PLANSPONSOR - April/May 2019 - 69

the world markets, both terminal values
in early 2019 are $341, while the U.S. ESG
leaders generated $466 over 10 years, just
below the $476 for the full market.
The evolution to ESG includes a
broader research process into companies'
businesses. " You're going to look at
the financial returns of a company and
not pay any attention to the governance? "
says Rob Thomas. His firm, Social (K), in
Springfield, Massachusetts, is a consultant
and " matchmaker " of sorts in the
industry bringing ESG-screened investment
options to DC retirement plans and
advisers for 10 years-plus. " You can come
up with examples all day long for the
value of the 'E' and the 'S.' It just makes
sense that more due diligence will lead to
better returns. "
" We state that we are growing wealth
responsibly, not that we are creating a
more promising future for the world, "
says Joe Sinha, chief marketing officer
at Parnassus Investments, a $26 billion
investment manager, located in San
Francisco, that has followed ESG criteria
since 1984. " We were founded on the
belief that you can invest on your values
and still beat the stock market. That calls
for a 360-degree, holistic view of enterprise
values. " About 20% of the firm's
assets are invested for retirement plans,
but, Sinha points out, " Many of our clients
are with us for our fundamental investing
and not for the ESG. "
Natixis Investment Managers, in
Boston, introduced an ESG-themed targetdate-fund
(TDF) series in 2017. " ESG is
part of every decision in the TDF range, "
explains Ed Farrington, head of retirement
strategies. " To construct a diversified glide
path over a 60-year time frame, we take a
broad view of ESG, covering large and small
equities as well as fixed income. " Natixis
affiliates manage the various sleeves, and
passive strategies are applied in areas hard
to access such as the emerging markets.
Even when portfolios are tied to
market indexes, managers can act on ESG
principles. State Street Global Advisors
(SSgA) manages roughly $179 billion in
funds, but as an index manager the firm
is often beholden to the methodology
of core indexes, sticking to the companies
included and their portfolio weightings.
But even when portfolios are tied to
market indexes, managers can act on ESG
principles. " We're able to do the 'G,' " says
Greg Porteous, head of defined contribution
intermediary strategy, in Boston. " We
spend a lot of time on governance and
withhold our votes where companies aren't
assembling diverse boards of directors. "
" We state
that we are
growing wealth
responsibly,
not that we are
creating a more
promising future
for the world. "
In evaluating the results of ESG
managers, " we do not make any concessions, "
says Bernhardt. " An ESG-themed
fund has to perform well against the
broader universe in which it operates,
so we don't compare ESG funds against
ESG indices. If they don't stack up on that
basis, then it's not a prudent decision. "
Mercer has had a formal ESG effort for
15 years and ratings on managers since
2008. " Now we have over 4,600 funds
rated, and about 20% earn a rating of 1 or
2 on a 4-point scale. "
For all the attention paid to diversity,
climate change and other potential avenues
for corporate responsibility, ESG investing
has been slow to take off in DC plans.
In its How America Saves 2018 survey,
Vanguard Group reported that while 20%
of participants are offered a sustainable
option-mostly at large plans-just 3% of
that group make the choice.
This low share is largely due to
the structure of the DC market and the
dominance of TDFs, which receive the
lion's share of contributions. However,
consultants and asset managers envision
several different catalysts for broader ESG
investing in the coming five to 10 years.
At the opposite end of the spectrum
from TDFs are managed accounts, which
Porteous says could be fashioned into
ESG defaults. " Advisers could build portfolios
in managed accounts and make
them available to participants oriented
toward ESG. "
" The adoption [of ESG] in DC plans
will be most successful where those
factors are considered alongside any
others that have economic consequences, "
reiterates Jason Shapiro of Willis Towers
Watson, in New York. " The better that
investment managers can display that, the
less controversial the idea will become. "
Sinha agrees that sustainable investment
choices have to pull their weight
and stresses, " There can't be any handicapping
for the ESG fund. It can't underperform
other options in the plan, and it
must have normal fees. "
But Farrington sees participants
as the prime movers. " By 2025, 75% of
American workers will be Millennials.
They demand transparency and want to
know how companies behave and that
someone is asking those questions. They
will pressure the employers, who will see
that ESG investing is aligned with their
fiduciary duty and not in conflict with it. "
-John Keefe
NEXT STEPS
* Sponsors should deliberate with
their plan board and financial
and legal advisers as to whether
an ESG investment choice suits
their company culture.
* If the answer is " yes, " the sponsor
should survey participants to
gauge their interest and evaluate
whether an ESG option will be
well-rewarded with participant
engagement and savings.
PLANSPONSOR.com April - May 2019 69
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