ESG investing — the practice of investing in funds that prioritize environmental, social and corporate governance criteria — is, without question, on the rise. According to a Bloomberg Intelligence
At Betterment, we’ve seen customers clamor for ESG investment options and have
Despite this momentum, socially responsible investing (SRI) has not fully taken hold in the retirement industry. As of 2019, only
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Consider how offering your clients a socially responsible 401(k) option could support their own business goals. As companies look into new ways to attract talent in the current tight labor market, providing a benefits package with differentiated offerings like an ESG-friendly 401(k) could provide a competitive edge. It can be enticing for both current and prospective employees to work with a company that is aligned with their passions, and can help build loyalty and increase retention.
Moreover, as an increasing number of businesses develop pledges to showcase their commitment to ethical and climate-friendly business practices, offering a sustainable retirement plan shows employees and stakeholders that the company is making meaningful strides to meet those goals.
From a benefits perspective, companies are often looking for ways to boost their 401(k) participation and engagement rates. Employers want their employees to take advantage of this benefit given both the resources invested into offering a plan and a desire to help set up employees for financial success. A
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Financial advisers have a fiduciary duty to guarantee that the investments they’re recommending will provide their client with the best returns possible. Similarly, plan sponsors must ensure that the funds offered in their retirement plans have been vetted diligently to ensure quality and solid performance. Some may assume that values-driven investing will yield poor returns, and dismiss it as not worth being part of a responsible 401(k) fund package. This is a misconception that we’re working to break.
Compared to traditional investment portfolios, there are a number of benefits to ESG investing that make them attractive to investors.
For starters, they can produce high returns.According to a 2019
The same white paper also found that sustainable funds had lower risk compared to traditional funds. ESG funds showed lower volatility because they considered factors beyond traditional financial information to select securities, which means their investment performance does not follow broad market benchmarks.
It’s important for advisers to take the time to educate their clients on this, and talk through their potential concerns that ESG investing will hamper returns. Retirement savers don’t need to compromise — they can invest in funds that match their values, while still seeing strong financial returns.
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With the recent news that the Department of Labor is considering a rule that would make it easier for employees to access ESG options in retirement plans, it’s clear that the industry is beginning to pay attention, as the world at large shifts to more renewable and sustainable practices.
As legislative barriers continue to be removed and education spreads on the opportunities possible with ESG investing, we expect to see even greater interest from investors and plan sponsors in building this into retirement plans. When executed properly, it can offer a path for people to support causes they believe in without sacrificing their retirement security.