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The ESG Evolution

ESG Investing

In the cover story of the latest NAPA Net the Magazine, Judy Ward takes a look at the new thinking on the use of  environmental, social, and governance factors in 401(k) plans.

Are we at the dawn of a new era for thinking about how ESG (environmental, social, and governance) factors can play a role in 401(k) plans’ investment menus? Neal Weaver believes so.

“In this new world, I think that advisors need to throw away what they know about ESG,” says Weaver, chief executive officer at LeafHouse Financial in Austin, Texas. It’s not just about screening out funds with holdings in certain sectors anymore, or picking an ESG-themed fund, he says. Just 2.9% of plans included in the Plan Sponsor Council of America’s “62nd Annual Survey” offer an ESG/socially responsible fund option in their plan. And only 0.1% of total plan assets are in those funds, the PSCA survey found.

“ESG is so much more broad than that,” Weaver says. He sees potential for ESG funds in some plans’ core menu, but also for ESG funds to be utilized within target date funds, and especially for ESG analysis as an overlay to broader fiduciary investment analysis of all funds. “I think that it will start piecemeal,” he says. “Advisors and plan sponsors will take the first step of including an ESG fund or two in the core lineup. They will put their feet in and say, ‘Here’s a couple of funds out of 20 on the menu.’ That way, they give participants a choice of whether they want ESG. And if participants demand it, then you’ll see bigger changes.”

Read the full article here.