Despite the growth in ESG interest within the institutional investing community, DC plan adoption of dedicated ESG options is still relatively low, according to new survey results.
This finding was referenced in Callan’s eighth annual ESG Survey, which found that 42% of institutional investors incorporate ESG factors into investment decisions, mirroring the 2019 results but is nearly double the 22% result from the firm’s first survey in 2013. Additionally, More than 30% of respondents not yet incorporating ESG factors into investment decisions are considering it, which the firm notes is the highest rate in the survey’s history and nearly three times the result from 2019.
The results further show that 26% of DC plans surveyed—both public and corporate—said there was an ESG option in their plan lineup. But digging deeper, Callan’s DC Index shows that only around 13% of DC plans offer a dedicated ESG option. And this number masks a large divide among plan types: only 5% of corporate DC plans offer a standalone option, compared to 43% of public and nonprofit plans.
What’s more, according to Callan’s DC Trends Survey, there was only a slight increase in the percentage of plan sponsors that have added an ESG option to the investment menu in the previous year (1.5% in 2018 vs. 5.3% in 2020).
The ESG survey was conducted from June to July 2020, and reflects input from 102 U.S. institutional investors that were asked about their approach to ESG factors when evaluating investments. It’s important to emphasize that respondents included public and corporate DB and DC plans, as well as endowments and foundations, ranging in assets under management from small (under $500 million) to large (more than $20 billion). The largest share of respondents (41%) is from the government sector.
Whether this had any impact on the overall results is hard to know, but it’s also worth noting that this survey was administered just as the Department of Labor issued a proposed regulation requiring ERISA fiduciaries to complete more stringent evaluations of ESG investments, including new investment analysis and documentation requirements. In fact, a recent survey by Cerulli found that nearly half (48%) of DCIO asset managers consider the DOL’s proposed regulation as one of the most significant barriers to adoption of ESG products in DC plans.
Portfolio Allocations
Overall, the Callan survey shows that only 19% of respondents maintain an ESG allocation separate from their traditional portfolio, indicating broader ESG integration is preferred, the firm notes.
In addition, utilization for all sponsor types remains low. Allocations range from 0.2% to 3.1% of total plan assets, with an average allocation of 1.2%. The authors note that these utilization and prevalence numbers are on par with the figures for emerging market equity, REITs and global/global ex-U.S. fixed income.
With respect to implementation, more than half of respondents that incorporate ESG have communicated ESG’s importance to their investment managers, consider ESG with every investment/investment manager selection and added ESG language to their IPS.
Investor Types
In comparing overall investor types, public plans (36%) have incorporated ESG factors into the investment decision-making process at a slightly higher rate than their corporate counterparts (32%), but this level of incorporation was still far behind that of endowments (63%) and foundations (57%).
When looking at ESG incorporation by size, the results shows that 55% of mid-sized funds ($500 million to $3 billion) incorporated ESG factors into investment decisions in 2020; the highest rate of the four categories. By comparison, only 26% of funds with less than $500 million incorporated ESG factors, while 43% of funds with $3 billion to $20 billion did so, and 47% of funds with over $20 billion did do.
The most frequently cited reason for incorporating ESG among respondents was to address stakeholder concerns (60%), followed by “to align our portfolio with our organization’s values” (53%), improved risk profile (47%) and fiduciary responsibility (44%). Conversely, the findings show that the most frequently cited reason for not incorporating ESG was because the benefits of ESG incorporation were “unproven or unclear.”
The survey further shows that when comparing early adopters’ motivations for incorporating ESG versus recent adopters, recent adopters were more likely to be addressing stakeholder concerns and to be focused on an improved risk profile, while early adopters were focused on alignment with their organization’s values and impact.
