PLANADVISER - January/February 2018 - 43

want to help your participants avoid
those risks? "
Benchmarking Performance
In terms of investment track records,
management with the benefit of an
ESG lens is fairly new, making its
effectiveness hard to evaluate. In
addition, ESG takes many approaches.
" ESG strategies are created in every
conceivable way, and some are more
'sincere' than others, " observes Andy
Iseri, senior vice president at Callan,
in San Francisco.
" Some managers build their ESG
MSCI World and World ESG Leaders Stock Indices
Cumulative monthly levels from December 2012 through December 2017
$160mm
- World ESG Leaders
- World
$150mm
$140mm
$130mm
portfolios from the ground up, " Iseri
explains, " but more common are
traditional strategies that have ESG
components in the existing investment
process or are evolving to
include ESG considerations for the
first time. " Managers can make their
own in-house judgments on which
companies clear the ESG bar, or
rely on the expertise of third-party
specialists such as index provider MSCI and long-time ESG
researcher Sustainalytics.
Data providers are developing performance attribution
$120mm
$110mm
$100mm
12/2012
Source: MSCI
measures to better isolate the impact of ESG, although it
may be some time before those measurements yield meaningful
information, Iseri adds.
" That said, ESG indices have generally outperformed
standard indices marginally since the global financial
crisis, " Iseri points out. " [But] from anecdotal evidence of
managers that offer ESG and non-ESG versions of the same
active strategy, there's been general underperformance of
the ESG versions. In each case, however, the performance
differences are very small. " Indeed, for the five years ended
this past December 31, the paths traced by MSCI's World
and counterpart World ESG Leaders indices have followed
each other quite closely (see chart).
Performance is just one consideration, though, and the
requirements of the DC world make the decision to offer an
ESG fund a bit more complicated. " ESG can make its way
into DC plans-or may have already done so-in three
ways, " Bailey says. " The first is historically, in plans run by
socially conscious organizations such as churches, hospitals
and schools. They've had SRI or ESG options for years. "
The last five years have seen greater interest from the
corporate world, accounting for the other two ways, she says.
" The first is [by] senior management, where companies have
stated a social responsibility initiative and want to make
their DC plan investments part of that. The second is driven
by the participants, in particular women and Millennials. "
But for sponsors, offering ESG means facing tradeoffs.
For one thing, to add a new option runs counter to a
frequent plan sponsor goal: to streamline core menus. Then
there is choosing the fund and whether to narrow the ESG
focus to companies with the same objective-e.g., reducing
carbon emissions-and then choosing among index funds,
or among strategies that are actively managed.
" With ESG, there is a balancing act between cost efficiency,
simplicity and customization, " observes Brendan Curran,
head of U.S. defined contribution investment
strategy
at State Street Global Advisors in Boston. " If a sponsor is
adopting ESG to align with its corporate philosophy, it has to
balance that against what investment options are available. "
Fund researcher Morningstar has developed an ESG
ranking system that comprehensively analyzes funds that
declare an ESG objective. Most ESG-specific funds invest in
developed market equities, but options are also available in
fixed income, emerging markets and specialty areas such
as real estate. Morningstar counted about 200 open-end
and exchange-traded fund (ETF) choices for ESG at the end
of third quarter 2017 and cited the opening of about 40 new
funds in the category for the full year. -John Keefe
KEY TAKEAWAYS
* ESG has been adopted largely among institutional
investors.
* However, as senior management of companies begins
to support social responsibility, and participants-
especially women and Millennials-grow aware of it,
ESG could become more common among DC plans.
* Data providers are beginning to track the performance
of ESG funds.
12/2013
12/2014
12/2015
12/2016
12/2017
planadviser.com january-february 2018 | 43
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