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A New Approach to ESG/SRI Options

Considering the ESG/SRI option from a combined investment and values perspective could increase sponsors’ and participants’ interest.

There’s no denying the sustainable investing trend’s momentum. Whether you define it as ESG (environmental, social and governance) or SRI (sustainable, responsible and impact), the growth is impressive. In the executive summary to its 2016 report, “U.S. Sustainable, Responsible and Impact Investing Trends,” the USSIF Forum for Sustainable and Responsible Investment estimated that “total U.S.-domiciled assets under management using SRI strategies grew from $6.57 trillion at the start of 2014 to $8.72 trillion at the start of 2016.” USSIF noted, “These assets now account for more than one out of every five dollars under professional management in the United States.”

That’s serious money, but contrast that result with Vanguard’s most recent annual defined contribution plan analysis, “How America Saves 2016.” That study found only 9 percent of Vanguard’s DC plans offered a socially responsible investing option, with the range of participation ranging from 7 percent for plans with fewer than 500 participants to 18 percent among the 5,000-plus participant plans. Nineteen percent of all participants had access to an SRI option, but only 3 percent of that group invested in their plan’s offering. The overall result: Just 1 percent of all participants were investing in SRI through their plans.

The 2017 update to Vanguard’s report hasn’t been released yet, but even if it shows increased uptake of SRI options, participation is unlikely to approach the growth reported in the USSIF survey. So, what’s behind the discrepancy between overall and DC plan SRI-adoption? I recently asked Jason Shapiro, a senior defined contribution investment consultant at Willis Towers Watson in New York City, to share his insights on this topic. In addition to working directly with plan sponsors, Shapiro sits on the firm’s contribution steering committee, a role that gives him insight into Willis Towers Watson’s broader clientele.

Barriers to Adoption

Shapiro believes several factors have slowed ESG/SRI options’ adoption. The Department of Labor’s (DOL) 2008 cautionary guidance on ESG investments appeared to discourage sponsors, even if that result was unintended. An updated 2015 DOL interpretive bulletin clarified the guidance, which could lead to greater adoption, but the regulations create an “additional layer of considerations when thinking about ESG,” he says.

A second barrier has been accommodating participants’ variety of preferences for ESG/SRI focus. For example, one group of employees might be interested in environmental causes while another cohort is concerned with corporations’ governance practices. Should a sponsor offer funds that work to counter climate change or those advocating for U.S. businesses to pay higher wages in countries to which they’ve outsourced production?

The Self-Directed Option

Although a single ESG/SRI fund can focus on multiple themes, it’s difficult to accommodate participants’ differing values and preferences without offering multiple investment options. A proliferation of funds runs counter to the current trend of streamlining plans menus, Shapiro notes, and many sponsors are hesitant to increase the number of core offerings. “If you were going to use the core lineup there are a number of decision points which you’d have to answer,” he says. “Do you go active or passive? Do you have an equity-only option or do you have ESG, social or economically targeted investments in multiple asset classes, [where] again, you worry about the number of options that you’d end up with. What are your selection criteria? Are there asset misallocation considerations when you think about participant behavior?”

One solution gaining traction with sponsors is to offer a self-directed brokerage account within the plan. That option can give participants access to multiple ESG/SRI investments on the provider’s platform without bulking up the plan’s core lineup. Willis Towers Watson’s latest research finds that 34 percent of plans now offer these accounts.


Instead of approaching the ESG/SRI-option decision solely from a personal values perspective, framing it as a financial value decision offers more potential for increased adoption because the sustainability focus offers return opportunities, he adds. “Certainly, [you] can make a case that those companies [with] an ESG framework, thinking about long-term sustainability can potentially be said to have a competitive business advantage,” he says.

The research on corporate financial and investment results supports Shapiro’s contention. Numerous studies have found that sustainable investing does not diminish performance increase risk compared to traditional strategies. Some studies have found that a corporate focus on sustainability improves financial results and the investment risk-return trade-off. The USSIF Performance & SRI webpage provides links to many of these studies.

Considering the ESG/SRI option from a combined investment and values perspective could increase sponsors’ and participants’ interest, says Shapiro. “When that ties into your investment beliefs and you as a sponsor or investor can see the financial value in that, then you can really start to integrate these types of considerations into your current investment process. I think that may be a nice meeting place for defined contribution.”

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