Recently, Morningstar talked about the US market reaching a “tipping point” in responsible investing. In 2019, investments in ESG-labeled funds in the United States increased nearly four-fold to nearly $120 billion – just over €109 billion.1
Even so, the United States is unlikely to take exactly the same path as Europe. Culturally, there are differences. Generally, belief in the free market is stronger. There’s less government intervention. Many Europeans grew up with state pensions; working Americans meanwhile keep a constant eye on their 401(k)s.
There’s a great opportunity here. Currently, the DC market is growing at 6% a year – and target date funds will take up the lion’s share of net new assets. People want an ESG option. In the next few years, we believe ESG is going to grow as a percentage of 401(k) assets.”
~ Ed Farrington
EVP, Institutional and Retirement Natixis Investment Managers — US Distribution
Not surprisingly then, US investors tend to put more emphasis on practical aspects: using ESG integration in an effort to reduce risk and generate better returns. So, what lies behind this upswing in responsible investing in the United States?
The single most important explanation is climate change. Polls show that Americans are increasingly worried about the effects of climate change. More US corporations, meanwhile, are building climate into their strategies and investments. Last year, the Business Roundtable, which brings together some of the country’s best known corporations, widened its definition of a company’s purpose to include “protecting the environment.”.2
All this opens up opportunities to shift the United States to more sustainable investing. Take the country’s retirement market. In the United States, Defined Contribution (DC) pensions are worth nearly $9 trillion (€8.2 trillion);3 the market, dominated by target date funds, is expected to grow at 7-8% over the next several years.4 At Natixis Investment Managers, we’re playing our part – we are currently working to help US companies integrate ESG into their retirement plans. Though many US corporations have adopted ESG in terms of strategy, very few include ESG in their retirement plans. The WBCSD’s Aligning Retirement Assets initiative aims to close that gap. We’re doing the same with US universities and colleges – through the IEN.
Net flows into US ESG funds increased nearly four-fold in 2019
Source: Morningstar – January 2020.
4% of 401(k) plans have ESG funds available to participants.6
ESG funds hold only .03% of total 401(k) assets.6
6 in 10 plan participants say it’s important to see more socially responsible investments in their workplace retirement plan.7
This doesn’t mean there aren’t headwinds. Proposed, new Department of Labor (DOL) rules for retirement plan fiduciaries emphasize the primacy of economic returns over ESG benefits.* Previous DOL advice was more accommodating with respect to ESG. This return vs. social good debate has been raging for years – and still is, perhaps more so in the United States than in Europe. At Natixis Investment Managers, we don’t believe there is a trade-off: responsible investment, if used well, can provide performance, just as well as more traditional forms of investing.
ESG funds may even offer lower downside risk. Certainly, some ESG funds have proven resilient during the recent market downturn – in part because they’re more exposed to growth sectors like healthcare and technology. Conceivably, COVID-19 could accelerate this trend. Evidence suggests that, during the first few weeks of the crisis, investors actually switched money into ESG funds – and that, in the United States, most of these funds outperformed the overall market index.5
Investors may come to see responsible investment as a way of generating returns – as well as reducing risk. At a time of very low interest rates, that’s important – not just in the United States, but in Europe as well.
This article is an excerpt taken from our inaugural Responsible Investment Report titled ‘Making A Difference’.
2 ‘Statement on the Purpose of a Corporation’, Business Roundtable, 2020
3 Source: Investment Company Institute (Defined Contribution Plan Participants’ Activities, 2019)
4 Source: ‘Long-Term Value Creation in US Retirement’, McKinsey & Co, 2019
5 Morningstar – Global Sustainable Fund Flows, May 2020. Figures showed inflows of $45.6 billion (€41.5 billion) into Morningstar’s sustainable fund universe during the first quarter of 2020 (compared with outflows from its overall fund universe of $384.7 billion (€350.4 billion).
6 Sources: 401(k) Plans Lag in ESG Investing, October 2019 by InvestmentNews (available at https://www.investmentnews.com/401k-plans-lag-in-esginvesting-2-1703342-170334).
7 Source: Natixis Defined Contribution Plan Participant Survey.
S&P Global Market Intelligence – April 2020 (based on analysis of 17 ESG exchange-traded and mutual funds with more than $250 million – €227.7 million – in AUM. Of these funds, twelve had lost less value during 2020 than the S&P 500).
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed are as of the date indicated, and may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
Data relating to Affiliates is taken from internal questionnaires completed by the Affiliated Investment Managers as part of a survey conducted by Natixis Investment Managers.
* ESG factors may include financial consideration if they present material economic considerations under generally accepted investment theories. However, the proposal would prohibit an ESG alternative from being added as a default component to a qualified default investment alternative (see 29 CFR 2550,
Financial Factors in Selecting Plan Investments, Employee Benefits Security Administration, Department of Labor – June 30, 2020).