PLANSPONSOR - December 2018/January 2019 - 53

compare costs, financial performance,
screens and voting records of competing
funds that implement some ESG
screening.
According to the tool, more than
180 mutual funds explicitly employ ESG
thinking as part of their stated investment
philosophy. These funds range across
various strategies: from 60/40 balanced
funds to equity funds set by market cap,
to aggregate bond funds focused on fixedincome
ESG opportunities. A handful are
labeled as retirement-specific funds.
According to My-Linh Ngo, ESG
investment specialist for RBC Global
Asset Management's BlueBay Asset
Management division in London, the
analysis of ESG funds to decide whether
any are a good fit for a DC plan's core
menu closely mirrors the analysis of any
other fund type. It is a matter of following
a plan's investment policy statement (IPS)
and assessing risk, returns, costs, objectives
and process. Ngo points out that her
firm factors ESG thinking directly into
all of its asset management products,
including those without an ESG-focused
name-which is an increasingly common
practice among asset managers.
" We feel that ESG is an advantage and
that it will benefit long-term risk-adjusted
returns, across many different fund types
and asset-allocation approaches, " she says.
ESG Strategies
Ngo observes that, on the equity side,
generally speaking, ESG fund managers
can select from a large universe of unique
stock issuers, but, at the same time, the
choice of financial instruments that give
exposure to these companies is limited.
" What this means in practice is that
managers can take a very fundamental
view on the equity side of whether they
want to have investment exposure to a
given company or not-because they have
only that one vehicle and thus only one
singular investment risk profile from the
ESG perspective, " Ngo says. " This allows
managers and their institutional clients
to more easily build their fundamental
ESG views directly into the decision of
whether or not a fund should invest in a
given company. "
When managers build ESG strategies
on the fixed-income side, essentially
the inverse is true.
" They have a smaller pool of unique
issuers, but each has a larger pool of
instruments the fund manager can
invest in, " Ngo says. " This means that
each issuer will have a variety of different
bonds that have different yields and
different maturities. The different bonds
will afford different levels of protection,
as well, depending on the structure of the
capital pool and how the bond is built. "
Thus, there are multiple credit
risk profiles to consider for each ESG
bond issuer, depending on the bond the
manager chooses to invest in. The idea
is that, for example, climate change will
have a more material impact on longerterm
bonds relative to shorter-term bonds.
For this reason, the ESG analysis for fixed
income is made that much more technical
and quantitative, Ngo says.
Technicalities
Thinking about these ESG topics is no
more complex for the novice investor than,
say, thinking about " small caps " or " large
caps. " Further, the Employee Retirement
Income Security Act (ERISA) provides, in
Section 404(c), that if plans present the
necessary conditions for making participant
investing success achievable, fiduciaries
will not be liable for imprudent
investment decisions participants make.
As long as they present a diversified
KEY POINTS
* According to a recent survey, the vast majority (88%) of plan sponsors
have not incorporated ESG into their DC or DB plan, yet more than
half of Millennial investors (52%) see the social and environmental
responsibility of their investments as an important criterion.
* The analysis employed to choose an ESG fund should closely resemble
the analysis of any other type of fund-assessing risk, returns, costs,
objectives and process. Asset management products, including those
without ESG-focused names, often contain ESG factors.
menu of quality funds, plan sponsors do
not have to fear liability if a plan participant
fails to use core menu funds in an
optimal way.
So in the end, it is not clear that plan
sponsors should completely shy away
from offering ESG funds on the core
menu-but the sponsor should probably
prioritize 404(c) compliance. At the most
basic level, to be 404(c) compliant, a DC
plan must offer a broad range of investment
options, make key disclosures
about performance and fees, and make
it possible for participants to easily view
and control their investments.
Fred Reish, a partner in the Drinker
Biddle & Reath LLP employee benefits
and executive compensation practice
group, and chairman of the firm's financial
services ERISA team, in Washington,
D.C., says a good way to view Section
404(c) is as " a relatively inexpensive
insurance policy. " According to Reish,
plan sponsors and fiduciaries should
make every effort to obtain its protections,
whether or not they are making a
foray into ESG.
Even in cases where the plan sponsor
is not in technical compliance, to be sure
of 404(c) protection, Reish says, fiduciaries
should still protect against possible
claims by helping participants improve
their investing; this can be done via
targeted communications and education.
And, even if a plan satisfies 404(c), there
is an important reason for improving
participant investing decisions-to help
participants reach their retirement goals.
-John Manganaro
PLANSPONSOR.com December 2018 - January 2019 51
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