ALIGNING RETIREMENT ASSETS TOOLKIT #2 - United States Version - WBCSD
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ALIGNING RETIREMENT ASSETS TOOLKIT #2 United States Version
Content
1 Executive summary | 4
A. Common misconceptions and abbreviated responses | 5
B. Methods for implementing a responsible retirement plan | 6
2 Introduction | 8
3 Common misconceptions and possible responses | 10
4 Methods for implementing a responsible retirement plan | 20
A. Assess existing ESG resources (as applicable) | 21
B. Assess plan fiduciaries’ perspectives on ESG risks and opportunities | 22
C. Update Investment Policy Statement to take ESG considerations into
account | 23
D. Evaluate current investment managers’ responsible investment efforts | 23
E. Evaluate potential replacement or additional responsible investment
managers | 26
F. Evaluate portfolio implications | 29
G. Communicate responsible investment changes to plan participants | 31
1 Executive summary Aligning Retirement Assets (ARA) Toolkit #2 is intended to provide more “tactical” and specific guidance for retirement plan fiduciaries and sponsors regarding responsible investment implementation methods and considerations. 4 Aligning Retirement Assets | Toolkit #2 4 Aligning Retirement Assets | Toolkit #2
1 Executive summary
Our hope is that plan fiduciaries, • Incorporating ESG into • ESG investing is making
or interested employees, after the retirement plan might a political and/or social
reading Toolkit #11 will decide that violate regulatory guidelines: statement: As clarified
shifting towards what we’ve termed In general, this sentiment previously in Toolkit #1, socially
a “responsible retirement plan” is is unsupported by recent responsible investment (SRI)
indeed achievable, and will then regulatory actions. The is typically focused on values
return to this Toolkit to understand European Union and United alignment of investments, in
the tools and processes available Kingdom have taken particular, with respect to moral
to help the retirement plan achieve a regulatory direction of travel and/or political values held by
these goals. that not only encourages investors. But ESG investing
ESG-related risk analyses, and SRI investing are not the
Chances are, if you’re reading this but requires such analyses to same. While many ESG-themed
document, then the fiduciaries be undertaken by retirement funds often avoid investments
of your retirement plan(s) are plan providers. The United in certain controversial sectors,
evaluating the possible inclusion States, on the other hand, such as tobacco or firearms,
of responsible investment has alternated regulatory this typically reflects managers’
practices into the retirement perspectives on considering views that the long-term growth
plan(s) offered to employees. If ESG factors in retirement prospects of those sectors
that’s the case, then it makes plans, while not explicitly are limited, i.e. ESG investing
sense to start by reviewing some declaring ESG incorporation is not focused on values or
common objections to ESG to be against regulations. moral considerations, but on
incorporation in retirement plans, economic considerations
as well as effective responses to • ESG investing increases impacting risk and return.
those objections. costs: As with most issues of
this nature the answer is not • Our investment consultant
straightforward and will differ doesn’t support ESG investing:
on a case by case basis. The Unfortunately, it appears that
A. Common
biggest factors in determining many consultants are unable
misconceptions and the effect of ESG investing on or unwilling to advise their
abbreviated responses costs will be the asset class, clients regarding responsible
vehicle type and the style of investment matters, either
• ESG investments reduce investment being deployed because they perceive that
performance: This statement (e.g. active vs. passive). clients are not interested, or
reflects a common due to a perceived lack of
misconception regarding Fidelity, utilizing Morningstar credible ESG-related product
the various methods used fee data as of 31 December offerings. However, there are
to integrate ESG factors into 2017, compared ESG share many consultancies who have
investment decision-making, class expenses against the developed, or are developing,
and how ESG integration expenses of traditional open quite robust responsible
differs from other responsible ended funds. That comparison, investment practices, and if
investment approaches. Multiple which included a number retirement plan fiduciaries
research studies have found of asset classes, found that believe that the advice they
that considering ESG factors 61% of the ESG share classes are receiving is not reflective of
within investment decision- evaluated were priced at or best practices in responsible
making is not an impediment to below the average expenses investment, then there are
financial performance, and can of the traditional fund universe certainly qualified firms available.
in fact enhance performance, when comparing against
if financially material factors similar categories.2
affecting underlying companies
are identified and analyzed
by investors.
1
WBCSD & Mercer (2018). “Aligning Retirement Assets Toolkit #1”. Available at: https://docs.wbcsd.org/2018/12/ARA-The_responsible_retirement_plan_opportunity.pdf
2
Fidelity (2018). “Investing based on your principles.” Available at: https://www.fidelity.com/viewpoints/active-investor/strategies-for-sustainable-investing.
Aligning Retirement Assets | Toolkit #2 5
1 Executive summary
• None of our competitors are i. Assess existing ESG iii. Update Investment Policy
integrating ESG: Depending on resources (as applicable) Statement to take ESG
global region, it is quite likely considerations into account
that many of your competitors’ Retirement plans often have
retirement plans are in fact access to many different internal Presuming that the steps above
integrating ESG factors into and external resources, some have been completed, formally
their retirement plans. PRI offers of which may have ESG-related integrating the material ESG
a useful listing of over 400 capabilities and expertise considerations identified by
asset owner signatories3 to the that fiduciaries may not have committee members into the
Principles as of early 2019, with taken advantage of previously, retirement plan’s Investment
86 signatories identified either including internal expert staff, Policy Statement (IPS) will provide
as retirement or pension plans investment managers, and/or a framework to inform future
(although a number are public investment consultants. A useful investment analyses and both
plans). A recent PlanSponsor first step to take is to inquire asset allocation (for DB plans) and/
analysis shows survey data about responsible investment or investment manager selection
for retirement plan sponsors experience, tools and capabilities. processes (for DB and DC plans).
in the United States regarding These policy updates provide
their inclusion of at least one specific guidance to investment
ii. Assess plan fiduciaries’
“socially responsible” (a term managers and advisors regarding
perspectives on ESG risks
that is undefined in the survey) where the retirement plan deems
and opportunities ESG factors to be material for
fund in the plan lineup. Of
particular note, the proportion of Retirement plan investment investment decision-making,
survey respondents across all committee members tend to be clarifying expectations.
