PLANSPONSOR - December 2021 - January 2022 - 19

2022 INNOVATION ISSUE | COVER STORY
wanting to make sure they invest in sustainable ways in their
401(k), " she says.
Russell Investments finds little difference in ESG takeup
according to employer type or geography, Lim says. " Where we
do see a difference in interest is where, at the corporate level,
there's a focus on sustainability and those types of policies, "
he says. " Where that's happening, there is much more push by
employees for options like this, and that usually translates into
the plan adding an ESG option. "
Lim is asked where he sees interest in specific aspects of ESG.
" The talk about sustainability, for the first couple of years, was
focused toward the environment, " he says. " In the past year, we've
started seeing more focus on the social aspect of ESG. "
Portfolio Evaluations Inc. has clients-e.g., some nonprofits,
an energy-conservation company and a health food company-
that use ESG funds. " Our clients that were early adopters of ESG
have generally been organizations where you can trace their
interest in sustainability back to their business operations or
their organization's culture, " says Brian Vest, senior research
analyst at the company, in Warren, New Jersey.
The other characteristic many early ESG adopters share
is they are the U.S. divisions of companies headquartered in
Europe, where this type of investing is more common, he says.
" Historically, most of our DC clients utilizing ESG do fall into one
of those two categories, " he says. " But now we're starting to see
more interest from companies that are outside of those categories. "
The Sponsor Impact
Whether participants ask for ESG funds or not, many DC plans are
poised to incorporate ESG factors into their menus. In October, the
DOL announced a new, proposed rule that, the agency said, would
remove barriers to plan fiduciaries' ability to consider climate
change and other ESG factors when they select investments.
" The proposed rule, if it's adopted largely as is, is significant, "
says George Michael Gerstein, co-chair, fiduciary governance and
environmental, social and governance at law firm Stradley Ronon
in Washington, D.C. " I think this will be a nudge, and possibly
even a strong nudge, toward ESG adoption by ERISA [Employee
Retirement Income Security Act] plans. "
Among the hundreds of responses the DOL has received
during the comment period, thus far a large share are from those
opposed to the rule, saying it is pushing the new administration's
political agenda. Others expressed support for the rule,
saying they agree that ESG factors should be considered in plan
investment selection, and suggest dialing back some language.
" This new rule reminds fiduciaries that ESG factors can be
material to investment performance-and we know from ERISA
that, if any factor is material to performance, fiduciaries should be
considering it, " Gerstein says. " The rule talks specifically about
the types of ESG factors that can be meaningful to an investment's
performance. It's really putting ESG in front of plan fiduciaries
and saying, 'You need to start paying attention to this.' "
Although the proposed rule sidesteps saying that ESG factors
are always material and always need to be considered, " it comes
very close to saying that, " Shingler says. If that is finalized, it will
put the onus on asset managers to apply ESG factors when making
decisions about investments. " Clearly, many asset managers
already do include ESG factors. But if the proposal becomes the
final language, it's going to put tremendous pressure on the other
asset managers to incorporate the factors into their decisions. "
Adding thematic ESG funds to a plan's core menu has been
challenging for sponsors, because of the regulatory environment,
Shingler says. " Now we have a proposed rule that, if it is finalized,
will be a significant accelerant to the use of ESG in defined
contribution plans. " Still, he says, he doubts ESG will become a
dominating factor in plan fiduciaries' investment selection and
monitoring. " Managers don't get hired and fired based on ESG
factors, " he says.
Where might the new DOL rule have the biggest impact in
DC plans? " My sense of where ESG is going, " says Gerstein, " is
that it will be an [investment analysis] overlay to many plan investment
options, over time. Where I think it will end up, maybe in
10 years, is it will be all 'under the hood' in funds: It will be part
of the normal due diligence analysis undertaken by investment
managers and plan fiduciaries. Some sponsors may want to offer
themed ESG funds on their menu. I see ESG as being like tentacles
that are reaching in many different directions. "
From Montgomery's experience, most sponsors fail to realize,
until he tells them, that many fund managers already include ESG
in their investment due diligence. " I try to educate the sponsors,
and keep the explanation relatively simple. I explain that, as part
of their overall investment analysis, these are factors the fund
managers will consider when selecting the companies to invest
in, for their fund. "
Ways to Increase Understanding
Plan sponsors are likely, in the years ahead, to hear more from
younger employees, who have a strong awareness of environmental
and social issues, Gerstein says. They may need more information
to make knowledgeable decisions about ESG investing, he adds.
" Younger participants especially are viewing their investments as
part of their ethos, " he says. " I don't think there's any requirement
under ERISA that participants need to be expert in the mechanics
of plan investment options. But more and more participants are
looking at how they can further their social and environmental
ideals when they invest. So sponsors may want to anticipate that. "
There have been many flows into ESG funds by retail investors,
Vest says. He attributes that to younger investors wanting to
incorporate factors such as climate change and social justice into
their investment decisions. He foresees similar growing interest
among younger participants in investing for ESG values in their
defined contribution plan. -Judy Ward
PLANSPONSOR.COM December 2021 - January 2022 19
http://www.PLANSPONSOR.COM
PLANSPONSOR - December 2021 - January 2022

Table of Contents for the Digital Edition of PLANSPONSOR - December 2021 - January 2022
