Socially responsible investing has become surprisingly contentious of late. There’s debate over whether socially or environmentally conscious funds deliver higher or lower returns, and the Department of Labor’s final rule on using ESG investing in retirement plans was widely condemned by those in the industry.
In the meantime, flows to ESG funds quadrupled between 2018 and 2019, according to Broadridge Financial Solutions, and are expected to reach $300 billion by the end of 2021.
Katrina Bell, principal and co-founder of Zuna, a finance and benefits consultancy firm, noted that regardless of how advisors feel personally about ESG investing, client interest is growing.
“If you think it’s hooey, you still need to get to know what’s going on because your clients are going to be asking for it, or asking about it at least,” Bell said during a webinar for the Excel 401(k) Digital Series.
Related: ‘Disappointing’ DOL Final Rule on ESG Investing Could Face Challenges
Bell explained the differences between the related but distinct concepts of ESG, SRI and impact investing, and why they matter to retirement plan advisors.
Environmental, social and governance. Bell described ESG investing as “an extra layer of quantitative and qualitative factors that we can layer on top of our existing fund due diligence.” ESG investing may be exclusionary, as investment managers divest from companies whose business or actions expose them to risks associated with the environment, social movements or how the businesses are run.
She called ESG a “framework for how we could utilize these concepts in our business [and] how do we evaluate risk in these different areas? How do those risks impact shareholder value in companies, and therefore, investment returns?”
“We’re not throwing out any of that solid work that we do on investment due diligence,” Bell said. “Your research, resources and investment teams, and all of the due diligence that you do, that doesn’t have to go anywhere. This is just an extra layer on top of what you are already doing.”
Impact investing. Bell swayed retirement advisors away from this strategy in retirement plans. Impact investing describes investors’ strategic use of investments to address causes that matter to them, whether it’s affordable housing, renewable power or social justice.
Related: Why ESG and Impact Investing Are A Natural 401k Fit
“Impact investing is going to be very specific to addressing a specific, measurable outcome in the environment or in society,” Bell explained. “Impact investing isn’t always going to be concerned with having the best returns. The goal may not even be to beat the market.”
As such, impact investing is inappropriate in ERISA plans.
“The financial factors in an ERISA plan are always going to need to come first, and in impact investing, that isn’t necessarily going to be the highest priority,” she said.
Socially responsible investing. SRI is an exclusionary way of investing, Bell said. Investment managers screen for companies in industries like tobacco, weapons or fossil fuels, and exclude them from a fund.
Bell said that managers may not screen an entire category, but “rank them based on how they how they meet certain guidelines, [so] some fossil fuel companies might make it into the portfolio, while others wouldn’t.”
Related:
- Despite Reg Barriers, 401k DCIOs Pursue ESG Strategies
- Investing Legend Slams ESG Strategies
- Episode 13—Prime Capital Investment Advisors’ Matthew Wolniewicz Gets Real About ESG, Peps and the Election
Danielle Andrus works as an editor for The Financial Planning Association® (FPA®). Over the past 15 years, she has worked in various capacities, including writing and editing. Andrus has worked for several notable publications and outlets and spent more than seven years as the executive managing editor at ALM Media, publisher of Investment Advisor magazine and ThinkAdvisor.com. Before that, she was online editor for Summit Professional Networks, where she oversaw newsletter development for four magazines, including Benefits Selling, Senior Market Advisor, Boomer Market Advisor, and Bank Advisor.