industries that offered such selected to serve in a fiduciary
a fund is far greater, at 8.4%, role because of the experience iv. Evaluate current
than the proportion of Fortune or perspective they bring to investment managers’
1000 funds that responded the committee, and many
to the survey, of which only responsible
tend to have relevant financial
4.8% offered a socially investment efforts
sector and/or human resources
responsible fund.4 experience. Given individuals The responsible investment
in such roles are likely to have industry is growing significantly
varying exposure to responsible in the range of products and
B. Methods for investment topics, and may bring services that are available to
implementing a responsible particular perspectives into such investors. However, it can be
retirement plan discussions, it can be helpful to challenging for retirement plan
hold an educational session for fiduciaries to assess the ESG
committee members, and then quality of investment funds
Presuming that retirement
issue a confidential survey to without access to third-party tools
plan fiduciaries have decided
individual fiduciaries to assess and ratings. Some investment
to incorporate responsible
their views on material long-term consultants offer ESG ratings of
investment approaches into the
ESG risks and opportunities. individual investment strategies –
retirement plans, what are the
The survey results will inform any a top-down approach assessing
next steps? The the following
next steps on ESG incorporation managers’ idea generation
suggestions are based on
the retirement plan may take. and portfolio construction
successful engagements that
project participants have had approaches – while many third
in advising retirement plan party data providers offer issuer (or
fiduciaries on such matters. company) level ESG research and
ratings – a bottom-up approach
3
United Nations Principles for Responsible Investment (2019). “Search Results.” Available at: https://www.unpri.org/searchresults?qkeyword=retirement&PageSize=10¶met-
rics=WVSECTIONCODE%7C1018%2CWVFACET2%7C77&cmd=ReplaceKeyword&val=retirement&SortOrder=3.
4
PlanSponsor; 2019 Defined Contribution Plan Survey.
6 Aligning Retirement Assets | Toolkit #2
1 Executive summary
evaluating a particular issuer’s ESG vi. Evaluate portfolio vii. Communicate
metrics, such as greenhouse gas implications responsible investment
emissions, or revenue derived from changes to plan participants
controversial business practices. Once a retirement plan has
Utilizing both perspectives in decided to shift toward Once changes have been made
combination can offer useful responsible investments, how to the retirement plan portfolio or
information for assessing ESG the new strategies fit within the lineup, informing participants is
incorporation within investment existing portfolio construction is an important aspect of ensuring
manager strategies. highly important, and there are a that the responsible investment
range of options both DB and DC changes – and the rationale behind
plans can consider. those changes – are understood
v. Evaluate potential by participants who may wish to
replacement or additional a. DB plans can utilize: an asset take advantage of them.
responsible investment class agnostic approach, which
managers designates a separate “sleeve” While ESG investment practices
of ESG assets; an asset class have been steadily growing in
If an evaluation of the investment specific approach, which popularity for many years, much
strategies currently used within determines a set amount of of that growth and investment
either a Defined Benefit (DB) plan assets to devote to ESG within activity has occurred outside of
portfolio or offered as part of a existing asset class allocations; retirement plans, and as a result,
Defined Contribution (DC) plan or a 100% ESG integrated retirement plan participants have
lineup reveals that the strategies approach, by integrating ESG not been able to invest their
don’t offer the responsible considerations into existing assets in accordance with their
investment profile that fiduciaries asset allocation, portfolio views. We hope that this Toolkit,
deem desirable, then retirement construction and manager in addition to the first Toolkit
plan fiduciaries should decide which selection/monitoring activities. in this series, provides useful
responsible investment method(s) guidance for fiduciaries and plan
fund managers should employ: b. DC plans can add: administrators in considering how
-- one ESG option, which can they might integrate ESG factors
• portfolio screening, either
be a good way for plan and considerations into their
negative or positive;
sponsors to “test the waters” retirement plans in the near future.
• ESG integration, using ESG of offering plan participants
factors and data to expand an ESG fund while not
upon fundamental research overwhelming them with too
and analysis; many options;
• thematic investing, focused -- an ESG tier of options,
on offering investors focused selecting a number of
exposure to an explicit strategies that allow
environmental or social theme; participants to effectively
diversify their ESG
• and/or active ownership, where investments, such as a
investors seek to use their global active equity fund, a
position as equity owners or global passive equity fund
as creditors to influence the and a fixed income fund;
behavior of investee companies.
-- an ESG default fund, as some
Once fiduciaries have identified the investment managers have
desired method(s) for managers developed suitable default
to use, DB plans can then begin fund options that integrate
to shift allocations to responsible ESG factors into the security
investment managers. DC plans, on selection and portfolio
the other hand, can add responsible construction process.
investment strategies or replace
existing strategies in the lineup.
Aligning Retirement Assets | Toolkit #2 7
2
Introduction
Integrating environmental, social and corporate
governance (ESG) considerations into retirement plans
is a growing area of interest for both retirement plan
sponsors and participants.
88 Aligning
Aligning Retirement
Retirement Assets
Assets || Toolkit
Toolkit #2
#2
2 Introduction
Since the launch of the Aligning #1 will decide that shifting retirement plan” provides
Retirement Assets (ARA) initiative towards what we have termed a the nuts-and-bolts details of
in early 2018, we have tapped “responsible retirement plan” is how, once the considerations
into a wellspring of enthusiasm indeed achievable and will then outlined in Section 2 have
and engagement from among review this Toolkit to understand been appropriately addressed,
members of the World Business the tools and processes available retirement plans can integrate
Council for Sustainable to help the retirement plan achieve responsible investment
Development (WBCSD) as well these goals. approaches successfully. The
as the broader corporate and advice offered in this section
investor market. After defining the In order to make this document is based off of the combined
key issues, considerations and as useful as possible to readers experience of the ARA
actions, retirement plans can take with different responsibilities and Steering Committee members’
to address responsible investment vantage points with respect to their engagement on responsible
themes in Toolkit #1, the question retirement plan, we have organized investment incorporation in
remains: exactly how should this document to facilitate shared retirement plan contexts, and
retirement plans go about adopting learning: it highlights best practices for
responsible investment methods? fiduciaries and plan sponsors to
• Section 2, “Common
consider.
