401k plans, we have a problem. According to a new survey from Sphere and noted behavioral economics professor Shlomo Benartzi, 76% of retirement plan participants do not know what the term “ESG” means.
The top answer when asked what “ESG” means was “Economic Stock Growth,” (cited by 30% of respondents) instead of what it actually stands for—Environmental, Social, and Governance investing (cited by 24%). The correct response barely edged out “Equity, Stocks and Government,” which at 22% was the third-most common response. “Environmental, Sustainable and Green” was next at 19%.
“It’s clear that most workers are very confused about ESG investing. They literally don’t even know what the letters stand for.”
Shlomo Benartzi
“It’s clear that most workers are very confused about ESG investing,” Benartzi said. “They literally don’t even know what the letters stand for. Is the “E” for economics, the environment or maybe entertainment? As an industry, we need to help participants, advisors and sponsors make informed choices.”
This is why Benartzi, known for the influence his research has had on retirement savings plans in the U.S., has joined the board of Walnut, Calif.-based fintech startup Sphere, a company that says it is on a mission to get climate-friendly options in every 401k.
“We could not be more honored to have Shlomo joining our board of directors,” said Sphere founder and CEO Alexandra Wright-Gladstein. “His insights and expertise have had an enormous impact on everyday Americans and their ability to retire in comfort, and those insights are now helping us ensure everyone has a healthy planet to enjoy in retirement.”
Benartzi co-developed the Save More Tomorrow (SMarT) program with Nobel Laureate Richard Thaler, which helps employees improve their savings rates over time, and is now implemented by the majority of large retirement plans in the U.S., with key elements included in the Pension Protection Act of 2006. He currently serves as Senior Academic Advisor for the Voya Behavioral Finance Institute for Innovation, and has served on advisory boards for Acorns, WisdomTree, Morningstar and Personal Capital.
In a news release, Sphere said Benartzi joins its board to help fiduciaries make informed decisions about ESG and climate investing, during a time of confusion as global dollars allocated to ESG investing reach all-time highs, but recent media and Securities and Exchange Commission (SEC) spotlights on greenwashing in the finance industry bring skepticism to the field.
Sphere strives to make it easy for employers to offer climate-friendly investment options in their retirement plans while maintaining their fiduciary duty, with products that demonstrate strong performance compared to benchmarks. The Sphere 500 Fossil-Free Fund (SPFFX) avoids fossil fuel industry investments and votes the shares of the companies it does invest in taking into account the planet, rather than automatically approving board recommendations.
In early August, Sphere announced that roughly 35 million retirement plan participants with Vanguard and Ascensus can now invest in SPFFX, which it bills as the first “climate-friendly fund made for 401ks.”
A study by the NYU Center for Sustainable Business reviewing 59 studies about the performance of climate-focused funds found that 43% showed a positive correlation between climate focus and performance, and only 14% showed a negative correlation. The Sphere index’s 10-year back test validates the academic findings, showing improved performance compared to an index of the top 500 U.S. companies that includes fossil fuel companies.
The Sphere release also states that excluding the fossil fuel industry from portfolios protects investors from stranded asset risk—the risk that public pressure and regulations will require oil, gas, and coal companies to “leave it in the ground,” resulting in a devaluation of the key assets on the companies’ balance sheets and loss of value of the shares in those companies.
Back to that ESG survey
While ESG is a commonly used term in the finance industry, the Sphere survey showed few outside the industry are familiar with it. When asked how they feel about climate change, however, 80% of respondents said they are somewhat, very, or extremely worried. And 77% said they want to be able to invest for a better climate future.
But the majority of 401k participants—70%—admitted they don’t know if they have the option of investing in an ESG fund in their plan, while 20% say they do and 10% said they don’t.
SEE ALSO:
• Fossil-Free Index Fund Added to Large 401k Platforms
• First Ever Fossil-Free Index Fund Launches in U.S.
• Investors Interested in ESG, but Education Lacking