Sustainable, responsible, and impact investing – also known as SRI – is investing that considers environmental, social, and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
SRI can take various forms. Some people and institutions actively seek investments — such as community development loan funds or clean-tech portfolios — that are likely to provide important societal or environmental benefits. Others embrace SRI strategies to manage risk and fulfill fiduciary duties; they review ESG criteria to assess the quality of a company’s management team and the likely resilience of that company in dealing with future challenges.
Whatever the motivation, investor interest and demand for SRI has grown dramatically in recent years. A 2016 report from the US SIF Foundation revealed a 33 percent increase in SRI assets from $6.57 trillion in 2014 to $8.72 trillion in 2016 — accounting for more than $1 in every $5 under professional management in the United States.
Workers are also getting more interested in SRI. In a 2016 survey by Natixis Global Asset Management, of 951 US workers participating in defined contribution plans, 64 percent were concerned about the environmental, social, and ethical records of the companies in which they invested. Seventy-four percent said they’d like to see more socially responsible investments in their retirement plan offering.
Seventy-four percent said they’d like to see more socially responsible investments in their retirement plan offering.
It’s clear that sustainable and impact investing is important to today’s investors, especially millennials. Millennials, defined as individuals 18 to 35 years of age, are twice as likely as other investors to invest in companies or funds that target social or environmental outcomes, according to a 2017 survey commissioned by the Morgan Stanley Institute for Sustainable Investing.
Offering SRI options in employer-sponsored retirement plans
Despite the growing interest in SRI, corporate plan sponsors are woefully behind in offering SRI options to employees.
Analysis by the US SIF Foundation of 2,390 private-sector retirement plans with over 100 participants as of year-end 2014 found that less than 1 percent of the assets were invested in funds that explicitly market themselves as SRI.
Managers of defined contribution retirement plans cited a few common reasons for not offering SRI options, as revealed by a 2011 study from Mercer and the US SIF Foundation. These included:
- Insufficient participant requests
- Plan sponsors’ lack of knowledge of the SRI options available
- Concerns that SRI funds may underperform
- Belief that the SRI funds selected may violate fiduciary duty
Some plan sponsors also said they could not add SRI options to their retirement plans due to structural barriers with third-party platforms.
To help corporate employers and other plan sponsors overcome these hurdles and uncertainties, the US SIF Foundation outlines five steps for them to follow in its new Resource Guide for Plan Sponsors.
Step 1: Increase your knowledge of SRI and related performance and fiduciary questions.
There’s a growing consensus that consideration of ESG factors as part of the investment process is consistent with plan sponsors’ fiduciary duty. With recent changes to ERISA guidelines, plan sponsors can be even more confident in their ability to offer SRI options.
Certainly, numerous academic and other studies have concluded that there need not be a performance cost to SRI on a risk-adjusted basis.
Step 2: Gauge interest in adding an SRI option.
Gauge interest in SRI and other investment options by asking your employees to complete a survey. The US SIF Foundation guide offers sample questions to consider.
Step 3: Discuss implementation and administration issues with your consultant and/or retirement plan administrator.
Most retirement plan administrators now offer SRI options or have the ability to add them if they aren’t yet available. Be sure to ask if there are significant fees associated with adding a new fund to your investment line-up. If that’s the case, an external adviser may be able to assist with negotiating lower fees.
External advisers can help plan sponsors create a clear plan and/or method for adding SRI investment options to support the plan’s fiduciary duty. If you’re working with a consultant, the US SIF Foundation guide suggests questions you might want to ask.
Step 4: Choose a fund or funds (and monitor performance).
SRI funds, like non-SRI funds, vary in performance and volatility. Domestic US equity funds are the most popular, but others are emerging — including asset allocation, income, style-based, and geographically-focused funds. As with any investment decision, once a fund option is selected, you will need to monitor the fund’s performance and regularly assess that it is meeting its objectives.
Step 5: Educate participants.
Plan participants should be alerted to the newly-added SRI fund with appropriate educational materials. Educational information may be provided as part of regular communications on plan options, or specific efforts can be made to educate participants on SRI through presentations by SRI investment firms, consultants, or industry experts.
The bottom line
SRI investing strategies can promote stronger corporate social responsibility, build long-term value for companies and their stakeholders, and foster businesses or introduce products that will yield community and environmental benefits.
For conscious business leaders who have already committed to purpose-driven work, offering socially responsible investment options is a natural next step as their companies mature — and it’s a move that speaks to employees who want their investments to reflect their values, concerns, and priorities.