This document, ARA Toolkit #2, misconceptions and possible
is intended to build upon the responses” highlights some of Throughout this document,
foundation established by Toolkit the most frequent questions we have included several case
#1, while providing more “tactical” and/or statements that tend studies of companies’ experiences
and specific guidance for plan to be raised in the context of at various points along the
fiduciaries and sponsors regarding responsible retirement, as well responsible retirement plan
implementation methods and as potential responses to those incorporation spectrum to help
considerations. Our hope is that statements. readers gain additional contextual
plan fiduciaries, or interested understanding that may aid their
• Section 3, “Methods for
employees, after reading Toolkit own company’s journey.
implementing a responsible
CASE STUDY: BLOOMBERG, L.P.
As a global business and financial information and news leader, innovation is at the core of Bloomberg’s business
model, driven by a set of principles established by its founder, Michael Bloomberg.
In line with Bloomberg’s broad offering of ESG data and tools on the Terminal, the company signed on to PRI as a
service provider in 2009. Becoming a PRI signatory emphasized the firm’s commitment to support their clients’
implementation of the Principles by providing and developing respective services.
In 2015, Bloomberg’s Investment Committee worked with Mercer, the DC plan’s consultant, to perform a search for
an ESG-driven investment option to add to their plan lineup. The search came in response to requests from some of
the company’s key stakeholders, particularly millennial employees seeking sustainable investment options as part of
their retirement planning.
Four investment managers presented their strategies for plan inclusion, and the committee selected U.S.-based
Parnassus Investments to offer their U.S. Core Equity fund to Bloomberg retirement plan participants.
In late 2017, the committee voted to sign the PRI as a plan sponsor, making Bloomberg the first U.S.-domiciled
corporate plan sponsor to sign the initiative.
In accordance with the plan’s pledge, the committee incorporated a specific section on ESG integration into its
Investment Policy Statement.
Bloomberg’s Investment Committee continues to explore opportunities to not only meet its fiduciary duties and fulfill
its reporting obligations to the PRI, but to further advance the practice of considering ESG factors in retirement plans.
Aligning Retirement Assets | Toolkit #2 9
3
Common
misconceptions
and possible
responses
Chances are, if you are reading this document, then the
fiduciaries of your retirement plan(s) are evaluating the
possibility of including responsible investment practices
into retirement plan(s) offered to employees. If that is
the case, then it makes sense to start by reviewing some
common objections to ESG incorporation in retirement
plans, as well as effective responses to those objections.
10 Aligning
10 Aligning Retirement
Retirement Assets
Assets || Toolkit
Toolkit #2
#23 Common misconceptions and possible responses
If you have not done so already, • Socially Responsible • ESG: In terms of how strategies
we strongly suggest that you Investment: Modern portfolio incorporating ESG factors
review the material in the first theory (MPT) – which is perform, a meta-study of over
Toolkit of this series, which covers underpinned by the Efficient 2,000 primary empirical studies
the basic elements of fiduciary Market Hypothesis (EMH), and conducted since the 1970s
duty, regulatory considerations the dominant financial theory in identified that approximately
and responsible investment many global markets6 – dictates 90% of these primary studies
approaches and methods, all in that, were portfolio restrictions identified a non-negative
the context of retirement plans. or screens are to be employed relationship between ESG
The responses below build as in an SRI portfolio, then long- criteria and corporate financial
upon the material presented in term risk-adjusted performance performance, with a majority
Toolkit #1, yet are more focused would be sacrificed compared of those studies reporting
on responding to the specific to an unconstrained portfolio. positive results, rather than
objections that may arise as neutral.11 Furthermore, an
fiduciaries consider responsible • There are indeed examples of academic study analyzing a
investment approaches. instances where organizations sample of more than 2,000
have divested from a certain U.S. companies over a 20
security or sector and year time period has shown
experienced worse than that companies with high
A. ESG investments reduce benchmark performance as a performance on financially
performance result, notably in the tobacco material ESG issues within
industry.7 However, more their businesses12 realized an
This statement reflects a common recently, the tobacco industry annualized outperformance of
misconception regarding the has faltered8 and the validity over 6%, whereas companies
various methods used to integrate of extrapolating from these with low performance on
ESG factors into investment examples to assume negative material factors saw alphas
decision-making, and how screening results in losses in all ranging between -2.9% to
ESG integration differs from circumstances is not supported 0.6%.13 Considering ESG
other responsible investment by empirical evidence. In fact, factors within investment
approaches.5 negatively screened portfolios decision-making is therefore
often perform in line with not an impediment to financial
and sometimes better than performance, and can in
unscreened portfolios,9, 10 fact enhance performance,
depending on the industry if financially material factors
screened, the timeframe of affecting underlying companies
assessment and the metrics are identified and analyzed by
used to evaluate performance. investors.
5
For a full taxonomy of approaches and methods refer to Toolkit #1.
6
For a high-level overview of MPT refer to: https://www.investopedia.com/terms/m/modernportfoliotheory.asp. For the purposes of this document, it is important to understand
that MPT presumes market efficiency and is by far the most dominant investment theory, underpinning most quantitative investment models in use today.
7
https://www.wsj.com/articles/tobacco-gains-prompts-fund-to-reconsider-investment-strategy-1461914447
8
Daniel Thurecht (2019). “The Great Tobacco Selloff of 2018.” Seeking Alpha. Available at: https://seekingalpha.com/article/4231320-great-tobacco-selloff-2018.
