Opinions February 8, 2021

Why Are Retirement Plan Sponsors So Far Behind on Sustainable Investing?

Lisa Woll, CEO of US SIF, discusses how inconsistent guidance has hindered the inclusion of sustainable investing options in defined contribution plans, but there is hope that a review ordered by President Joe Biden can change that.

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The United States has the largest retirement plan market in the world. With more than 700,000 private sector workplace retirement plans, it covers 136 million participants and, as of the end of 2019, held assets of more than $11 trillion. For some investors, their only exposure to mutual funds is through their retirement plans.

According to the recently released “Report on US Sustainable and Impact Investing Trends 2020,” more than $17 trillion of professionally managed assets in the United States use one or more sustainable investment strategies. Yet, the report found that fewer than one-fifth of private sector retirement plans offer funds that consider environmental, social and governance (ESG) criteria as part of their investment analysis. This is despite the fact that there is strong interest among individual investors—such as retirement plan participants—in sustainable investing options.

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Individual investors want sustainable investing options: According to a 2019 survey by Natixis Investment Managers of 1,000 U.S. employees, including 700 participants in 401(k) and other defined contribution (DC) plans:

  • 61% said they would be more likely to contribute, or increase contributions, to their workplace retirement savings plan if they knew their investments were doing social good, and
  • 74% indicated they believe that companies that provide clean water and clean energy present significant growth opportunities.

Similarly, a 2019 study by the Morgan Stanley Institute for Sustainable Investing of 800 U.S. individual investors with assets of $100,000 or more found that 85% of all respondents—and 95% of Millennials—were interested in sustainable investing, up from 75% and 86%, respectively, in a survey the institute conducted two years earlier.

Large majorities in the Morgan Stanley survey said they believe their investment decisions could help improve the world.

  • Seventy-one percent of all survey respondents—and 85% of Millennials— agreed that “it is possible for my investment decisions to influence the amount of climate change caused by human activities.”
  • More than 80% agreed that “it is possible for my investment decisions to create economic growth that lifts people out of poverty.”

Asset managers recognize the value that ESG analysis can offer. Numerous studies confirm that companies with good ESG policies and records tend to deliver better financial performance. Not surprisingly, seven of the 15 investment management firms that constitute the top 10 defined benefit (DB) and the top 10 DC plan managers in the United States are signatories to the Principles for Responsible Investment and thus pledge to “incorporate ESG issues into investment analysis and decisionmaking processes.”

In US SIF’s 2020 survey of sustainable investing trends in the United States, we identified 384 U.S. money managers that consider ESG criteria in portfolio selection and investment analysis across $16.6 trillion of assets managed on behalf of both institutional and individual clients. In the survey, 113 money managers with aggregated assets of $3.6 trillion responded to a question on their motivations for incorporating ESG criteria into their investment process. More than 80% of these managers cited the desire to improve returns and to minimize risk over time. Seventy-two percent cited their fiduciary duty obligations as a motivation. 

So why are so few sustainable investing options offered in U.S. private sector retirement plans?

The inconsistency in the Department of Labor (DOL)’s guidance and rulemakings governing Employee Retirement Income Security Act (ERISA) plans is a major barrier. In 2008, at the end of the George W. Bush administration, the DOL issued poorly crafted guidance discouraging fiduciaries for private sector retirement plans from considering environmental and social factors in their investments. It was a major departure from the department’s 1994 guidance, which had essentially stated the opposite. 

In October 2015, the DOL, under then-Labor Secretary Tom Perez, rescinded the 2008 bulletin and issued Interpretive Bulletin 2015-01, which made clear that “fiduciaries need not treat commercially reasonable investments as inherently suspect or in need of special scrutiny merely because they take into consideration environmental, social or other such factors.” The guidance also stated that “environmental, social and governance issues may have a direct relationship to the economic value of the plan’s investment,” and thus these issues “are not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis of the economic merits of competing investment choices.”

However, the DOL, in the final days of the Trump administration, once again left the impression that considering ESG factors as part of fiduciary due diligence is somehow wrong. Over the summer, it issued a proposed rulemaking that suggested, without evidence, that fiduciaries considering ESG options for a retirement plan may make investment decisions for purposes that do not align with providing benefits to participants and beneficiaries. It cited no empirical data for this claim—just two newspaper columns.

The proposal received overwhelming opposition, including from such major investment firms as BlackRock, Fidelity and Vanguard. In response, the DOL’s final rule, which went effect last month, leaves the door open to including sustainable options, but a lack of clear definitions will continue to concern plan fiduciaries. However, on January 20th, President Joe Biden directed the DOL to review this Trump-era rule in one of his earliest executive orders.

It’s time to move forward and ensure that all plan participants have the opportunity to invest in funds that consider critical environmental and social issues. We are hopeful that the upcoming review of the rule will end up with policy that clearly states consideration of ESG factors is permissible within ERISA plans.

Lisa Woll is CEO of US SIF: The Forum for Sustainable and Responsible Investment.

 

This feature is to provide general information only, does not constitute legal or tax advice, and cannot be used or substituted for legal or tax advice. Any opinions of the author do not necessarily reflect the stance of Institutional Shareholder Services or its affiliates.
Reader Responses February 8, 2021

SURVEY SAYS: Has Remote Work Affected Your Career?

PLANSPONSOR NewsDash readers share how working remotely can affect a person’s career success.

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A recent survey found employees, especially those younger than 30, are worried about their career success because of working remotely.

