A new paper out about ESG in retirement plans argues against the “myths” it sees in discussion of the subject.
And despite skepticism from some ERISA attorneys about the fiduciary viability of including it investment menus (with one referring to it as a “fiduciary nightmare”), the Defined Contribution Institutional Investment Association (DCIAA) argues that environmental, social and governance factors are indeed in line with current regulatory thinking.
“The recent series of bulletins issued by the DOL has led to confusion due to a lack of clarity in the language and an inconsistent tone over the course of different administrations,” they acknowledge. “However, the latest Field Assistance Bulletin, (FAB) 2018-01, issued in April 2018 maintains the analytical architecture of IB-2015 and IB-2016, and indicates that ESG factors remain an appropriate component of a prudent investment decision.”
A major criticism of the strategy is that while there appears to be a correlation between the incorporation of ESG factors and better company performance, there was little evidence of causation—that is until a high profile MSCI study appeared to show that companies that employ ESG factors deliver higher returns.
While it was only one study, the authors (one of whom is from MSCI) claim, “The case for integrating ESG factors into the investment decision-making process is supported by both academic and industry research.
“The investment case for integrating ESG factors into the investment process is less ambiguous than previously perceived,” they add. “Many academic and industry research studies provide a clear rationale for incorporating ESG factors into investment decision-making. Academic studies that have analyzed the relationship between ESG factors and performance have found a strong correlation with alpha, beta, and portfolio value.”
One prominent criticism they address was recently propagated by Boston-based research and consulting firm Cerulli Associates, which found ESG investments face “headwinds,” specifically in 401ks, due to a lack of participant interest.
Cerulli blames fee sensitivity, the (mistaken?) notion that ESG investing entails a trade-off in performance, and the regulatory environment in the DC market for barriers to adoption.
No so, according to the paper, and it’s all in how ESG is framed.
“Since the availability of ESG data is relatively new, and is not often marketed directly to participants, it is up to plan sponsors and investment managers to provide education and communication about how their DC investments would score when viewed through an ESG lens,” it concludes. “Further, because these strategies have only recently become more mainstream, broad participant demand for ESG integration could be considered latent, versus weak.”
With more than 20 years serving financial markets, John Sullivan is the former editor-in-chief of Investment Advisor magazine and retirement editor of ThinkAdvisor.com. Sullivan is also the former editor of Boomer Market Advisor and Bank Advisor magazines, and has a background in the insurance and investment industries in addition to his journalism roots.
