The environmental, social, and governance (ESG) investing trend continues its seemingly unstoppable march.
According to Schroders, a stalwart in sustainable investing, 74% of defined contribution plan participants who lack or don’t know if they have ESG investment options in their plan, said they would or might increase their contribution rate if offered ESG options–up from 69% who said the same in 2021.
Revealed in its 2022 U.S. Retirement Survey, Schroders noted that the vast majority (87%) of plan participants said they want their investments to be aligned with their values and see ESG as a driver of performance. And 78% said they believe companies that are socially responsible (ESG focused) will have better results over time than companies not socially responsible.
Participants further broke down where ESG segments they would like their investments to make an impact on as follows:
- Employee welfare/living wage–51%
- Climate change/global warming/carbon reduction–39%
- Human rights–36%
- Biodiversity (pollution, deforestation, clean water)–30%
- Diversity and inclusion–22%
Deb Boyden, Schroders’ Head of U.S. Defined Contribution said the message is clear: plan participants want ESG options.
Boyden added that participants say that ESG may also be a catalyst to save more for retirement.
“This is a compelling reason to believe that ESG could become a significant factor in improving participant retirement readiness while offering an opportunity to maximize risk-adjusted returns for participants.”
Detractors? There are a few…
The ESG movement is not without its detractors, with billionaire Peter Thiel weighing in during a recent rant, “I think that ESG is a hate factory, it’s a factory for naming enemies,” the PayPal founder said. “What’s the difference between ESG and the CCP (Chinese Communist Party),” adding, “perhaps the real enemy is ESG.”
A more measured skeptic is Ben Warwick, chief investment officer at Aveo Capital Partners and founder of Quantitative Equity Strategies, a quantitative investment management firm that developed indices for the mutual fund industry.
“Although committing capital that supports ESG principles is a great marketing tool for asset managers, there are many unanswered questions about its real-world efficacy,” said Warwick in an interview last year. He said that accurately measuring a company’s ESG impact is difficult and there is “scant” evidence that ESG investing leads to favorable outcomes.
His view is somewhat supported by Morningstar, which found that funds courting less ESG risk beat their benchmark indexes more often, and by larger average margins, than funds courting more ESG risk in 2020
In 2020, approximately 46% of funds with a low ESG risk generated higher returns than their benchmark while only 30% of funds with a high ESG risk did the same. Low ESG risk funds also bested their benchmarks by larger average margins than funds with higher ESG risk, concluding that there was a better average payoff to investing in funds that courted less ESG risk.
“If the ESG philosophy is indeed the way of the future, and those stocks will outperform, eventually market cap-weighted companies will be dominated by such names,” said Warwick. “Why not let the market take this natural course rather than putting up obtuse restrictions on which stocks to own?”
Add to this a recent analysis of 94 mutual funds and ETFs with ESG in their name which found that the linguistic patterns in prospectus language have a relatively low correlation with ESG ratings. Based on the research, the report showed that one cannot tell the difference between a prospectus for true ESG vs. greenwashing mutual funds and ETFs.
So where does this leave plan sponsors and advisors?
“When choosing investment options for a defined contribution plan, companies should seek products that meet participants’ investment goals and align with their investment priorities and values,” said Marina Severinovsky, Head of Sustainability, North America at Schroders.
“While ESG is most often associated with climate or decarbonization…the top ESG issues for US investors are actually social in nature – focused on workers and communities. It’s vital that plan sponsors keep this in mind as the regulatory landscape evolves and more ESG options find their way onto 401k menus.”
Lynn Brackpool Giles is a contributing editor to 401(k) Specialist. Giles is a former Managing Director of Communications and Consumer Services for the Financial Planning Association (FPA), where she oversaw all corporate, legislative, and consumer communications. In her current journalistic practice, she is a frequent contributor to numerous financial services industry publications.
