The US Department of Labor recently announced a proposed rule intended to remove barriers to retirement plan fiduciaries considering climate change and other ESG factors when selecting investments. The proposed rules are designed to guide Employee Retirement Income Security Act (ERISA) fiduciaries when considering ESG incorporation within their investment process.
At Goldman Sachs Asset Management, we believe ESG factors are important tools for identifying investment risk and capturing opportunity. And at a recent investor forum, we asked corporate retirement plan sponsors how they have or are integrating ESG-oriented strategies within their ERISA plans. Here are key takeaways from the forum:
Consideration of an ESG-oriented strategy in a retirement plan should be based on its potential to maximize risk-adjusted return. That, plan sponsor panelists said, means evaluating the strategy like any other strategy. “We use a standard benchmark—a non-ESG benchmark—to evaluate a strategy, regardless of whether it stresses ESG factors or not,” said Alex Lee, chief investment officer at Deloitte. Put simply: make decisions based on a strategy’s investment merits, such as growth relative to benchmark and risk analysis.
Strategies that measure up on a risk-return basis should be scrutinized in terms of their ESG investing capabilities, our panelists said. For many, a demonstrated track record of ESG investing is a must for any plan that wants to include an ESG fund in the investment lineup and support that they are doing what they say they’re doing when it comes to incorporating ESG factors into the investment process. Bruno Grimaldi, managing director of pension investments at KPMG, said his team looks for investment managers with ESG investing experience and evidence of engagement with the companies that managers invest in. That includes a deep dive into proxy votes cast by a fund’s investment stewardship team.
The topic of ESG investing is still new for many retirement plans. Panelists said it’s important to enlist the help of subject matter experts, for example, ERISA counsel and the plan’s investment managers, to bring the plan’s investment committee up to speed both on the regulatory and investing landscape. Key decisions may include whether to add an ESG option to a plan’s DC investment menu or how to assess ESG factors within each of the investment options. For pensions, understanding where and how to incorporate ESG factors may be top of mind for fiduciaries.
High demand for ESG options among younger DC plan participants—panelists said many newly-added ESG options have gained assets faster than non-ESG additions did in the past—continues to put a focus on participant education. “If there are individuals who appear to be overweight—say 100 percent invested—in an (ESG strategy), we do some targeted communication to educate them on diversification,” said Deloitte’s Lee. It’s also important to ensure that ESG options complement other strategies within the investment lineup, panelists said. For instance, for an investment menu without an all-cap equity fund, a plan fiduciary evaluating the menu might choose to consider an ESG equity all-cap strategy.
Democratic and Republic administrations have differed over the years regarding their stance on the materiality of what we now refer to as ESG factors for investment decisions. The Biden administration’s position, as seen in the DOL’s proposal, is that climate change and other ESG factors can be financially material considerations that affect long-term risk-adjusted returns. But that could change with the next administration. This can no doubt be frustrating for fiduciaries. Still, panelists said it was important to look beyond the noise. Michael Kreps, a partner at Groom Law Group in Washington, DC, put it this way: “As fiduciaries, you have to do what’s right. You have to pay attention to the law. I advise clients to ignore the noise. Because at the end of the day, we’re looking at what is financially relevant to our investments. And that’s not ever going to change.”