infrastructure and economic growth.” The evident purpose of the EO is to apply extra scrutiny to any application of ESG principles that might disfavor retirement plan investments in the petroleum sector. It’s possible the EO could slow the adoption of ESG, but some observers view the order as mostly symbolic. Its practical effect may simply be to abate activist investor spending by requiring shareholders to prove the materiality of ESG factors. The administrative debate will probably continue until a compromise emerges. In the meantime, it’s a conversation that merits close monitoring.
3 Trends that Could Signal a Scalable ESG Shift
Three industry indicators could create a more welcoming environment for ESG integration:
1. New populations demanding new solutions. Yesterday’s retirement plans need retooling to meet the unique needs of Millennial and Gen Z workers —including their long-time horizons. At State Street, we already apply unique investment approaches by life stage. For younger participants, for example, our Target Retirement 2060 Fund stacks a high equity allocation on top of a small-and mid-cap tilt and long U.S. bonds to maximize opportunity over the long run. This philosophy could extend to include ESG options for younger savers in order to hedge against downside risks that previous retirees never had to consider —from superstorm damages to the impact of droughts on textile manufacturing to rising global obesity costs.
In addition, as younger generations move to center stage in the American economy, their concerns about investing in socially responsible ways are likely to bring ESG considerations further into the mainstream.