While the US market for socially responsible investing is a fraction of Europe’s, one move that’s expected to significantly advance the popularity of ESG investing is giving Americans more responsible choices within accounts that offer tax benefits for certain types of savings, most notably retirement and college savings.
Both these vehicles can incorporate such investments, but few do so far.
Only 4% of 401,000 plans have an ESG fund available for investment by retirement plan participants, and ESG funds only hold 0.03% of 401,000 assets, according to the Plan Sponsor Council of America. And now the use of ESG in retirement accounts is getting a review of sorts.
The US Department of Labor said in June that it’s surveying some of the nation’s retirement plans to see how they use ESG factors in making investment decisions. The New York office of the department’s Employee Benefits Security Administration has sent letters to some plans that have ESG-themed funds as investment options.
The focus of the inquiries is to ensure that plan fiduciaries are not sacrificing investment returns or increasing investment risks in order to meet ESG goals that aren’t related to the financial interests of plan participants, a DOL spokesperson said.
Allison Wielobob, general counsel at the American Retirement Association, said more regulatory direction on ESG would be helpful. “There’s a lack of clarity,” Wielobob said. “This is an area all of us in the industry can learn more about. Service providers are starting to pay more attention to it.”
At the same time, the college savings accounts are slowly offering more ESG options.
College savings accounts
A new report published this month by AKF Consulting Group shows of the nation’s 90 or so 529 college savings plans — which are named for the US tax code that created them — 17 now include at least one fund using ESG criteria. Those plans, managed by nine different investment managers, mostly are included as individual options but some as part of an asset allocation option. The topic also is being brought up more frequently in industry discussions, the report said.
“As demand for ESG investment solutions increases in the 529 industry and state sponsors find ESG compelling from a cost and performance standpoint, we believe ESG investing presents opportunities for investment design enhancements in the future,” according to the report.
Shareholder activism
In the US, the concept of financial advisers helping their clients engage companies as shareholders is fairly novel. But now — as America faces a double threat of social unrest over the Black Lives Matter protests and the economy-crushing global pandemic — it might just be the right time to encourage company engagement.
Kristin Hull, founder of Nia Impact Capital, told ESG Clarity‘s sister site in the US InvestmentNews that helping clients “to own what they own” and using their investor voices can provide unexpected value to sustainability-minded clients.
She described how Nia worked with Meredith Benton of Whistle Stop Capital to create a campaign focused on companies within its Global Solutions Equity Portfolio that ranked on the low end of its diversity and inclusion.
“We approached them as allies — not adversaries — with our concerns about the relatively low number of women on their boards, executive teams, barriers to workplace equity and the use of forced arbitration policies. Our goal was to build relationships, share current research on the benefits of building diverse teams, and help them become even better, more profitable businesses,” Hull said.
Engagement results
After six months, six of the 23 of the companies Nia engaged with made substantive changes and nine had filed shareholder resolutions; many firms also thanked the group for nudging it to discuss change.
“Sometimes it takes something like a shareholder resolution to get things like this moving,” one corporate counsel told her.
Hull recommended advisers analyse the holdings of clients’ ESG portfolios for performance on key client concerns and help clients write letters to corporate leaders. Advisers also should consider seeking corporate engagement help from California-based As You Sow, a non-profit that promotes corporate social responsibility through shareholder advocacy and legal strategies.
Advisers also could team with other planners and investors on coordinated campaigns to encourage change, Hull said.
Liz Skinner is special projects editor at InvestmentNews, a sister publication of Last Word Media