Last week, I asked NewsDash readers, “Do you think working remotely has affected your career success? In what ways?”

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Sixty-four percent of responding readers work in a plan sponsor role. Twenty percent are advisers/consultants, and 16% are recordkeepers/TPAs/investment consultants.

Among respondents, 84% are currently working remotely, and 12% reported they are not working remotely now but have done so at some point since the pandemic started.

Forty-eight percent said they do not think working remotely has affected their career success, but more than one-third (36%) said they think it has. Sixteen percent said they don’t know.

Asked in which ways working remotely has affected their career success, nearly one-third (32%) each selected “I am less visible to managers/leaders,” and “I am suffering from burnout and a lack of motivation.” More than one-quarter (28%) selected “I do not have all the tools I need to do my best work,” 12% chose “I feel I am unable to do my best work,” and 8% said they have gotten behind in their work. Thirty-two percent selected “none of the above.”

“Other” responses included:

  • Like many others, working longer hours.
  • I feel that lack of interpersonal communication has affected my mood, but not my work or future success in my career.
  • Communication skills – I spent most of the day talking to my pets rather than other people!
  • Exposure to outside company contacts and not connecting with new workers beyond my department.
  • I am more productive, and I have to set boundaries to prevent burnout. The missing “watercooler chat” creates inefficiencies in the work product.

Asked for comments about the effect of working remotely on employees’ careers, some readers said it depends very much on how employees react and behave. While some agreed remote work would have some negative effects, readers also offered tips for overcoming the limitations and negative effects. Editor’s Choice goes to the reader who said: “If there’s a will, there’s a way! If you’re too apprehensive about reaching out for help (tools, resources, guidance, etc.) or not disciplined enough to focus on putting out your best work (which a good manager/leader will notice), you’re probably the one who festers in their cube or is distracting others in the office. Yes, burnout is real; but that’ll happen anywhere. Know yourself and your limits.”

A big thank you to all who participated in our survey!

Verbatim

Working remotely makes it harder to showcase achievements to a wide variety of company leaders which can hinder any job mobility since you are not as visible to others outside your group/team.

Many employees, at all ages but mostly under 40, seem to love working remotely. It will ABSOLUTELY affect their careers as many do not conduct themselves as if in the office.

Everyone at my company is working remotely now and anything that may be a negative is affecting everyone. It’s about how you continue performing at a high level despite the challenges is what gets you noticed.

I don’t feel there is a significant effect, considering how positive management has viewed how their employees have handled this shift on such short notice, and the fact it’s a company-wide decision, puts everyone in the same position, not necessarily giving anyone an advantage. The disadvantages may come to those who have children that are not in a school or day-care, but that’s the result of the pandemic and not necessarily the work from home model. In fact, if we were all expected to come into the office, the effect on the career of some folks who may have to work remote due to having children home for reasons stated previously, could potentially be negative, but not necessarily. I don’t believe the situation itself creates a negative effect, but rather how the employee handles the situation is what will ultimately affect their careers.

I was working remotely before COVID, so the shift to remote work has not affected me. However, I think younger workers are right to be concerned about the impacts of remote working on their careers. One of the biggest challenges is training. Much like remote K-12 learning, some things are much easier to teach in-person. I think it is also harder to build interpersonal and mentor relationships remotely. I think these effects will be self-correcting once we return to more normal working conditions, and younger workers should be receiving reassurances and support during this difficult time.

My boss thinks anyone working from home is not really working.

At first it was very weird. I’m used to it now and it was especially nice to work from home during the summertime. Being able to take a break mid-day and play with my kids outside was pretty awesome. However, I am ready to go back into the office at least on a PT basis. I miss seeing other people in person!

I think as long as you accomplish more than what is expected of you, you will be fine. Set high but realistic goals.

The team aspect is gone, we all get our work done but there is no team atmosphere. Yes, we do virtual meetings, but I can only take so many of those – usually a meeting is taking a break from your computer screen, now it is more time spent in front of it, staring intently…trying to convey that you are not a robot…

Fortunately, I work with a firm who is very in tune with its employees. We have regular meetings with cameras on, so we feel connected. People are starting to work half-half at home and office and it is good to get back to in-person, but I have no concerns about my career. Very thankful for my company and how well they take care of us!

There are some companies who are “face-time” companies where it is out of sight out of mind. Also, it can hurt your communication skills not being in person. Finally, it can also lead to bad habits when working remotely.

If there’s a will, there’s a way! If you’re too apprehensive about reaching out for help (tools, resources, guidance, etc.) or not disciplined enough to focus on putting out your best work (which a good manager/leader will notice), you’re probably the one who festers in their cube or is distracting others in the office. Yes, burnout is real; but that’ll happen anywhere. Know yourself and your limits.

We are working a blended schedule, remotely 2-3 days a week and on site the other days. I believe services to our clientele has suffered. It wouldn’t be bad if it were temporary, but working remotely has become a permanent thing and will not end when the pandemic ends. Fortunately, retirement is not far off for me, which will alleviate my feeling of not being a stellar employee.

Fortunately, the company I work for was well prepared to support a remote workforce. We continue to remain focused on our business which provides all of us increased opportunities. People continue to be recognized for their contributions.

I started new job in August after being laid off at the start of the pandemic. The position is a big role for me and a stretch career-wise. I was in the office for my first three weeks, then home since then. The challenge is bonding with my team – most of whom I have never met in person.

 

NOTE: Responses reflect the opinions of individual readers and not necessarily the stance of Institutional Shareholder Services (ISS) or its affiliates.

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