401(k) Plan Sponsors Hesitate to Incorporate ESG
Call it what you will—sustainable investing, impact investing, socially responsible investing (SRI) or environmental, social and governance (ESG) investing—there’s a growing interest among investors to put their money where their morals are by investing in companies that are aligned with their values.
In response, a slew of investment companies have rolled out ESG products over the last few years, but recent research shows plan sponsors have been hesitant to incorporate them into their investment menus.
According to the latest NEPC survey of corporate defined contribution (DC) and defined benefit (DB) plan sponsors, only 12 percent have adopted ESG. The majority that have are DC plans (70 percent). And interestingly, over half (62 percent) are healthcare organizations.
“[I]t was not surprising to see healthcare adopting ESG at higher rate than its corporate peers, given the nature of the industry and the fact that many of these organizations are mission-driven or faith-based,” Brad Smith, partner in NEPC’s Corporate Practice, explained in a statement. “Many healthcare organizations have historically included a socially-responsible investment option within their DC plan, which is likely the reason why the survey findings show more ESG adoption by DC plans than other plan types.”
But given all the hubbub surrounding the topic and a clear interest among consumers—particularly among Millennial investors, who will soon account for the bulk of the workforce—12 percent adoption is still strikingly low.
What gives?
Among those surveyed, DC and DB plan sponsors who have yet to consider ESG indicated that their disinterest is purely based on financial reasons. Nearly two in five respondents said they only consider financial factors when choosing investment options.
Almost 60 percent of those surveyed named long-term risk and return factors as the most important consideration when evaluating potential investments. Diversification came in second (39 percent). More than a quarter feel data is lacking surrounding ESG’s impact on performance.
“The survey findings solidify our belief that institutional investors can capitalize on opportunities created by ESG as long as it makes sense for them,” Smith said. “Right now, for example, a big focus for DB plans is closing funding gaps, and while ESG may reduce risk over time, these plan sponsors often prioritize purely financial factors versus sustainability to drive excess returns.”
What’s more, the vast majority of sponsors (84 percent) said they haven’t considered adding ESG because plan participants haven’t asked them to consider it.
But that’s not to say there isn’t interest among plan sponsors. Nearly a third of those surveyed expressed interest in incorporating ESG down the road. And it’s likely they’ll feel more pressure to do so.
“Millennials are emerging as a generation that favors ESG relative to others, so as they become a larger part of DC programs, it’s not unreasonable to expect more requests for ESG-related investment options,” Smith added. “However, there are many additional factors aside from participant demand that need to be considered when contemplating the addition of an ESG investment option to a DC plan—not the least of which is ERISA guidance on the topic.”
Jessica Claeys is an editor, writer, and graphic designer, who has been creating both print and digital marketing and communications content for 10+ years.
Jessa Claeys is a licensed insurance producer in the state of Colorado and an insurance editor for Bankrate. She currently covers auto, home and life insurance with the goal of helping others secure a healthy financial future. Jessa has over a decade of experience writing, editing and leading teams of content creators. Her work has been published by several insurance, personal finance and investment-focused publications, including BiggerPockets, 401(k) Specialist, BP Wealth and more.
