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READER POLL: Is the (Advisor) Environment Not Quite Ready for ESG?

Advisors – participant investors – and these days, even regulators – appear to be of two minds on environmental, social and governance investing – better known as “ESG.”

Indeed, in the inaugural NAPA Summit Insider survey of more than 500 retirement plan advisors, 16% of that group was inclined to label ESG as “over-hyped” – though just as many (20%) indicated it was a topic on which they would like to have more information. That, and a Cerulli report suggests that a significant factor in the slow uptick in adoption of ESG are – advisors – and that the factors holding them back is a perception that these strategies do not fit into client investment policy statements (26%), negative impact on investment performance (24%) and cost (19%).

Recommend ‘Actions’

Reader responses were almost as varied; roughly half said they are not recommending ESG, though about a quarter (27%) were to some, and another 9% “only when asked.” Just 14% were doing so regularly.

Doubtless at least part of that response is because only about 1 in 10 said they have plan sponsor clients/prospects asking about ESG. On the other hand, nearly half (48%) said that while some are asking, most aren’t, nearly 4 in 10 (38%) said they weren’t asking. As one reader explained, “only one client is asking, and they are a religious group.” The rest? They said they are asking, but not acting…

Speaking of asking, half of this week’s respondents said that clients were not acting on ESG, 27% said that while some are, most weren’t, and another 9% said they mostly “seemed to be window-shopping.” About 14% said plan sponsors were acting.

As for participant reaction when ESG was offered, about half (54%) said the reaction was “tepid at best,” while 30% characterized it as “modest, but enthusiastic.” The rest said response had been “very positive.”

Asked for their personal perspective regarding ESG options on a DC plan menu, 47% said it “makes sense as a consideration, but not a controlling consideration,” another 29% had their doubts, and 14% were “open to the idea, but not really committed." About 1 in 10 were “completely on board.”

Needs to Know?

Anticipating our upcoming session on the topic at the 2019 NAPA 401(k) Summit (, we asked readers if they had any questions they would like addressed – here’s a sampling:

  • How much research is there to support this is a valid investment strategy?

  • What safe harbor protections are available for plan sponsors that add an ESG investment to a defined contribution plan?

  • How do you incorporate them into an IPS?

  • Are advisors creating custom peer groups of ESG options with similar mandates in order to monitor performance or are they using the Morningstar-assigned category (i.e., Large Blend, Large Value, etc.)?

  • I want to know more about how they compare to their benchmark/peers in performance and volatility.

  • How to identify “green-washing,” namely, when an investment is called “green” but really isn't in practice. For example, if ESG guidelines can allow for Exxon Mobil to qualify as "green," then what good are those guidelines? How does an advisor or investor cut through the hype and determine which investments are actually “socially responsible”?

  • As a plan fiduciary, how could you justify putting a “cause,” like ESG, above profitability?

  • When do you see more index products coming to market (aside from Calvert)? For the naysayers, speak to on-par and out-performance of ESG over traditional. Talk about stranded asset risk and fiduciary liability.

Reader Comments

And then, readers also had a number of comments and perspectives on the topic – like these:

  • Certain firms are incorporating ESG into their fundamental analysis to determine long term economic success. We believe this is the correct approach, and can be supported within the DOL’s guidance, as opposed to a negative selection process.

  • Attention span of participants to really know, understand or even take a large amount of care for a product like ESG.

  • Not opposed to the concept of ESG; however, have seen some complications: (1) A client's participant asked the Investment Committee to add a faith-based investment option (single faith). The client decided not to do so after reasoning that there could be a wide variety of faiths and ESG preferences across their employee group and it would not make sense to expand the investment menu to accommodate all preferences. This client's plan had a self-directed brokerage option, so the client was able to refer the employee to that avenue. (2) The DOL’s FAB appears to make it more difficult for advisors to evaluate and monitor ESG investment options without creating custom peer groups (Morningstar does not have an ESG peer group).

  • I think the motives for offering ESG are in the right place, but I’m not convinced that any investment that demands endless growth can necessarily call itself sustainable.

  • If a participant has strong beliefs that he/she does not want to invest in a fund that prohibits investments that produce environmentally harmful products, or tobacco, drugs or firearms, for example, and the participant is willing to accept a lower rate of return due those restrictions, it should be permissible to be offered those funds.

  • DOL under current administration seems to be less than enthusiastic. This doesn’t change the facts of climate change/ out-performance of ESG over traditional (see the work done by HIP Investor).

  • As a firm, we wholeheartedly support the concept of ESG, and believe there is a place in DC menus to accommodate ESG investment options. However, the Department of Labor's recent comments in FAB 2018-01, were somewhat cautionary, which has limited our use of ESG in ERISA plans.

  • Our non-profit clients are most interested in these aligning with their values, but they aren’t necessarily willing to pay more or sacrifice performance for it.

  • We are on a “wait-and-see” approach as I heard one client describe that it seems to be a marketplace “fad/buzzword” and not really of material importance right now. Like anything we do as advisors, it's really about knowing your clients and helping to leveraging the most effective options to their demographics.

  • DOL regulations make it difficult to make an ESG fund a designated investment option. There is too much exposure to fiduciary liability if the fund underperforms relative to other funds with the same investment objectives without the ESG restrictions.

Thanks to everyone who participated in this week’s NAPA Net Reader Poll! We’ll have a new one for you on Monday.