A growing number of companies have publicly stated their intentions to add environmental and sustainable retirement options to their workplace savings plans.
If only the regulatory environment wouldn’t keep slowing them down.
InvestmentNews caught up with Liana Magner, executive vice president and head of retirement and institutional in the U.S. at Natixis Investment Managers, to learn about the rising interest in ESG investing in the U.S. defined-contribution marketplace, especially among millennials, and how the retirement industry is pushing policymakers to increase ESG availability in corporate retirement plans.
InvestmentNews: What is the current landscape of sustainable investment strategies available within the industry today?
Liana Magner: There are a variety of different approaches to ESG investing available in the market today covering a spectrum of objectives. Examples include positive or negative screening on ESG or values-based criteria, ESG integration where ESG factors are incorporated into the investment process to pursue alpha and manage risk, sustainability-themed approaches where investment selection may be guided by long-term environmental, demographic, social, sustainable development or other trends, and impact investing, which targets a particular environmental, social or governance objective. 2020 alone saw a record number of product launches in the ESG space.
Given the wide range of investments available, it is important to understand what is the primary objective of the strategy and how are ESG factors incorporated into the investment process. Is financial risk and return the primary objective for the inclusion of ESG factors? Or is a social agenda or impact the primary goal? Some, but not all, seek to focus on financial factors as the primary objective. While the difference may appear to be subtle, the ramifications can be significant if misunderstood.
IN: Are you seeing interest in ESG within the U.S. defined-contribution marketplace? Where is there interest and who seems to be committed?
LM: Yes, survey data gathered over the past several years has reported growing interest in sustainable investment solutions from plan sponsors and retirement plan participants. Many corporations today have publicly stated sustainability goals and objectives and are looking at how those goals may align with participant desires with respect to their workplace savings plans.
According to Natixis Investment Managers survey results, 86% of millennials say they want their investments to reflect their personal values and 66% of millennials would be more likely to contribute for the first time or increase contributions to their workplace retirement savings plan if they knew their investments were doing social good. This is important considering that in a few short years, 75% of the American workforce will be millennials. It is evident that this is no longer a ‘do good, feel good’ story, but a movement that will affect the retirement savings outcome of a generation of Americans.
IN: Is implementation of ESG commensurate with the demand?
LM: While there has been a lot of interest and education on the topic, implementation within defined-contribution plans has not yet been reflective of this growing demand. According to the recent Callan DC Index, only 16% of DC plans surveyed offer an ESG investment option. There are several reasons why this implementation is lagging the stated demand.
IN: How has the current regulatory environment impacted the demand and implementation of ESG within qualified retirement plans?
LM: This is widely considered to be one major reason why adoption of ESG options within plans has been slow to take place. The U.S. has faced repeated regulatory changes and headwinds relating to ESG investing within qualified retirement plans.
Most recently, the Department of Labor has proposed a rule recognizing that fiduciaries should be able to consider all factors, including ESG factors, as part of a prudent investment and risk management strategy. This rule will lay the necessary groundwork for inclusion of ESG factors as investment criteria for qualified plans, including 401(k) and pension plans.
IN: How are plans typically implementing ESG options into their DC plan investment lineup?
LM: We have seen organizations implement ESG into their DC plans in a variety of ways. Beginning with adding a single asset class ESG strategy to the fund menu to ‘check the box’ on ESG, to adopting a sampling of ESG options, and progressing to implementing a multi-asset ESG solution such as an ESG risk-based or ESG target-date fund.
For those adding one ESG option, we commonly see an ESG stock fund that is either global equity- or U.S. equity-oriented. A sampling of ESG options may include an ESG stock index fund, an actively managed ESG stock fund and an ESG bond fund. Target-date funds that include ESG as a mandate are growing in popularity and availability.
Clearly, there is not a one-size-fits-all solution as plan sponsors seek to implement what fits best with their plan and participant demographics. The good news is that there is an increasing number of compelling options for those looking to implement ESG within plans.
IN: How can a plan sponsor feel comfortable putting an ESG alternative in their plan today?
LM: Plan fiduciaries are responsible for managing defined-contribution plans in the best interest of all participants. Selection of ESG-oriented investment options which put financial risk and return objectives first align with this fiduciary responsibility. ESG factors have proven to have a material impact on the financial returns of an organization, particularly over the long term.
Many ESG investing approaches seek to balance environment, social and economic considerations with the goal of generating long-term sustainable returns. So this circles back to my earlier comment about understanding what is the primary objective of the ESG investment strategy, financial or social? Choose those that put financial objectives first.
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