Few Plans Embrace ESG
In a report requesting Department of Labor (DOL) guidance on the use of environmental, social and governance (ESG) factors by private-sector U.S. retirement plans, the Government Accountability Office (GAO) says, retirement plans need to be considering these factors: Whether or not a plan takes into account their projected impact, they could affect investment returns and, in turn, retirees’ financial health. The GAO also says some investors believe that companies with good corporate governance practices are better managed and will perform better financially over time.
The GAO specifies environmental factors as, for example, climate change impact, energy efficiency and waste management. Social issues include labor standards, human rights, and gender and diversity. Governance includes board composition, executive compensation, whistleblower programs, and accident and safety management.
Citing a report from US SIF: The Forum for Sustainable and Responsible Investment, the GAO says U.S. investors are increasingly incorporating ESG factors into their investment management. US SIF said assets in the U.S. that considered the factors in 2016 amounted to $4.7 trillion—14% more than in 2014, when they were $4.1 trillion. Globally, the amount of assets using ESG factors was $22.9 trillion in 2016, up 26% from $18.3 trillion in 2014.
Yet, few retirement plans in the U.S. incorporate the factors into how they manage investments, the GAO says. It was informed by asset managers that retirement plans face several challenges, including a lack of consistent and comparable data on ESG factors, and regulatory uncertainty. According to the Plan Sponsor Council of America (PSCA)’s 2016 survey of 600 defined contribution (DC) plans, only 2% offered an ESG investment option to participants. The asset managers told the GAO that if companies were required to standardize reporting of ESG factors, this would help plan sponsors assess funds that apply the factors.
Asset managers also told the GAO that, while some findings say incorporating ESG factors has a positive or neutral impact on financial performance, the perception persists that it could affect performance negatively—this is another impediment to plans incorporating ESG. Asset managers also said that the DOL’s guidance on ESG investing has changed with different administrations.