Ten things to consider when implementing ESG in your DC plan


It may soon become official: the U.S. Department of Labor may be close to lowering barriers that historically created a chilling effect on the inclusion of Environmental, Social and Governance (ESG) investment options in defined contribution (DC) plans. For the first time, there may be a rule that specifically contemplates the inclusion of investment options on the basis that ESG factors can and often should be viewed as economic factors on the same footing as other financial factors. The industry has awaited such a moment and if the DOL’s rule proposal is adopted, there will be no time to lose.

Meanwhile, surveys indicate robust interest in ESG among plan participants. For example, the 2022 Schroders US Retirement Survey broadly reveals that:

- 74% of plan participants said they would or might increase their overall contribution rate if ESG options were offered, up from 69% who said the same in 2021.

- Nine out of ten said they invested in ESG options when they were aware of their availability in their DC plan and almost three quarters (73%) estimate they allocate 50% or more of their assets to socially responsible choices.

More broadly, interest in ESG has grown significantly in recent years.

- In 2021, an estimated $120 billion was placed into Sustainable investments—more than double the $51 billion of 2020.1

- An estimated one third of all US assets under professional management contain Sustainable investments, according to the Forum for Sustainable and Responsible Investment’s 2020 trends report.2

With a regulatory greenlight possibly impending amid consumer demand for ESG, how should you proceed as a DC plan sponsor or plan advisor?

1. Do the research

First, make sure you have a deep understanding of ESG and its various concepts and approaches. Do your homework and get up to speed. A knowledgeable plan advisor should be able to help you through the entire process.

ESG encompasses diverse elements and means different things to different people. It takes time and a degree of expertise to discern serious ESG initiatives from those that involve lip service, are motivated by public relations marketing spin or “greenwashing” (fraudulent claims). So, be prepared to roll up your sleeves.

2. Learn what your participants want

As part of an initial two-way communication process, use surveys and educational efforts to discover what your plan participants desire in a potential ESG offering. What is their level of awareness of or interest in ESG? Engage in a dialogue about ESG and its potential role within a diversified investment portfolio as well as the diverse objectives and types of Sustainable investments.

3. Determine what your firm wants

Set your overall goals and objectives in making ESG options part of your DC plan by reflecting on how your organization is considering integrating ESG.

What is prompting you to consider implementing ESG and what are your future objectives? Will the plan lineup include standard asset classes that have ESG analysis fully integrated or will there be an allocation for specific ESG products?

4. Review the potential investment options

Because there are so many potential ESG investments, engaging an ESG plan advisor may allow you to benefit from an expert’s experience and expedite a potentially time-consuming process. It is possible to gain ESG exposure across many asset classes and segments such as equities, fixed income, domestic investments, global opportunities and even alternatives.

5. Decide on a specific approach

A variety of potential approaches exist within the realm of ESG investing broadly. Here are a few main ones:

Integrated ESG risk management: The investment manager uses rigorous analysis to understand the major ESG factors that affect investments. The overriding goal is to achieve better returns by identifying and managing critical investment risks effectively.

-  Sustainable investments: Rather than simply taking ESG factors into consideration as in the category above, Sustainable investments seek to promote ESG characteristics as a goal of the investment process, while remaining focused on investment returns.

- Thematic investing: Pursuing investment themes that align with the UN Sustainable Development Goals. These themes can include climate change, good health and well-being, responsible consumerism, diversity and inclusion or sustainable infrastructure.

- Impact focus: The goal is to create a measurable positive impact on society or the environment. The impact of investments should be targeted and measurable. The intention is to solve important problems through investments as well as generate a competitive bottom-line return.

While Thematic and Impact approaches to ESG investing are common practice, we do not expect most retirement plans to include these types of strategies in plan lineups in the near term. Plan fiduciaries should carefully analyze individual funds or strategies before including them in a DC line up.

6. Update your plan’s investment policy statement

Making a substantial change in the investment approach of your DC plan, if necessary, calls for updating your plan’s investment policy statement to reflect the expansion of the plan’s offerings as well as a possible expansion of its objectives and criteria for success. This is an area where sponsors can benefit enormously from the impartial expert guidance that a fiduciary plan advisor can provide.

7. Implement the ESG addition to your plan lineup

Once you have chosen an investment focus for ESG funds, such as ESG integration or Sustainable investments, decide how to deliver the chosen approach to participants. For example, you may opt for a single one-size-fits-all solution or a more customizable menu of options that participants can review and decide among.

8. Educate plan participants on the new options

Once you have decided on an ESG approach and are about to implement it, inform participants of the change and explain the rationale for the investment offerings. Help them to make informed decisions on the new ESG choices and how they can fit into their overall retirement investment portfolio.

9. Monitor, measure and report the results

Whatever choices you have selected, now that you have implemented them, as part of your fiduciary duty, monitor, measure and report the results both to plan participants and the plan investment committee. Always carry out your ESG investment selection and review being mindful of your fiduciary duties. Again, working with an experienced, knowledgeable plan advisor can be beneficial.

10. Provide participants with ongoing communication and education

The initial participant communication efforts are just the beginning. As part of ongoing plan management, continue to inform, educate and explain ESG options, where appropriate, to plan participants, enabling them to make informed decisions.

Schroders can help

Schroders has decades of global expertise in managing Sustainable investments. We are here as a resource to help DC plan sponsors and plan advisors become more knowledgeable about ESG investing and implement various Sustainable investing alternatives within a retirement plan.

1https://www.fastcompany.com/90706552/esg-investing-continued-to-soar-in-2021- the-government-could-boost-it-even-more

2https://www.cnbc.com/2020/12/21/sustainable-investing-accounts-for-33percent-of-total-us-assets-under-management.html

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.