ESG can’t catch a break, the target of increasing ire from politicians, pundits, researchers, and even investment firms with significant positions in the strategy.
The Wall Street Journal is out with yet another piece attacking ESG, this time in the form of an op-ed by former Labor Secretary Alex Acosta. While the Trump administration official’s criticism isn’t surprising, his slam of the department’s policies during his tenure is.
The beneficiary of positive press and impressive fund flows as recently as last year, ESG is falling from favor, with rampant inflation and skyrocketing gas prices possibly to blame. While something of a luxury to “invest in one’s values” in up markets, ESG’s nebulous returns and imprecise benchmarking make for a harder case after a turn.
Or, more directly, “A rising tide lifts all boats. It’s not until the tide goes out that you realize who’s swimming naked,” Warren Buffett allegedly said of ESG-like bull market manias.
According to David Blanchett, the high-profile Managing Director and Head of Retirement Research with PGIM DC Solutions, it’s also a case of investor intention versus actual behavior.
While hedging that ESG demand and return are a “heavy topic,” he nonetheless noted, “People love the environment until it gets really hot out, and they want to have the air conditioning on, right?
Blanchett’s latest research dispels, at least in part, the demand narrative and the supposed popularity ESG enjoys among younger Millennial and Gen Z investors and even Baby Boomers.
Blaming the relative scarcity of ESG funds in DC core menus, he finds that “only 8.9% of new DC participants allocated to an ESG fund, and the average allocation to ESG funds among those who held at least one ESG fund was 18.7% of their total balance. The average allocation to ESG funds among all DIY participants included in the analysis was 1.7%.”
Read Blanchett’s Latest Research HERE and the Summary HERE
So, why the gap in perception when compared with reality? Blanchett blames industry surveys, noting most have a metaphorical dog in the hunt.
“[The findings suggest] like, every 10 participants will sell their unborn child to buy ESG investments,” he quipped. “Honestly, some of the worst surveys I’ve seen in our industry have been about participant demand for ESG funds. They make it sound like people are dying to invest in these things, and if they do, it will radically change retirement. That doesn’t resonate with me.”
“When people have access to these funds, are they actively using them? And the answer is a strong no.”
Questions can be (and are) worded a certain way to increase response rates, for instance: Would you potentially contribute more to your 401k if you’re plan offered ESG?
“Who wouldn’t say yes to that? But that doesn’t mean the person is actually going to invest in ESG, right? So, to me, it’s an intention gap.”
Echoing Acosta’s WSJ argument, most participants won’t care about or make investment decisions because of the diversity of a company’s board.
Referencing his history and experience in participant behavior, “The vast majority just take whatever they’re given. And that was the evidence behind this paper; when people have access to these funds, are they actively using them? And the answer is a strong no.”
Yet Morningstar, Blanchett’s previous firm, reported record ESG flows in 2021, with sustainable funds averaging $17.3 billion in new money every quarter. Where is the demand coming from, if not retirement plan participants?
“The retail space,” he answered. “If you’re going to see ESG, it’s going to be more of that personalized portfolio where [an advisor] has done the due diligence and has model portfolios and can better align it to someone’s goals and objectives. It’s tough to do that if you’re just adding a few funds to the core menu in a DC plan.”