Sustainable, responsible, and impact investing — also known as SRI or just sustainable investing — is investing that considers environmental, social, and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.
Sustainable investing strategies can promote stronger corporate social responsibility, build long-term value for companies and their stakeholders, and even yield community and environmental benefits.
Demand for sustainable investments has grown dramatically in recent years. A 2018 report from the US SIF Foundation revealed a 38 percent increase in sustainable investment assets from $8.7 trillion in 2016 to $12.0 trillion in 2018 — accounting for more than $1 in every $4 of the $46.6 trillion in total assets under professional management in the United States.
Workers are also increasingly interested in sustainable investing, so adding ESG investment options to employer-sponsored retirement plans can be an incentive to boost plan participation.
In a 2019 survey by Natixis Global Asset Management, of 1,000 US employees participating in defined contribution plans, 61 percent said they would be more likely to contribute, or increase contributions, to their workplace retirement savings plan if they knew their investments had a positive impact. Six in 10 said they’d like to see more sustainable investment options in their retirement plan offering. Millennials were even more likely to agree with that statement; 66 percent answered in the affirmative.
Millennials are also 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.
Sustainable Investment Options in Employer-Sponsored Retirement Plans
Despite the growing interest in sustainable investing, corporate plan sponsors are woefully behind in offering sustainable investment options to employees. Plan sponsors may lack knowledge about these funds, be concerned that they may underperform or fear that selecting sustainable investment funds may violate fiduciary duty.
As time goes on, many of these reasons have proven invalid. Analyses and meta-studies from such sources as Barclays, Deutsche Asset & Wealth Management/University of Hamburg, Morgan Stanley, MSCI, Nuveen/TIAA, and UBS indicate that sustainable investors do not have to pay more to avoid companies with poor ESG practices. Morgan Stanley’s review of sustainable mutual funds in existence for seven or more years found that “sustainable equity mutual funds had equal or higher median returns and equal or lower volatility than traditional funds for 64 percent of the periods examined.”
What’s more, in October 2015, the US Department of Labor (DOL), which is responsible for enforcing the Employment Retirement Income Security Act (ERISA), rescinded previous guidance that had discouraged some fiduciaries for private sector retirement plans from considering environmental and social factors in their investments.
The DOL also issued Interpretive Bulletin 2015-1, which states that “environmental, social, and governance issues may have a direct relationship to the economic value of the plan’s investment,” and thus these issues “are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”
To provide further guidance, the US SIF Foundation outlined five steps for plan sponsors to follow in its Resource Guide for Plan Sponsors.
Step 1: Increase your knowledge of sustainable investing and related performance and fiduciary questions.
Numerous academic and other studies have concluded that there need not be a performance cost to sustainable investing on a risk-adjusted basis.
Moreover, consideration of ESG factors as part of the investment process is consistent with plan sponsors’ fiduciary duty. With the above-mentioned changes to ERISA guidelines, plan sponsors can be even more confident in their ability to offer sustainable investment options.
Step 2: Gauge interest in adding a sustainable investment option.
A 2011 Mercer and US SIF Foundation study showed that requests from participants, as well as recommendations from board members, staff, and consultants or record-keepers, are leading drivers for adding a sustainable investment option. Survey plan participants to gauge interest; US SIF’s Resource Guide for Plan Sponsors 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 sustainable investment options or have the ability to add them if they aren’t yet available. Ask if there are significant fees associated with adding a new fund to your investment lineup. If that’s the case, an external advisor may be able to assist with negotiating lower fees.
External advisors can help create a clear plan and/or method for adding sustainable investment options to support the plan’s fiduciary duty. Find a consultant familiar with sustainable investing; the US SIF Foundation guide suggests possible questions to ask.
Step 4: Choose a fund or funds (and monitor performance).
Sustainable investment funds, like non-SRI funds, vary in performance and volatility. Numerous resources exist that provide more information on ESG incorporation strategies. 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 election(s) with appropriate educational materials. Educational information may be provided as part of regular communication on plan options, or specific efforts can be made to educate participants on sustainable investing through presentations by investment firms, consultants, or industry professionals with expertise in this area.
The bottom line
As the labor market tightens and it becomes more challenging to attract and retain top talent, offering sustainable investment options is an additional perk for employees.
For conscious business leaders who have already committed to purpose-driven work, adding sustainable investment options to their workplace 401(k) is a natural next step as their companies mature — and is a move that speaks volumes to employees who want their investments to reflect their values, concerns, and priorities.