For plan sponsors of defined contribution (DC) plans, the adoption of environmental, social and governance (ESG) analysis into plan management is somewhat unchartered territory, but it is growing in prominence. We believe an integrated ESG approach – implemented correctly – can materially improve risk-return profiles and is well aligned with the time horizons in DC.

ESG cannot be ignored by DC plan sponsors

In 2015, the US Department of Labor wrote a bulletin outlining how DC plan sponsors can best adhere to the Employee Retirement Income Security Act in light of newer ESG considerations. In it, the department specified that ESG-related risks are “not merely collateral considerations or tie-breakers, but rather are proper components of the fiduciary’s primary analysis…”¹ Of course, significant discussions, debates (and, headlines) had since carried on about the ERISA rule, and the DOL’s guidance. As DC practitioners, we fully respect the rule and every plan’s specific adherence to the present guidance.

Historically associated with moral stances, ESG at that point took rank alongside traditionally recognized drivers of sustainable retirement returns and prudent plan management. What’s more, ESG’s proliferation in the broader financial industry is not likely to slow any time soon. In the year of the above bulletin, around 50% of the total global institutional asset base was managed by signatories of the Principles for Responsible Investment (PRI). Further, Schroder’s 2019 Global Investor Study – which collects the views of 25,000 people from 32 countries around the world – found that 61% of respondents believe all investment funds should consider sustainability factors.

¹Sustainable Investing in Defined Contribution Plans, Defined Contribution Institutional Investment Association, May 2019