9
Jeremy Grantham (2018). “The mythical peril of divesting from fossil fuels.” The London School of Economics and Political Science, Grantham Research Institute on Climate
Change and the Environment. Available at: http://www.lse.ac.uk/GranthamInstitute/news/the-mythical-peril-of-divesting-from-fossil-fuels/.
10
Mercer (2017). Preparing Portfolios for Transformation. Page 32-33. Available: https://www.mercer.com/our-thinking/assessing-the-prospective-investment-im-
pacts-of-a-low-carbon-economic-transition.html
11
Gunnar Friede, Timo Busch & Alexander Bassen (2015) ESG and financial performance: aggregated evidence from more than 2000 empirical studies, Journal of Sustainable
Finance & Investment, 5:4, 210-233, Available at: https://doi.org/10.1080/20430795.2015.1118917.
12
Sustainability Accounting Standards Board (2019).” Find Your Industry.” Available at: https://www.sasb.org/find-your-industry/.
13
Khan, Mozaffar and Serafeim, George and Yoon, Aaron, Corporate Sustainability: First Evidence on Materiality (November 9, 2016). The Accounting Review, Vol. 91, No. 6, pp.
1697-1724. Available at SSRN: https://ssrn.com/abstract=2575912.
Aligning Retirement Assets | Toolkit #2 113 Common misconceptions and possible responses
B. Incorporating ESG into the retirement plan might
violate regulatory guidelines Department of Labor’s
Field Assistance Bulletin
In general, this sentiment is This brief guide cannot provide on ESG Investing
unsupported by recent regulatory the level of guidance and context
actions. that retirement plan legal counsel On April 23, 2018 the US
The United States, has alternated can provide on this topic, however Department of Labor (DOL)
regulatory perspectives on we have provided comments on issued Field Assistance Bulletin
considering ESG factors in the United States retirement plan (FAB) 2018-01 which provides
retirement plans, while not explicitly market below to indicate areas guidance to the national and
declaring ESG incorporation to be for further investigation by plan regional offices of the DOL’s
against regulations. sponsors. Employee Benefits Security
Administration for applying
Interpretive Bulletins (IBs) 2015-
01 and 2016-01, which address
ESG investing and proxy voting
responsibilities, respectively.
While not overturning the prior
IBs14, the FAB strikes a more
cautious tone about ESG
investing than the IBs, which
were issued under the previous
administration. In particular, the
FAB may warrant attention by
plan fiduciaries in the following
circumstances (language in
quotations in the following
bullets is from the FAB):
• The treatment of ESG
factors in investment
decision making generally.
The FAB clarifies that
ESG factors should be
considered based on their
economic or financial
impact on an investment
and non-financial ESG
considerations may be
12 Aligning Retirement Assets | Toolkit #23 Common misconceptions and possible responses
used to choose between QDIA. The FAB suggests those of prudence, loyalty
largely equal alternatives. that it would not be prudent and impartiality, when
For example, where a to designate an ESG-themed considering undertaking
fiduciary is considering the Target-Date Fund (TDF) as a corporate engagement
inclusion of ESG factors in the plan’s Qualified Default strategy focusing on
the plan’s investment policy Investment Alternative (QDIA) environment or social
statement (IPS) it would be “if the fund would provide issues it is important that
sensible to assess whether a lower expected rate of the plan fiduciary can justify
those factors contribute to return than available non- and substantiate any related
an analysis “based solely on ESG alternative target date “routine or substantial”
economic factors” and that funds with commensurate expenses incurred as being
“the weight given to [ESG] degrees of risk, or if the fund in the economic interests of
factors [is] appropriate to would be riskier than non-ESG the plan.
the relative level of risk and alternative available target date
return involved compared funds with commensurate • To the extent a fiduciary has
to other relevant economic rates of return.” As such adding already incorporated ESG
factors.” an ESG-themed TDF as a QDIA factors into its investment
would be permissible if it has process, selected an ESG-
• The addition of so-called equivalent or better risk/return themed fund (particularly as
ESG-themed funds15 to prospects when compared a QDIA), and/or engages in
a plan’s lineup. Where a to available non-ESG-themed active ownership practices,
fiduciary is considering alternatives though reasonably it may be prudent to
adding an ESG-themed demonstrating the risk/return conduct a review of these
fund option to its plan, merits of the option would processes and practices in
the FAB indicates that a seem to be a prerequisite. view of the recent FAB.
fiduciary should consider
whether the option • The extent to which Consistent with a large and
constitutes “a prudently expenses incurred by the growing body of research
selected, well managed, plan in exercising shareholder linking ESG factors to positive
and properly diversified rights and/or engaging with company financial performance
ESG-themed investment companies in which the plan outcomes16, Mercer believes
alternative” and does not owns stock are appropriate. that environmental, social and
“require the plan to remove While the FAB does not alter governance (ESG) factors
or forgo adding other non- the DOL’s position that proxy can have a material impact
ESG-themed investment voting is a shareholder right on long-term risk and return
options to the platform.” which must be exercised by outcomes17 and therefore may
plan fiduciaries and investment be an appropriate consideration
• The consideration of an managers in accordance with for ERISA fiduciaries to take into
ESG-themed fund as a fiduciary duties, including account when determining how
14
A FAB typically cannot change the substance of pre-existing regulations unless it was subject to public notice and comment, which 2018-01 was not (Source: https://www.
groom.com/resources/dol-and-esg-investing-evolving-guidance/).
15
Defined in the FAB as a “e.g. Socially Responsible Index Fund, Religious Belief Investment Fund, or Environmental and Sustainable Investment Fund…[and] distinguished from
non-ESG-themed investment funds in which ESG factors may be incorporated in accordance with IB 2015-01 and IB 2016-01 as one of many factors in ordinary portfolio man-
agement and shareholder engagement decisions.”
