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companies, [about] the quality of their
products, and for industrial companies,
what they do about worker safety, and
toxic waste and emissions. "
Index levels from December 2007
through this May for the MSCI World
Standard Index (including all relevant
stocks in the developed markets) and
MSCI's ESG Leaders subset of the World
Index (those ranked in the top half by the
firm's ESG scores) are indicated on the
chart. It's hard to tell the two lines apart-
but that's the point, Thompson notes.
" Assuming we can track ESG considerations
fairly-and I assume that MSCI
and others do-on a risk-adjusted basis,
ESG investing does not damage returns. "
He elaborates: " There are just 20
years of data points on ESG characteristics,
and these are naïve portfolios, tilting
toward companies that have better scores
and away from those with worse scores.
I would like to think that if investors are
more actively engaged than that, they could
do a little better. But it shows that you are
not hurting yourself with ESG investing,
and that is the big concern for fiduciaries. "
In specific markets, the results can
improve, says Laura Nishikawa, executive
director of ESG investing at MSCI in
New York City. " We see our ESG indexes
outperforming in a number of international
and emerging markets, and, when
we look at the performance attribution,
most of that is tied to the specific ESG
factors and not to the exposure to the
common factors for all companies. "
Where ESG investing shows an advantage
is volatility, she observes. " Globally,
we see a reduction in risk, in standard
deviation and other risk measures, with
performance that is similar to the market.
" The most intuitive factor is the
'G'-that these companies are better at
managing their strategic risks through
better governance, " she says. " A lot of the
big blowups have been at least somewhat
governance-related such as the cases of
Volkswagen and Valeant. We also see
relationships with risk on the 'E' and 'S'
sides, as well. For instance, data security
New Guidance-It's Political
A
s expressed in Field Assistance Bulletin (FAB) No. 2018-01, this April, " ERISA
fiduciaries must always put first the economic interests of the plan in providing
retirement benefits. A fiduciary's evaluation of the economics of an investment
should be focused on financial factors that have a material effect on the return
and risk of an investment based on appropriate investment horizons consistent with the
plan's articulated funding and investment objectives. "
Chris Thompson of Willis Towers Watson believes that this more recent guidance
just twists words, and " of course it's important to assess all risks. To be fair, ESG is
political in both directions-the DOL [Department of Labor] is a department that serves
at the pleasure of whoever is in charge, and it writes letters that softly rebuke the prior
view. What's important, though, is that sponsors fulfill their fiduciary responsibility. "
The Wagner Law Group points out that the DOL published its new bulletin to assist
the Employee Benefits Security Administration (EBSA) offices as they respond to inquiries
about prior Interpretive Bulletin (IB) 2016-01, relating to shareholder rights and
written investment policy statements (IPSs), and IB 2015-01, relating to economically
targeted investments (ETI).
" Perhaps not surprisingly, their current view on these issues is considerably
narrower than those expressed by the prior administration, " the attorneys note.
" Although IB 2015-01 had apparently allowed the collateral benefits of ESG considerations
to be taken into account in certain circumstances, such as a tiebreaker when
the economic benefits of an investment were equivalent, in FAB 2018-01 there were
circumstances when otherwise collateral ESG issues present material business issues
that qualified business professionals would treat as economic considerations. In the
[current] DOL's view, in these circumstances, the otherwise collateral ESG benefits
would be more than tiebreakers. Only to the extent that these ESG considerations could
properly be treated as economic considerations, could they be taken into account. "
The attorneys suggest that FAB 2018-01 " would have been shorter and had fewer
questionable interpretations of what was intended by prior DOL guidance had it indicated
that it had changed its position on these issues. "
" It obviously makes it difficult for the applicable plan fiduciaries to operate in a
frequently changing legal environment with respect to such an important fiduciary
rule, " they observe. " Perhaps at some point, the DOL will propose regulations for public
comment, instead of providing sub-regulatory guidance through the issuance of Field
Assistance Bulletins. Until such time, however, plan fiduciaries will need to act in
accordance with FAB 2018-01. " -PS
may not be something everyone thinks of
as an ESG issue, but it's a social pillar,
and lately we've seen a lot of disappointments
there. "
Plan sponsors have several options
for taking an ESG stance, such as passive
ESG index products and dedicated active
ESG strategies. " Sponsors considering
ESG also should survey their existing
manager lineup, " advises Kelly Regan,
senior consultant at NEPC, Boston, and
a member of the firm's impact investing
team. " You may have already selected a
manager for other reasons that incorporates
ESG in its investment process. "
Investment manager Loomis, Sayles
& Co. L.P., in Boston, has been incorporating
ESG criteria into its equity
and fixed-income strategies since 2013,
notes Kathleen Bochman, the firm's
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