According to survey data gathered by the Natixis Center for Investor Insight, 75% of participants believe it is important to make the world a better place while growing their personal assets. And 63% of workers said they would be more likely to contribute, or increase contributions, to their workplace retirement savings plan if they knew their investments were doing social good.1 The academic community has a history of leadership in this type of thinking, and now there are new ways to put theory into action.
FIGURE 1: Today’s Plan Participants Want Investments to Reflect Their Personal Values1
want their investments
to reflect their
63% – and 69%
of Millennials – would
contribute more if it
advanced social good
would like more socially
responsible investments in their
retirement plan offering
Many plan administrators may not realize that there are investment options suitable for retirement plans that use sustainable and ESG (environment, social, governance) criteria in the investment process. Adding these types of funds to the plan option menu is a way to give all members of the academic community the ability to choose investments that align with their beliefs.
ESG 101: What Is ESG Investing?
ESG is a general term for investment strategies that consider environmental, social, and governance factors in the fundamental analysis of potential holdings. ESG criteria can be used to assess corporate responsibility, and may allow investors to identify investment risks and opportunities, as well as to align financial assets with personal values. There is no standardized list, but Figure 2 highlights some of the factors used most frequently.
FIGURE 2: ESG Factors Cover a Broad Range of Issues
Air and water pollution
Data protection and privacy
There are many ways to implement ESG factors into an investment strategy, both to seek better returns and to manage the risk of loss. Investments using ESG-based strategies have generally performed as well as the broad market over time, according to analysis by MSCI (Figure 3).
In some cases, ESG analysis may help identify issues that could lead to corporate scandals or other reputational risks.
A recent example is Volkswagen, which claimed to have a positive environmental record, but had governance issues that led to cheating on emissions tests. In the week following the issuance of the EPA’s notice of violation to Volkswagen, investors punished the company and the stock lost 33%. Deep ESG research could well have revealed some of these governance issues.
FIGURE 3: ESG-Focused Equity Index Has Kept Pace with the Broad Market
Hypothetical growth of $10,000 (9/30/07–9/30/19)
Source: MPI Stylus/Morningstar (9/30/2007–9/30/2019)
ESG Investing and Educational Institutions
According to US SIF,2 educational institutions constitute the third largest pool of institutional capital with ESG assets, after public funds and corporations. A growing number of institutions are committing money to sustainable investment funds (Figure 4) and specifying ESG considerations in their investment policy statements. Given this trend, adding ESG-driven funds to qualified retirement plans can be a logical next step.
As fiduciaries for plan participants, plan sponsors are subject to Department of Labor (DOL) regulations. Until quite recently, there were no specific rules relating to ESG or sustainable investments in retirement plans, but in 2018 the DOL updated its guidance for plan sponsors. The new rules specify that adding ESG or sustainable funds to the lineup should be no different from adding any other new investment option. They are subject to the same due diligence process as any other fund.
FIGURE 4: Educational Institutions Hold the Third Largest Share of ESG Assets
Source: US SIF 2018 Report on US Sustainable, Responsible and Impact Investing Trend
Opportunities for Action
Plan sponsors interested in pursuing ESG or sustainable investment options may want to start by determining which types of funds would be the best match for their plan. There are three common ways to implement ESG considerations into a fund strategy: negative screening, best-in-class, and ESG integration. Each can be used on its own, or in conjunction with the others, depending on the desired result.
- Negative screening relies primarily on excluding industries, products, or countries based on moral or faith-based values. While this approach can help avoid specific ESG risks, it often leads to underperformance relative to traditional investment strategies, as it may exclude large sections of the investable universe.
- Best-in-class analysis seeks to invest in companies with better or improving ESG scores relative to their industry peers. This approach encourages progress in each sector, but without excluding any of them.
- ESG integration puts the emphasis on absolute ESG factors to evaluate companies and their associated investment risks and opportunities. This style seeks to identify businesses that may be more resilient over the long term because their environmental, social, and governance policies may contribute to better financial performance. Unlike best-in-class, decisions are not made relative to industry peers.
- Equity funds – Sustainable equity funds can be domestic, international, or global in scope. Some funds are broad-based, investing in a full range of sectors, while others are concentrated or focused on a specific sector, such as carbon neutrality companies.
- Fixed income funds – Green bond funds specialize in bonds issued to finance projects that provide positive environmental impact, and are the most popular way to access sustainable themes through fixed income.
- Balanced funds – These funds combine equity and fixed income, and may generally be used as a qualified default investment alternative (QDIA).
- Target date funds – Designed specifically as a retirement plan QDIA, target date funds adjust their equity and fixed income allocations, seeking to optimize returns based on the participant’s intended year of retirement.
Would you like more information?
To learn more about adding sustainable investments to your 403(b) plan, talk with your plan advisor or a Natixis Investment Managers representative.
Developed by Natixis Investment Managers in partnership with the Intentional Endowments Network
The Intentional Endowments Network supports colleges, universities, and other mission-driven tax-exempt organizations in aligning their endowment investment practices with their mission, values, and sustainability goals without sacrificing financial returns. In doing so, this broad-based, collaborative network will make a significant and critical contribution to creating a healthy, just, and sustainable society.
2 US SIF: The Forum for Sustainable and Responsible Investment (www.ussif.org)
This material is provided for informational purposes only and should not be construed as investment advice.
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