Risk Control At Heart of ESG and SRI Developments

Investment providers that serve retirement plan sponsors see opportunities for outperformance in ESG and SRI programs. 

Asset managers seeking new levels of diversification and risk awareness are wholeheartedly embracing investing programs designed with environmental, social and governance (ESG) themes in mind, according to a new report from U.S. SIF, the research and advocacy organization supporting ESG and sustainable and responsible investing (SRI).

According to U.S. SIF researchers, ESG/SRI investing assets have expanded to $8.72 trillion in the United States, up an impressive 33% from $6.57 trillion in 2014. Important to note, much of the interest and growth is driven by asset managers themselves, rather than their institutional and retail clients. Investment firms, looking to better map risk exposure and reduce asset correlations, now consider ESG criteria across $8.10 trillion in assets, up a whopping 69% from $4.8 trillion in 2014.

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Some investors, for example, are thinking deeply about how the social interconnectivity of the world has dramatically impacted market correlations and the competitive landscape in which all for-profit enterprises operate. Other investors, it could be said, are actually hedging the possibility of negative environmental impacts from climate change within their portfolios, positioning themselves to be ready to take advantage of new solutions that will undoubtedly be needed in a climate-stressed future. At a high level, the top two issues considered both by money managers and by their institutional investor clients are “conflict risk” and “climate change,” the researchers observe.

“The trend of robust growth in sustainable and impact investing is continuing as investment managers apply ESG criteria across broader portions of their portfolios, often in response to client demand,” adds Lisa Woll, U.S. SIF Foundation CEO. “Asset managers, institutional investors, advisers and individuals are moving toward sustainable and impact investing to advance critical social, environmental and governance issues in addition to seeking long-term financial returns.”

NEXT: Robust embrace of ESG themes 

Looking closer at the growing pool of investments that consider ESG/SRI factors during portfolio management, U.S. SIF measures $8.10 trillion in U.S.-domiciled ESG/SRI assets, as of the outset of 2016. The investments are held by 477 institutional investors, 300 money managers and 1,043 community investing financial institutions to which various ESG criteria are applied in investment analysis and portfolio selection.

There is also roughly $2.56 trillion in U.S.-domiciled portfolios, held by 225 institutional investors or money managers, that filed or co-filed shareholder resolutions on ESG issues from 2014 through 2016.

“These two segments of assets, after eliminating double counting for assets involved in both strategies and for assets managed by money managers on behalf of institutional investors, yield the overall total of $8.72 trillion, a 33% increase over the $6.57 trillion that the U.S. SIF Foundation identified in sustainable investing strategies at the outset of 2014,” the report explains.

Contextualizing the data, U.S. SIF says the significant growth in ESG assets “reflects demand from individual and institutional clients, growing market penetration of SRI products, the development of new products that incorporate ESG criteria and the incorporation of ESG criteria by numerous large asset managers across wider portions of their holdings.”

Indeed, the top reasons managers reported incorporating ESG factors include client demand (85%), mission (83%), risk (81%), returns (80%), social benefit (78%), fiduciary duty (64%) and regulatory compliance (22%).

NEXT: Market evolution also encouraging for ESG

The report concludes the number of investment vehicles and financial institutions incorporating ESG criteria will very likely continue to grow.

Today ESG/SRI is already being implemented within mutual funds, variable annuities, exchange-traded funds (ETFs), closed-end funds, hedge funds, VC/private equity, property/REIT, other pooled investment vehicles, and community investing institutions.

“The leading ESG criteria that institutional investors consider are restrictions on investing in companies doing business in regions with conflict risk—particularly in countries with repressive regimes or sponsoring terrorism—and consideration of climate change and carbon emissions,” U.S. SIF finds. “While the number of institutions and money managers actively involved in filing shareholder resolutions has remained relatively stable over the past four years, the proportion of shareholder proposals on social and environmental issues that receive high levels of support has been on the rise.”

Further, according to the report, money managers and institutional investors are pursuing engagement strategies on ESG issues in addition to filing shareholder resolutions at publicly traded companies.

For additional findings and information, visit www.ussif.org/trends.  

PSCA Offers Plan Sponsor Education About Third-Party Fiduciaries

Topics discussed include how often plan sponsors should review their third-party fiduciaries.

The Plan Sponsor Council of America (PSCA) has published an article and a two-part podcast on third-party fiduciaries.

Stephen Abramson, president of APS Pension Services and author of “Advisor’s Guide to Qualified Plans” and co-author of “Plan Smart, Retire Rich,” wrote the article for DC Insights Magazine and sat down with PSCA executive director Tony Verheyen for a two-part interview.

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Topics discussed include:

  • How often plan sponsors should review their third-party fiduciaries;
  • What plan sponsors are doing to become better fiduciaries; and
  • How retirement plan managers can convince plan fiduciaries to take their responsibility seriously.

“This is an important topic given the Department of Labor’s new fiduciary rule and intensifying scrutiny of fiduciaries in the courts,” says Stephan McCaffrey, senior counsel for National Grid and PSCA Board Chairman. “We encourage readers and listeners to understand the nuanced world of fiduciary services, to educate colleagues about the role and importance of the fiduciary, and to lead their organizations through conversations about whether outsourcing fiduciary services will work for the organization.”

To read Abramson’s article and listen to his discussion with Verheyen, follow these links:

PSCA also offers a formal, three-hour online fiduciary training program to members and non-members. The program will contain information related to the Department of Labor’s fiduciary rule in 2017. Click here for more information.

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