Have you considered ESG investing (Environmental, Social and Governance) options for your retirement plan? If you’re like many people, you have concerns over social issues. Likely your employees do as well. Some of the issues may be pro-life, pro-choice, sustainability, tobacco, etc.
Said another way, have you considered investing in companies like Google or HSBC? Google is one of the companies that make up the Calvert Social Index which compares itself to the S & P 500 benchmark. HSBC Holdings of Great Britain, is one of the companies that make up the MSCI EAFE ESG Index. The MSCI EAFE index, a proxy for International companies.
I have had people tell me they were shocked at some of the investment choices in their employer sponsored plan. Recently, the privately owned company, Hobby Lobby has received much criticism in the media because of their 401(k). Some of their investments ran counter to the owners expressed beliefs. Likely the owners and company fiduciaries were unaware of the misalignment.
While some argue that incorporating your values into the investment process will cost you return, consider that the average investor fails to achieve the return of the S & P 500 index (What about your participants?). There are several ESG investing strategies that have bested the average investor.
ESG investing as part of a prudent investing process
A growing number of investors interested in incorporating social, ethical, moral, religious, and environmentally sustainable strategies into their portfolios. You may be one of them. The Center for Fiduciary Studies offers an Optional Practice Standard, 2.7 to formalize incorporating ESG investing:
- When socially responsible investment strategies are elected, the strategies are structured appropriately.
- The goals and objectives established for the portfolio are evaluated to determine whether socially responsible investing is appropriate and/or desirable.
- If a socially responsible investment strategy is elected, the investment policy statement documents the strategy, including appropriate implementation and monitoring procedures.
The exclusive purpose doctrine under the Employee Retirement Income Security Act (ERISA) focuses upon the need to align the investment options with the central purpose of an ERISA-covered plan, which is saving for retirement or health and welfare benefits. Thus, fiduciary standards of care cannot be abandoned.
ESG investing an ERISA
Before selecting an ESG investment for an ERISA covered plan, you must first conclude that the value to the plan offered by the ESG investment is equal to or greater than the value of other investment opportunities available to the plan – truly equal or greater, taking into account a quantitative and qualitative analysis of the economic impact to the plan. Rather, it means that non-economic factors may be considered only if the two investment options are truly equal.
A popular index to measure the performance of international stocks is the MSCI EAFE (Europe, Australasia, and Far East) Index. The ESG version, MSCI EAFE ESG Index has outperformed the MSCI EAFE Index by 2.93% from 10/1/07 to 12/31/2013. The MSCI EAFE (Europe, Australasia, and Far East) Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada.
In order to be help make sure ESG investing screens do not systematically damage performance, a best practice in participant directed DC plans, for each asset class in which an ESG investment is offered, also offer a non- ESG investment. Communication is always key. Your employees should understand the why of each investment choice.
ESG investing specialist advisor
Work with an advisor that is a specialist in ESG investing. Hopefully this person is also your ERISA 3(21) co-fiduciary advisor or an ERISA 3(38) manager. As this may not be the case, you or retirement plan consultant may need to look for a specialist advisor or broker to assist. As there is no ESG investing designation acknowledging skill, be sure to ask plenty of questions to get a sense of the specialist’s knowledge and access to investing tools to help your due diligence. Your specialist can do sufficient research to identify ESG strategies for your plan that are likely to be prudent, effective, and practical to implement and that are regularly monitor whether in fact they are accomplishing the intended results. These may be broad-based or specific issues based on your goals.
It is important to note that your chosen recordkeeper, often referred to as plan provider, may limit your access to the universe of available ESG investing strategies. You can always advocate for them to expand their platform or take your business to “greener” pastures.
(1) The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada. As of May 27, 2010 the MSCI EAFE Index consisted of the following 22 developed country indices: Australia, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, and the United Kingdom. The MSCI EAFE ESG Index, a member of the MSCI Global Sustainability Indexes, is a capitalization weighted index that provides exposure to companies with high Environmental, Social and Governance (ESG) performance relative to their sector peers. MSCI EAFE ESG consists of large and mid cap companies across Developed Markets countries around the world, excluding the US and Canada. The Index is designed for investors seeking a benchmark comprised of companies with strong Sustainability profiles and relatively low tracking error to the underlying equity market. Constituent selection is based on data from MSCI ESG Research.
(2) Past performance is no guarantee of future results.
(3) Index performance is not necessarily representative of fund performance; one cannot invest directly in an index.
(4) The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(5) Securities and Advisory services offered through LPL Financial, a Registered Investment Advisor. Member FINRA/SIPC.
(6) The LPL Financial Registered Representatives associated with this site may only discuss and/or transact securities business with residents of the following states: AZ, IL, MI.