Investing November 19, 2020

Measuring the Financial Impact of ESG Factors on Investments

Measuring the materiality of each factor and considering the changes that have occurred in 2020 are important, according to speakers at DCIIA's Academic Forum. 

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The Defined Contribution Institutional Investment Association (DCIIA) hosted a panel about examining the financial impacts of environmental, social and governance (ESG) factors on investments during its Academic Forum.

One of the key themes throughout the session was the importance of measuring the materiality of each factor. Materiality importance depends on location and strategy, said Shaheen Contractor, a research analyst on the environmental, social and governance team at Bloomberg Intelligence.

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She said looking at the performance of ESG investing in the United States compared with its showing in Europe is a good example of how such investments can differ. While ESG investments have underperformed in the U.S. since the economic recovery period in the third quarter of this year, the funds have largely outperformed in the European Union (EU). Therefore, looking at short-term measures is not an adequate outlook, she said. “ESG is a long-term performance measure. … It’s important to measure those nuances—that it’s so different by location and strategy,” she added.

David Wood, director of the Initiative for Responsible Investment (IRI) at the Hauser Institute for Civil Society at the Harvard Kennedy School of Government, echoed that thought, noting that ESG investors need a set of comparable information across themes and portfolios.

Contractor recommended looking beyond company reporting to understand each factor behind “E,” “S” and “G.” “Understanding the data and metrics for the ESG standard, try to understand more forward-looking targets or measures of performance,” she said.

Investors must also take into account changes that have occurred throughout 2020. Wood noted that the divide between economic and systemic inequality and responsible investing is closing somewhat, as more companies are being held accountable for their diversity and inclusion efforts. A history of inequality can strain performance levels, he said. “With responsible investing, whether or not people are engaging policy discussion, there is a focus on sustainable social systems,” he said.

The final rule on ESG investing implemented by the Department of Labor (DOL) has also brought challenges to responsible investing, and, more specifically, on how to interpret such investments. Christopher Geczy, an academic director for the Jacobs Levy Equity Management Center for Quantitative Financial Research at the Wharton School, explained that it’s important to document practices when analyzing and selecting responsible investments, and to use third-party professionals to assist in that effort to comply with the DOL’s final ruling.

“The standards are higher on documentation and decisionmaking,” he said. “There are a handful of critical questions, but the baseline notion of comparative analytics will stay there. Document as always and have the analysis done.”

Benefits November 17, 2020

New Financial Education Strategies Anticipated After Biden Win

With a new president coming into the White House in 2021, experts are banking on new plans for financial education in the future.

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With a new president and administration heading to the White House come January, more experts are pushing for effective financial wellness education strategies to be implemented nationwide.

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President-elect Joe Biden has outlined plans for taxes, retirement planning and Social Security, but he has yet to announce a strategy for nationwide financial education in a year in which the pandemic has aggravated financial illiteracy, especially for lower income workers without proper resources, says Kenneth Van Leeuwen, managing director and founder of Van Leeuwen and Co.

 

“Internet connections and learning tools are second nature for many, but, for a lot of lower income people, these are the folks who are going to need more financial wellness education,” he notes. “Many don’t even have an internet connection where they can go and do an online tutorial for some type of incentive-based education.”

 

John Lowell, an Atlanta-based partner for October Three, says engaging workers in a remote work world is more difficult than it was in a traditional one. “If you’ve got a worksite that has 200 people and you want to do multiple financial education seminars, you can ask participants to sign up for any one of them,” he explains. “In a remote world, while many people have internet and Zoom access, in other businesses it’s really not an easy thing to do.”

 

In September, the Department of the Treasury released a report called the “U.S. National Strategy for Financial Literacy,” highlighting best practices for financial wellness education. But Van Leeuwen says the country needs a concrete, actionable solution to encourage workers to engage and participate in financial wellness offerings from employers.  

 

Therefore, incentives will largely drive future engagement with financial wellness and could even become national policy, he says. Such incentives may come in the form of tax credits or rebates on the national stage, or smaller, company-tailored rewards such as gift cards or cash-based credits on an individual firm basis. For example, an employee who enrolls in a 401(k) and completes an online financial education class would receive a reward for their time and attention.

 

But lower income workers without access to a computer or internet connection lack the resources to complete an online certification, even though this group needs financial wellness education the most. Van Leeuwen says one solution would be to require financial advisers to volunteer time teaching in-person financial education to people who need it, even if it’s meant as a continuing education (CE) prerequisite for advisers. “As advisers, a thing we should be required to do is give back to our communities,” he says. “We should be required to give up our own time to teach people with lesser means on making contributions to retirement plans and on financial wellness.”

 

Yet, with COVID-19 cases rising throughout the country and many workers and business owners afraid of the looming possibility of businesses shuttering again, it’s unlikely any in-person classes will be in session for 2021. In fact, the Biden administration likely won’t make financial wellness education a priority in the next year. Instead, vaccines and getting people back on their feet will take precedence. “This is one of the soft issues currently. This year and next year, it’s going to be all about the pandemic and how we provide a stimulus to those who have struggled during this time,” Van Leeuwen adds.

 

But even as COVID-19 vaccinations take priority, Lowell says he still anticipates financial wellness education will be an emphasis in the future. The past year alone has exemplified a need for financial education in workforces, as more employees demand education strategies from their employers. “Employees continue to call for it, and employers are not being resistant but also are not really knowing how to add it [to their plans],” Lowell says.

 

With a new president comes a fresh administration, including a new Department of Labor (DOL) secretary. And while the nation won’t know until January which party wins the Senate, Lowell says it is clear that cooperation will be needed from both Democrats and Republicans for financial wellness education reform. “There’s going to be this need for negotiation from both sides,” he says.

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