16
E.g. the 2015 metanalysis linked in this footnote showed that the majority of over 2000 primary studies found a positive correlation between ESG factors and company financial
performance and over 90% showed a non-negative relationship: https://www.db.com/newsroom_news/K15090_Academic_Insights_UK_EMEA_RZ_Online_EN_151216_R2a.pdf
Aligning Retirement Assets | Toolkit #2 133 Common misconceptions and possible responses
to invest plan assets. outperformance ratings Mercer different fund options, ESG-
Mercer has been advising also assigns ESG ratings to themed or otherwise. This being
investors of all types and investment strategies as part of said, Mercer is not a law firm and
sizes worldwide on how to its manager research process. does not provide legal advice.
incorporate ESG factors into This information helps clients Clients may wish to consult
their investment programs distinguish between ESG leaders their ERISA counsel regarding
for well over a decade. To and laggards and, along with a host the impact of the FAB, if any,
support provision of this of additional analyses, supports on the fiduciary’s investment
advice, alongside typical the assessment of the merits of processes and/or practices.
Figure 1: History of US regulatory action related to ESG incorporation in corporate retirement plans
1994
DOL IBs 94-01 2015 2018
and 94-02 DOL IB 2015-01 DOL FAB 2018-01
2008 2016
DOL IB 2008-1 DOL IB 2016-01
Figure 2: A Summary of ESG-related regulatory guidance from the US DOL currently in force
IV. IB 2015-01 – ESG INVESTING AND ETIS V. IB 2016-01 – PROXY VOTING AND ENGAGEMENT
Replaced IB 2008-01 and clarified: Replaced IB 2008-02 and clarified:
• ERISA does not prohibit fiduciaries from • A burdensome cost-benefit analysis is not required
incorporating ESG factors in investment policy for ERISA plans to vote proxies, establish a proxy
statements or integrating ESG-related analyses. voting policy, or otherwise exercising shareholder
rights.
• Consideration of ESG criteria does not presumptively
require additional documentation or evaluation • Shareholder engagement around ESG issues can
beyond generally applicable fiduciary standards. result in long-term financial benefits for shareholders
and thus can be considered in active ownership
activities of ERISA plans.
VI. FAB 2018-01 – CLARIFYING IBS 2015-01 AND 2016-01
• While not overturning prior IBs the FAB strikes a more cautious tone on ESG-themed investing.
• May require particular attention in the context of QDIAs or when incurring routine or substantial expenses to
engage in environmental or social engagement campaigns.
17
https://www.mercer.com/our-thinking/wealth/mercer-investments-beliefs.html
14 Aligning Retirement Assets | Toolkit #23 Common misconceptions and possible responses
C. ESG investing increases more expensive than traditional D. ESG investing is making
costs approaches, the record- a political and/or social
breaking growth of responsible statement
As with most issues of this nature investment funds in both the
the answer is not straightforward European and United States
As clarified previously in
and will differ on a case by case markets, where 14719 and
Toolkit #1, socially responsible
basis. The biggest factors in 7220 sustainable equity funds
investment (SRI) is typically
launched in 2018, respectively,
determining the effect of ESG focused on values alignment of
investing on costs will be the asset indicates that increasing
investments, in particular, with
class, vehicle type and the style competition among fund
respect to moral and/or political
of investment being deployed managers should drive future
values held by investors. But
(e.g. active vs. passive). For the costs down further and provide
ESG investing and SRI investing
sake of brevity, we will focus in fiduciaries a greater range
are not the same. SRI has
this paper on fees associated of options.
traditionally focused on exclusions
with investments made in active • Passive equity: ESG index of disfavored companies or
or passive equity funds with the funds tend to be higher cost industry sectors based on moral
understanding that these asset than funds tracking equivalent underpinnings, however similar
classes broadly will reflect the market-cap weighted indices motivations have frequently been
dynamics in other asset classes. due to the current common ascribed to any investors who
practice amongst index consider financially material ESG
• Active equity: While accessing factors in investment analyses.
data regarding the expense managers of passing the
extra costs of ESG research However, such a conflation is
ratios for ESG, active equity inaccurate and inappropriate.
strategies (or any asset onto investors in these
specialized funds. However, While many ESG-themed funds
class) can be challenging to often avoid investments in
find in many cases. Fidelity, some ESG index funds have
come to market at prices certain controversial sectors,
utilizing Morningstar fee such as tobacco or firearms,
data as of 31 December below equivalent standard
funds lately.21 This means the this typically reflects managers’
2017, compared ESG share views that the long-term growth
class expenses against the ESG fund expenses will be
competitive with the average prospects of those sectors
expenses of traditional open are limited, i.e. ESG investing is
ended funds. That comparison, index fund in the category, but
they will not be the lowest cost not focused on values or moral
which included active equity considerations, but on economic
strategies, found that 61% option. Increasingly index fund
managers are exploring “self- considerations impacting risk
of the ESG share classes and return. Managers may take
evaluated were priced at or indexing” whereby they acquire
third-party ESG data from similar long-term perspectives on
below the average expenses certain fossil fuel sectors, which,
of the traditional fund universe multiple sources and develop
their own specialized indices. based on numerous reports and
when comparing against projections,22 face an uncertain
similar categories.18 This can reduce cost, as they
are not paying the index creator future in a time of transition to a
While the historical data implies new global energy system.
that ESG-aligned investments a fee to track the published
in active equity need not be index.
18
Fidelity (2018). “Investing based on your principles.” Available at: https://www.fidelity.com/viewpoints/active-investor/strategies-for-sustainable-investing.
19
Hortense Bioy (2019). European Sustainable Funds: 2018 in Review. Morningstar. Available at: http://images.mscomm.morningstar.com/Web/MorningstarInc/%7B-
8f5366b4-9511-448e-9d19-6ae42c12c5e3%7D_2018_ESG_funds_review_final_.pdf.
20
Jon Hale (2018). Sustainable Funds U.S. Landscape Report. Morningstar. Available at: https://www.morningstar.com/content/dam/marketing/shared/pdfs/Research/Sustainable_
Funds_Landscape.pdf. Page 9.
