ESG investing — the practice of investing in funds that
prioritize environmental, social and corporate governance criteria — is,
without question, on the rise. According to a Bloomberg Intelligence report,
global ESG assets are set to exceed $53 trillion by 2025, which represents more
than a third of the $140.5 trillion in projected total assets under management.
At Betterment, we’ve seen customers clamor for ESG
investment options and have launched three socially responsible investing
portfolios to date. This has been the fastest-growing portfolio ever launched
on our platform, passing $100 million in total assets within the first three
weeks of its launch. In short, we’re seeing exactly what’s being reflected
across the industry. Investors are hungry to put their money into companies
that aren’t just sound investments, but are also making a positive and ethical impact
on the world around them.
Despite this momentum, socially responsible investing (SRI)
has not fully taken hold in the retirement industry. As of 2019, only 3% of
401(k) plans held an ESG fund. As social impact and environmental concerns grow
among investors and businesses, advisers that can offer clients a retirement
plan with the option to invest with their values have the opportunity to
differentiate themselves from the pack and deepen their client relationships.
Consider how offering your clients a socially responsible
401(k) option could support their own business goals. As companies look into
new ways to attract talent in the current tight labor market, providing a
benefits package with differentiated offerings like an ESG-friendly 401(k)
could provide a competitive edge. It can be enticing for both current and
prospective employees to work with a company that is aligned with their
passions, and can help build loyalty and increase retention.
Moreover, as an increasing number of businesses develop
pledges to showcase their commitment to ethical and climate-friendly business
practices, offering a sustainable retirement plan shows employees and
stakeholders that the company is making meaningful strides to meet those goals.
From a benefits perspective, companies are often looking for
ways to boost their 401(k) participation and engagement rates. Employers want
their employees to take advantage of this benefit given both the resources
invested into offering a plan and a desire to help set up employees for
financial success. A 2021 survey found that offering ESG options in 401(k)
plans could lead to higher contribution rates, with 69% of respondents
indicating that they might increase their rate if given that option.
Financial advisers have a fiduciary duty to guarantee that
the investments they’re recommending will provide their client with the best
returns possible. Similarly, plan sponsors must ensure that the funds offered
in their retirement plans have been vetted diligently to ensure quality and
solid performance. Some may assume that values-driven investing will yield poor
returns, and dismiss it as not worth being part of a responsible 401(k) fund
package. This is a misconception that we’re working to break.
Compared to traditional investment portfolios, there are a
number of benefits to ESG investing that make them attractive to investors.
For starters, they can produce high returns.According to a
2019 white paper, sustainable funds have performed comparably to traditional
funds when it came to their total returns. At Betterment, we’ve seen the same
trend. When analyzing our socially responsible investing portfolios compared to
our core investing portfolio, we found that SRI portfolios perform on track or
better than core portfolios over both short- and long-time horizons.
The same white paper also found that sustainable funds had
lower risk compared to traditional funds. ESG funds showed lower volatility
because they considered factors beyond traditional financial information to
select securities, which means their investment performance does not follow
broad market benchmarks.
It’s important for advisers to take the time to educate
their clients on this, and talk through their potential concerns that ESG
investing will hamper returns. Retirement savers don’t need to compromise —
they can invest in funds that match their values, while still seeing strong
financial returns.
With the recent news that the Department of Labor is
considering a rule that would make it easier for employees to access ESG
options in retirement plans, it’s clear that the industry is beginning to pay
attention, as the world at large shifts to more renewable and sustainable
practices.
As legislative barriers continue to be removed and education
spreads on the opportunities possible with ESG investing, we expect to see even
greater interest from investors and plan sponsors in building this into
retirement plans. When executed properly, it can offer a path for people to
support causes they believe in without sacrificing their retirement security.
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