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More Retirement Plans Offer a Better Future for Investors and the Next Generation

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Did you know that your retirement savings may already be contributing to a cleaner, greener, and more egalitarian society? And that your retirement plan’s carbon footprint may be lower than you think? 

A 2020 ESG Survey by the Callan Institute — a leading research and education platform for the investment industry — found that out of 102 participating organizations, 42 percent incorporated environmental, social, and governance (ESG) factors into their investment decisions. And within the remaining 56 percent that did not prioritize ESG factors, about one-third at least considered doing so. This year’s findings featured the highest response among non-participants in the study’s eight-year history, and nearly three times the levels reported in the 2019 survey.

Those two groups calculated together amount to 61 percent of institutional investors who are including or plan to include ESG factors within investment portfolios. These investors represent public and corporate defined benefit and defined contribution plans, as well as endowments and foundations.

What does this mean for your retirement plan?

If you have a defined contribution or a defined benefit plan, your plan administrator or asset manager may already have included ESG fund options in the portfolio. And if an outside asset manager is running your retirement portfolio, you may own ESG funds as part of the long-term strategy of the pension fund.

That said, it’s still early days.

Within defined contribution plans, only 13 percent offered a dedicated ESG option, the survey found. However, there was a large divide within that slice: corporate DC plans only showed a 5 percent adoption, while public and nonprofit plans had a 43 percent participation rate.

Endowments and foundations have been the frontrunners in this area with the highest overall ESG inclusion rates, at 63 percent and 57 percent respectively. And while public and corporate plans have lagged, with overall adoption rates of 36 percent and 32 percent, respectively, corporate plans registered the highest inclusion rate in 2020, the survey found. Also, larger plans showed more participation than smaller ones.

“The larger plans do tend to incorporate ESG a bit more frequently than smaller plans,” said Alex Hoy, investment consultant at Callan’s global manager research group and member of Callan’s ESG Committee. “So, the question is why? It’s that ESG incorporation isn’t easy. You need a staff to spearhead this effort, and that lends itself just to having more resources.”

So how do money managers incorporate these ESG factors in retirement portfolios?

There are two main ways of doing that: embracing the “beneficial” factors or avoiding industries or companies based on ethical concerns. 

For example, pension plans can emphasize financial returns while adding positive ESG elements such as investments in clean energy, diversity, and inclusion, local economic benefit, poverty alleviation, and education. This also plays in the manager selection when a public fund or a corporation decides to hire asset managers to run their pension funds.

An earlier practice that is still prevalent among 33 percent of all ESG adopters is negative screening, whereby the managers sell or avoid certain investment exposures. Those could be tobacco, weapons, adult entertainment, gambling, companies with poor labor practices, alcohol, fossil fuel, and religious bias.

Asset managers have many different options for incorporating ESG into portfolios. For example, they can include an ESG “slice” within the overall portfolio allocation where they can invest in ESG index, impact, or thematic funds. “Or, a plan can say ‘we want all of our managers to have ESG incorporated into their investment process in some way, shape or form,” said Hoy.

Several studies point to the fact that ESG strategies can not only offer equivalent or even higher returns than non-ESG investments, but tend to decline less in times of higher volatility. The reason is that companies that include ESG considerations in their operations tend to be higher-quality companies and show higher resilience in downturns.

In addition to returns, Hoy added, “Being a better corporate citizen, being focused on climate change and the effects of it or trying to mitigate those has become top of mind for everyone, investor or not. And I think it’s much safer to say that highly rated ESG companies or ESG strategies do at least contribute to climate change mitigation by not being the dirtiest of investments, such as fossil fuel companies or polluters.” 

And individuals, investors, and the investment industry have taken note of that.

“We’re believing more and more that ESG is going to become almost table stakes, where if you’re not doing anything related to ESG, that’s actually going to start working against you, instead of just being a yes or no question that we might have asked in the past,” said Hoy.


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