21
Hortense Bioy (2019). European Sustainable Funds: 2018 in Review. Morningstar. Available at: http://images.mscomm.morningstar.com/Web/MorningstarInc/%7B-
8f5366b4-9511-448e-9d19-6ae42c12c5e3%7D_2018_ESG_funds_review_final_.pdf. – “IShares and L&G launched ESG-screened core ETFs that are cheaper than most non-
screened rivals, with ongoing charges ranging from 0.05% to 0.20% depending on the geographic exposure. The ETFs exclude companies that operate in controversial industries
such as tobacco, weapons, and coal mining in addition to those in violation of the United Nations Global Compact principles. For the first time, investors can buy a range of sustain-
able portfolio building-blocks without having to pay a premium for the privilege. Surely, this must be one of the strongest signals that ESG investing is fast becoming mainstream.”
22
McKinsey & Company (2019). Global Energy Perspective: Accelerated Transition. Available at: https://www.mckinsey.com/solutions/energy-insights/global-energy-perspec-
tive-accelerated-transition.
Aligning Retirement Assets | Toolkit #2 153 Common misconceptions and possible responses
Again, what might be perceived However, there are many retirement plans investing in
as political or values-based consultancies who have “sustainable, responsible and
judgments may in fact simply developed, or are developing, quite impact” funds grew 70%, with
reflect a manager’s view that the robust responsible investment related plan assets growing 71%
long-term risks of investing in practices, and in fact there are from USD $2.7 billion to USD
such sectors may outweigh any third-party surveys that rank $4.61 billion.26 PensionsEurope
expected returns. It is important consultancies on their responsible conducted a survey of members
that investors understand the investment practices, most notably in 2018 which found that pension
analyses supporting managers’ the Independent Research in funds expect that the share of
decisions on ESG topics, to Responsible Investment Survey sustainable investments in their
ensure that the manager’s 2017, which highlights both portfolios will increase in coming
perspective on long-term trends leading advisory firms as well as years, due to a combination of
aligns with those of prospective individuals, based on surveys such investments becoming
investors. of asset owners and asset more mainstream, regulatory and
managers.24 If retirement plan legislative encouragement and
fiduciaries believe that the advice interest by plan participants.27
they are receiving is not reflective Global trends appear to be all
E. Our investment
of best practices in responsible pointing in one direction when
consultant doesn’t support investment, then there are other it comes to the incorporation
ESG investing qualified firms available. of responsible investment
practices into retirement plans,
Some consultants are unable or and for that reason, concerns
unwilling to advise their clients over competitors not integrating
regarding responsible investment F. None of our competitors
responsible investment practices
matters, either because they are integrating ESG appear to be largely unfounded.
perceive that clients are not
interested, or because of a Depending on global region, it
perceived lack of credible ESG- is quite likely that many of your
related product offerings. A 2017 competitors’ retirement plans are
UN Principles for Responsible in fact integrating ESG factors
Investment (PRI) paper reviewing into their retirement plans. PRI
investment consulting services offers a useful listing of over 400
found that “most consultants asset owner signatories25 to
and their asset owner clients the Principles as of early 2019,
are failing to consider ESG with 86 signatories identified
issues in investment practice… either as retirement or pension
There currently seems little plans (although a number are
commercial imperative for public plans). In the United
investment consultants to extend States, data gathered by the
the coverage of ESG integrated US Sustainable Investment
services among their clients.”23 Forum indicated that between
2014 and 2016 the number of
23
United Nations Principles for Responsible Investment (2017). Working Towards a Sustainable Financial System: Investment Consultant Services Review. Available at: https://www.
unpri.org/download?ac=5167. Page 3.
24
SRI-CONNECT (2018). “Independent Research in Responsible Investment Survey 2017.” Available at: https://www.sri-connect.com/index.php?option=com_content&view=cate-
gory&layout=blog&id=201&Itemid=1827. NB: Free registration may be required to view results.
25
United Nations Principles for Responsible Investment (2019). “Search Results.” Available at: https://www.unpri.org/searchresults?qkeyword=retirement&PageSize=10¶met-
rics=WVSECTIONCODE%7C1018%2CWVFACET2%7C77&cmd=ReplaceKeyword&val=retirement&SortOrder=3.
26
Judy Faust Hartnett and Rebecca Moore (2018). “SRI Holdings in ERISA Plans Gaining Ground, but Concerns Remain.” Plan Sponsor. Available at: https://www.plansponsor.com/
sri-holdings-erisa-plans-gaining-ground-concerns-remain/.
27
PensionsEurope (2018). PensionsEurope survey report on drivers of equity investments by pension funds. Available at: https://www.pensionseurope.eu/system/files/PE%20sur-
vey%20report%20on%20drivers%20of%20equity%20investments%20by%20pension%20funds%20-%20September%202018%20-%20FINAL.pdf. Pages 7-8.
16 Aligning Retirement Assets | Toolkit #23 Common misconceptions and possible responses
The table below shows survey proportion of Fortune 1000 funds as funds over USD $1 billion in
data for retirement plan sponsors that responded to the survey, of plan assets were less likely to offer
in the United States regarding which only 4.8% offered a socially such a fund, at 3.8%, compared
their inclusion of at least one responsible fund. In addition, to 4.8% across all Fortune 1000
“socially responsible” (a term that while out of the broader cohort plan sizes. There may be many
is undefined in the survey) fund of all industries, the larger plan underlying reasons for these
in the plan lineup. Of particular sizes (those over USD $1 billion trends, however the clear finding
note, the proportion of survey in plan assets) were more likely to is that there is significant room for
respondents across all industries offer a socially responsible fund, growth among large retirement
that offered such a fund is at 10.6%, the opposite was true plans to offer additional socially
far greater, at 8.4% than the among Fortune 1000 companies, responsible funds to participants.
