ESG Investing

ESG 101 for Retirement Plans – The Basics of Environmental, Social, and Governance Funds

ESG funds, or funds that are conscious of environmental, social, and governance practices, have been gaining popularity, especially with non-profit organizations. These funds are sometimes referred to as “sustainable.” If you’re considering adding these types of investment options to your organization’s retirement plan, check out our FAQ below.

What is ESG Investing?

ESG stands for environmental, social, and governance. ESG investing emphasizes these factors in the investment decision-making process. For example, an ESG fund may invest primarily in companies that have high environmental stewardship, socially responsible policies and sound management practices. These funds are becoming more common as investment options within company retirement plans – like 401(k) and 403(b) plans.

Below are a few examples of criteria ESG funds may focus on:

Nearly 40% of 403(b) plans include an ESG option in their lineup ¹.

Some mutual fund companies have begun launching dedicated ESG funds to capture the perceived demand. Other mutual fund companies have started to see ESG as a viable investment strategy and have begun incorporating an ESG framework into their existing “non-ESG” funds. For example, when evaluating companies, some institutional asset managers account for ESG factors during their risk assessments. Either way, investors have more access to ESG investment options than ever before, and we expect this trend to continue.

US investments in ESG funds have increased 10x since 2018 ².

What are the benefits of including ESG options?

Organizations that choose to include ESG investments in their 401(k) and 403(b) plans cite the following benefits:

• Plan participants can invest in companies that share their values; this makes plan participants feel good about participating in the plan and may even increase engagement and participation rates.
• ESG options can allow values-based organizations to provide a retirement benefit that reflects the goals and values of the organization.

8 in 10 retirement plan participants want their retirement plan investments to reflect their personal values ³.

What are the challenges to including ESG options?

The inclusion of ESG funds in 401(k) and 403(b) plans may also present some challenges:

• Many “ESG” funds do not live up to their marketing claims, are expensive, and have poor performance records. Stringent due diligence is required to ensure these funds are high quality investments and fulfill their ESG mandates
• By choosing ESG investments for non-financial reasons, plan fiduciaries risk breaching their legal duties to the plan.

How can Fisher Investments help?

Fisher Investments specializes in retirement plans and has the expertise to help our clients find answers to questions about ESG investments. We act as a 3(38) fiduciary, and provide proactive employee education. This helps our clients provide high quality investment options that set their employees up for the retirement they deserve. Contact us today to learn more.

¹ Plan Sponsor Council of America 2020 403(b) Plan Survey

² Jon Hale, “A Broken Record: Flows for US Sustainable Funds Again Reach New Heights,” Morningstar Research, January, 28 2021.

³ Natixis Investor Insight Series, “Running on Empty: Attitudes and Actions of Defined Contribution Plan Participants,” 2016 Survey of Defined Contribution Plan Participants. https://www.fa-mag.com/userfiles/stories/whitepapers/2016/December/running_on_empty_natixis_december_whitepaper_2016.pdf