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.
2. Better, more consistent ESG data. ESG investors have long struggled to find a consistent approach to defining whether an investment aligns with an ESG philosophy. Now, asset managers are pursuing solutions to help. For example, State Street is working to create a clearer and more consistent foundation for ESG data, combining multiple data sources with active company engagement to deliver standardized, transparent ratings and reporting. This new in-house ESG scoring system, called R-Factor, collects raw company metrics from multiple data providers and scores more than 5,000 companies on a consistent scale of 0 to 100. Its goal is to take the guesswork out of ESG reporting, easing the adoption of ESG strategies.
3. The growing popularity of alternatives. Sponsors’ interest in alternative asset classes is increasing. As we discussed in an earlier issue of The Participant, plan sponsors may consider dipping their toe into ESG using an approach similar to the way they are incorporating real assets and other alternative asset classes. Currently, ESG prevalence in DC plan lineups is on par with emerging market equity, REITs and global fixed income. As demand for alternative asset classes grows, the rising tide of popularity is likely to buoy ESG strategies as well.
ESG: Bridging to the Future
The pace of DC ESG adoption has been gradual, slowed somewhat by muted domestic demand and confusing policy guidance. But today, demand worldwide is growing, the data are improving and the diversification potential of ESG is winning wider recognition. Prudent plan sponsors need to keep a close eye on these three elements in order to monitor market momentum —and avoid being caught by surprise.
For young workers, the world of tomorrow may feel unimaginable, though ESG investing could help prepare participants for the unpredictability by protecting them from new risks and reducing the likelihood that certain perils will ever come to pass. By thoughtfully considering ESG approaches, DC plans could help workers build a more resilient retirement strategy —as well as a more resilient world in which to retire.
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