Figure 3: DC plan investment offerings survey data
PLANSPONSOR SURVEY DATA 28 ALL INDUSTRIES (N=4000) FORTUNE 1000 (N=194)
Plan size Overall >USD $1B Overall >USD $1B
% of plans offering a socially
8.4% 10.6% 4.8% 3.8%
responsible fund29
CASE STUDY: PIRELLI NORTH AMERICA
Pirelli Tire LLC is a US subsidiary of WBCSD member Pirelli & C, a global tire manufacturer. As a perennial
sector sustainability leader recognized by leading global indexes and third-party organizations, Pirelli has
committed to continually enhancing its environmental, social and governance performance.
In 2015, Pirelli North America’s Public Affairs team began to recognize that offering an ESG option as part
of the company’s defined contribution plan lineup could be an effective way to provide plan participants
with enhanced retirement outcomes that reflect a longer term perspective on risks and opportunities.
However, initial inquiries with the HR department, which were well-received, did not lead anywhere
because the investment managers told HR representatives that there wasn’t an available “sustainability”
option. Later, it became clear that there had been a “social responsibility” fund option available but that
there was confusion between the terms “sustainability” and “social responsibility.”
The HR representative reported in 2015 and 2016 that the Defined Contribution Investment Committee
was nevertheless looking into the request and had discussed it at quarterly meetings.
In the Fall of 2016, new committee members found that the committee, and its key service providers,
were interested in the topic of ESG but not fully familiar with it, and a question was raised about whether
there could be a trade-off between financial performance and ESG performance. The plan’s investment
consultant agreed to do research, and returned to the committee with a complete report and comparative
information on a passive sustainable equity strategy, as well as an ESG integrated active equity strategy.
After considering fees and risks related to the relative concentration of the active equity strategy, the
committee decided to add the passive sustainable equity strategy to the DC plan lineup in Q3 2017.
At the beginning of 2018, assets in the sustainable fund were at a low level, yet grew by 170% over the
course of the year as the fund saw significant new allocation and re-allocation from participants, revealing
strong demand for this sustainability-oriented investment option.
28
PlanSponsor; 2019 Defined Contribution Plan Survey.
29
PlanSponsor does not define
Aligning Retirement Assets | Toolkit #2 174
Methods for
implementing
a responsible
retirement plan
Presuming that retirement plan fiduciaries have decided
to incorporate responsible investment approaches into
the retirement plan, what are the next steps?
18 Aligning
18 Aligning Retirement
Retirement Assets
Assets || Toolkit
Toolkit #2
#24 Methods for implementing a responsible retirement plan
The following are suggested steps have some interest or untapped and opportunities in relation
to take, based on successful expertise in ESG topics, but to various investment options.
engagements that the participants have not had the opportunity to Many consultants also offer
in this project have had in advising demonstrate that expertise. ESG-related capabilities to clients
retirement plan fiduciaries on through retainers or project-based
such matters. While these steps Other retirement plans may engagements.
are laid out in a deliberate order, discover that the investment
different plans will have different managers whose strategies As retirement plans generally have
governance structures and/ they are invested in have ESG existing relationships with at least
or third-party relationships, capabilities and guidance to offer one of the resources noted above
which may render certain steps plan fiduciaries. This is because – internal expert staff, investment
redundant. Nonetheless, we many managers are rapidly managers, and/or investment
believe that the steps outlined developing their ESG expertise consultants – inquiring about those
below will be applicable to the in response to market demand. resources’ responsible investment
majority of retirement plans While not strictly hired to perform experience, tools and capabilities
around the world. such tasks, investment managers could be a worthwhile first step to
can frequently provide insights take. If the resource offers some
on ESG topics (or indeed, many capabilities to draw upon, then
other topics) based on their retirement plan staff could request
A. Assess existing ESG experiences, although many an educational session regarding
resources (as applicable) retirement plan fiduciaries may not the current retirement plan
be aware of such capabilities. portfolio (for DB plans) or lineup (for
Retirement plans often have DC plans) and potential areas for
access to many different internal Finally, many other retirement ESG incorporation that fiduciaries
and external resources, some plans engage a third-party could consider.
of which may have ESG-related consultant to aid in key elements
capabilities and expertise of retirement plan activities, in If existing resources do not have
that fiduciaries may not have particular, Investment Policy robust responsible investment track
taken advantage of previously. Statement (IPS) maintenance records or resources, or appear
For example, retirement plans and the investment selection and resistant to engage on the topic,
that have devoted significant monitoring process. Consultants retirement plans can seek outside
resources to developing internal are generally expected to be advice – specific to responsible
staff investment capabilities may well-informed about investment investment topics or otherwise –
not employ third-party investment managers and their products, as from consulting firms for a fee, or
consultants30 to aid in investment well as their particular capabilities; issue RFPs/tenders to seek new
manager selection processes as such, consultants are typically relationships with resources with
and other aspects of retirement a key source of information more advanced RI capabilities.31
plan governance. It’s possible that to investment committees,
certain retirement plan staff may helping them balance risks
Figure 4: Steps toward retirement plan ESG incorporation
1 2 3 4 5 6 7
Assess Assess Update Evaluate Evaluate Evaluate Communicate
existing ESG plan trustees IPS current potential new portfolio changes to
resources perspectives managers managers implications participants
30
While this paper refers to investment “consultants,” we recognize that the term investment “advisor” is frequently used synonymously, although typically in reference to retail
investment relationships, rather than institutional investment relationships. As this paper is oriented toward institutions, we will use the term consultant.
31
One possible source for assessing investment consultants’ ESG capabilities is the 2017 Independent Research in Responsible Investment Survey, which (as of this writ-
ing) is being updated for 2019, and surveyed over 1,000 professionals working in responsible investment, corporate governance or other functions with insight into
ESG practices from over 40 countries. The 2017 survey results can be found here: https://www.sri-connect.com/index.php?option=com_content&view=category&lay-
out=blog&id=201&Itemid=1827.
