PLANADVISER - January/February 2019 - 47

a nonprofit, or donating to charities or, in this case, using their
retirement savings to make a positive impact. Employees are
waking up to the full set of opportunities, and employers are
doing more at the same time. "
" We serve over 20 million investors in the retail channel,
and many of those have DC accounts, as well, " says Matt
Brancato, head of Vanguard's portfolio review group, in
Malvern, Pennsylvania. " We're hearing investor interest in
incorporating more than just a return strategy. They want
to broaden their investing to include a greater stakeholder
focus and ESG. " Vanguard's FTSE Social Index Fund, with
$4.7 billion in assets as of last November, is a popular choice
among those plans offering ESG options.
But sponsors encounter several obstacles in evaluating
ESG. One is finite bandwidth and the demands of higherlevel
plan issues. " For us, the idea of a sponsor requesting
a specific investment has been rare, " says Scott Everhart,
founder and president of Everhart Advisors in Dublin, Ohio.
" Their focus continues to be on implementing fiduciary
practices and ensuring they have an elite 401(k) plan, as
well as employee engagement and financial wellness. "
More directly challenging the idea of ESG is the regulatory
climate. Last April, the Department of Labor (DOL) issued Field
Assistance Bulletin (FAB) No. 2018-01, which did not advise
against ESG investing but seemed to reverse prior accommodative
guidance. " The regulatory landscape is confusing, "
says Brancato. " The DOL has opined in various ways on ESG
mandates in DC plans, and sponsors are confused on their
regulatory obligations. It feels like a seesaw. "
" It's important to note that while that bulletin had a
negative tone, nothing really changed, " says Veneruso. " But
it provided another head wind to adoption, and it did slow
the number of new conversations. "
There is also a fear that ESG investments might produce
subpar returns. However, academics have thoroughly
studied ESG's results and generally have found no disadvantages.
In the case of the Vanguard FTSE Social Index Fund,
returns have beaten those of the Standard & Poors (S&P)
500 over the last three-, five- and 10-year stretches.
From the participant perspective, the prospect of lower
returns can get in the way of social objectives. " Sponsors tell
us that participants ask about ESG investing-Millennials
and others whose philosophical beliefs line up with that, "
says Ed McIlveen, director of research at Francis Investment
Counsel, an advisory firm in the Milwaukee suburb of
Brookfield. " We conduct online surveys, and our experience
has been that nearly all participants have said, 'Yes, we'd be
interested in that sort of investment alternative.' "
He adds: " But when we ask whether they would be willing
to give up returns in exchange for a greater alignment with
their philosophy, we find that, about 75% of the time, participants
favor the return objective over ESG goals. "
With all of these hurdles, adoption of ESG has been slow.
In its 2018 " How America Saves " study, Vanguard reported
that, of those participants in its DC plans offered socially
responsible options in 2017, just 3% allocated funds to them.
Callan Associates reports that, for the third quarter of 2018,
ESG investments made up just 1.2% of plan assets overall-
a level similar to that of niche funds investing in emerging
markets or high-yield debt.
Still, there are pockets of interest in ESG. In Callan's 2018
DC survey, only 5% of corporate sponsors responded that they
offer ESG funds, versus 43% of public and nonprofit organizations.
And sources reported a concentration of interest at
health care organizations, as well as law firms where younger
associates make up much of the participant base.
Nielsen added an ESG fund option to its $1.5 billion
401(k) plan last July. " We make an effort to be as sustainable
as possible in our day-to-day operations, " says Wilson.
" That includes all of the traditional things, but we have a
unique opportunity to create value through using our data
resources to help clients on their sustainability journeys or
by donating [such resources] to nonprofits and community
organizations.
" We've seen an uptick in interest over ESG issues and
heard positive things from our employees over how Nielsen
walks the walk on our commitments, " she continues. " It's a
perfect win-win-win, to align not just with the company's
values but their own, as well, and making a positive impact
with their investments. "
Nielsen's early results have been good. " We've gotten
about 3% of our participants into the fund and about 1% of
fund assets in six months, " notes Brendan Perkins, vice president
of global benefits and mobility. " We didn't expect 20%
of our people to be investing immediately, but we're happy
with the progress, and the number continues to grow. "
What catalyst does ESG investing need? Some of the
effort lies with managers, says McIlveen. " Products have not
differentiated themselves enough for investors to understand
what beneficial outcomes they can expect, " he says.
Advisers play a role, too. " I see very little grassroots
activity from participants, " says Kirk Welch, a principal at
advisory firm MRP, in Sandy, Utah. " Even at one client where
the ESG option was driven by participants, those funds are
just 2.5% of plan assets.
" If ESG is really going to take root, " he adds, " ultimately
it's going to come down to advisers and consultants pushing
the idea. More people are going to feel that how they invest
their money is important. But to reach the levels the industry
expects, it may take a generation. " -John Keefe
KEY TAKEAWAYS
* According to one firm's online surveys, nearly all
participants say they would be interested in ESG, but
about 75% change their minds when learning it could
lower their returns.
* ESG is substantially more popular among sponsors at
public and nonprofit organizations-especially health
care-and legal practices than among corporate sponsors.
* It could take a generation for ESG to become widely
established as an institutional plan investment option.
Art by Alex Eben Meyer
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