Aligning Retirement Assets | Toolkit #2 194 Methods for implementing a responsible retirement plan
B. Assess plan fiduciaries’ Following the education session, Some example topics for
perspectives on ESG risks a useful next step to engage members to respond to include:
and opportunities retirement plan fiduciaries is to
• Do fiduciaries believe that
develop and issue a confidential
survey regarding committee considering ESG factors in
Retirement plan investment investment decision-making is
members’ views on material
committee members tend to be aligned with fiduciary duty?
long-term ESG risks and
selected to serve in a fiduciary
opportunities that the plan should
role because of the experience • Do fiduciaries believe that
actively consider in investment
or perspective they bring to the considering ESG information
decisions. This survey could be
committee, and many tend to have as part of the investment
administered through an online
relevant financial sector and/or process can help identify
tool, or an in-person meeting,
human resources experience. material financial issues and
although the emphasis should be
can contribute to better risk
Given individuals in such roles placed on gathering the views of
adjusted returns?
likely have varying exposure individual fiduciaries in their roles
to responsible investment governing the retirement plan, and • Do fiduciaries believe that
topics, and may bring particular therefore should be confidential or investment stewardship – or
perspectives into such anonymous. proxy voting and engagement
discussions, it can be helpful to with investee companies
If administering a survey is
hold an educational session for – can enhanced corporate
not feasible or is otherwise
committee members to provide governance and long-term
undesirable, engaging committee
a common foundation to ensure financial performance?
members in a discussion around
consistency regarding ESG topics,
long-term risks and opportunities, • Do fiduciaries believe that
definitions and implications in a
and how such considerations reputational issues or long-
retirement plan context.
are considered in the retirement term financial performance
Investment advisors can typically plan’s overall strategy (if at all) can considerations connected to
conduct such sessions during result in useful guidance. certain investments present
regularly scheduled committee material risks, and should
meetings, presuming they therefore be considered for
have sufficient background in exclusion from the investment
responsible investments. portfolio? If so, what are those
industry sectors or topics?
The plan advisor and/or staff
should then aggregate all
responses and analyze them
for trends before presenting the
results to the committee.
If fiduciaries indicate in the
survey that the majority hold
views about the materiality of
ESG incorporation methods to
investment performance, then
considering how to integrate such
perspectives into the committee’s
investment strategy would be a
prudent next step.
20 Aligning Retirement Assets | Toolkit #24 Methods for implementing a responsible retirement plan
C. Update Investment • What is your rationale for A recent report estimated that
Policy Statement to updating your policy? And the global responsible investment
take ESG considerations why now? Is it a best practice/ market grew to exceed USD $30
into account regulatory requirement? trillion in AUM in 2018, up from
USD $23 trillion in 2016.36 It’s clear
• What considerations must the responsible investment market
Presuming that the steps above your policy include to meet is growing, dynamic and innovative
have been completed, formally your organization’s investment across the world. In the face of
integrating the material ESG strategy and objectives?33 this dynamism, many methods
considerations identified by
of analyzing the ESG quality of
committee members into the Crafting responses to these
investment funds and issuers of
retirement plan’s Investment questions, ideally with help
securities (primarily publicly traded
Policy Statement (IPS) will provide from an experienced advisor or
companies) are emerging.
a framework to inform future consultant to guide the process,
investment analyses and both can provide useful support to
asset allocation (for DB plans) and/ the committee for drafting and i. Fund-Level ESG
or investment manager selection adopting updates to the IPS that commitment and
processes (for DB and DC plans). reflect ESG considerations. These investment process
policy updates will, in turn, provide
The Principles for Responsible specific guidance to investment In order to evaluate the best
Investment (PRI) published useful managers and advisors regarding course of action for aligning a
guidance to aid investment where the retirement plan deems retirement plan with responsible
committees in considering ESG factors to be material for investment, a prudent first
responsible investment in their investment decision-making, step for plan sponsors is to ask
investment policies, including the clarifying expectations. investment consultants or other
following questions to consider resources about their capabilities
as part of the policy development for assessing investment
process: managers’ ESG approaches.
D. Evaluate current
Driven by growing client demand,
• Does your organization have investment managers’ numerous investment consultants
a comprehensive investment responsible are enhancing their research and
strategy which accounts for investment efforts capabilities around responsible
long-term trends? PRI’s Crafting
investments, with ESG ratings of
an Investment Strategy32 The responsible investment investment strategies being one
guidance on investment industry is growing significantly in approach that is being increasingly
strategy development highlights the range of products and services developed by consultancies.
key aspects to consider. that are available to investors.
Between 2015 and 2017, over In 2008, Mercer developed an
• How does your organization
100 different sustainable open- integrated approach to rating
view ESG factors? Are you
ended mutual and exchange-traded investment strategies for how
conducting this review for
funds were launched in the United actively the strategy incorporates
risk-management purposes, to
States,34 and in 2018, over 290 ESG factors and active ownership
unlock new opportunities, or is
sustainable funds were launched approaches into investment
it a combination of both?
in Europe alone.35 decision-making, to accompany
the company’s existing traditional
32
A complete guide to investment policy development can be found in UNPRI’s Investment Policy: Process & Practice document, available for download here: https://www.unpri.
org/download?ac=1605.
33
Principles for Responsible Investment (2016). “Getting started on an integrated investment policy.” Available at: https://www.unpri.org/asset-owners/getting-started-on-an-inte-
grated-investment-policy/411.article.
34
Jon Hale (2018). Sustainable Funds U.S. Landscape Report. Morningstar. Available at: https://www.morningstar.com/content/dam/marketing/shared/pdfs/Research/Sustainable_
Funds_Landscape.pdf. Page 7.
35
Hortense Bioy (2019). European Sustainable Funds: 2018 in Review. Morningstar. Available at: http://images.mscomm.morningstar.com/Web/MorningstarInc/%7B-
8f5366b4-9511-448e-9d19-6ae42c12c5e3%7D_2018_ESG_funds_review_final_.pdf.
36
Axel Pierron (2019). “ESG Data: Mainstream Consumption, Bigger Spending.” Opimas. Available at: http://www.opimas.com/research/428/detail/#.
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