As we explore global retirement trends through our quarterly Defined Contribution in Review, a notable difference between regions includes the greenish tinge to global plans, with a number of factors bolstering the Environmental, Social and Governance (ESG) standards outside of the U.S.
Plan sponsors are increasingly eyeing ESG factors, especially in Europe, where more robust rules governing pension management give the trend a higher profile. A larger number of companies in Europe have also chosen to become signatories of the Principles of Responsible Investment (PRI), developed by an international group of institutional investors and shepherded by the United Nations, reflecting an increased global focus on ESG.
The expected transition to a lower-carbon economy, a key topic within ESG, is estimated by the industry-led Task Force on Climate-related Financial Disclosures (TCFD) to require around $1 trillion of investments a year for the foreseeable future. Globally, nearly 400 investors representing $22 trillion in assets under management have publicly called on the G20 to support the Paris Agreement, drive investment into the low-carbon transition and support TCFD1 goals. Different countries, such as Australia, are still finding ways to balance TCFD’s voluntary recommendations with non-ESG economic drivers.
What are the Six Principles for Responsible Investment?2
- Incorporate ESG issues into investment analysis and decision-making processes.
- Be active owners and incorporate ESG issues into ownership policies and practices.
- Seek appropriate disclosure on ESG issues by the entities in which PRI members invest.
- Promote acceptance and implementation of the Principles within the investment industry.
- Work together to enhance effective implementation of the Principles.
- Report on activities and progress toward implementing the Principles.
Europe Leads the Way
Surveys of institutional asset owners and investment consultants have found that the majority of respondents in Europe consider ESG principles during their decision-making process. Both cultural and regulatory factors can describe the increased focus in the region, not to mention a $1.8 trillion institutional pension fund coalition calling on banks to supply more and better information about climate-related issues.
Examples of European plans adhering to TCFD recommendations to drive ESG progress include the National Employment Savings Trust (NEST) (£2.2bn) and Environment Agency Pension Fund (£3.8bn) in the UK, Swiss multi-employer funds Caisse Inter-Entreprises de Prévoyance Professionnelle (€5.5bn) and Nest Sammelstiftung (€2.1bn), Finland’s Elo Mutual Pension Insurance (€22bn) and Swedish pensions and insurance firm Folksam (€38bn).3
Further, a recent report from the European Commission’s High Level Expert Group (HLEG) on sustainable finance represents a step toward implementing the Paris Agreement and the EU’s Agenda for Sustainable Development. If the report leads to increased regulatory legislation, it will become increasingly difficult for European companies to wriggle out from underneath sustainability requirements.
Jury Still Out in the U.S.
Bloomberg L.P. took the lead by becoming the first U.S.-domiciled corporate retirement plan sponsor to join PRI. Could this be the beginning of a larger trend?
UK-based Janus Henderson Investors is a signatory.
The U.S. Forum for Sustainable and Responsible Investment found that by the end of 2016, there were more than 1,000 funds incorporating ESG criteria into their investment decisions.4 But while a spark has been struck with some plans in the U.S., the fire hasn’t quite kindled, as only 2.4% of U.S. 401(k) or Profit Sharing Plans have ESG funds, according to the Plan Sponsor Council of America’s most recent survey. The question remains: why not?
Studies abound questioning whether ESG as a source of alpha justifies the investment, and much of the dialogue has only surrounded using it as a means of engaging millennials versus incorporating it for the benefit of all participants. One possibility is a lag in education, sometimes stemming from a misunderstanding that ESG investing means only utilizing specialized products like themed bonds and green bonds. In reality, responsible investment doesn’t rule out any sector or company. Nor is it the same as socially responsible investment (SRI) or impact investing. And which criteria to use when determining ESG can be subjective, so research is required to ensure that goals and values align with specific investments. Companies in the U.S. are increasingly choosing to publish reports on their ESG approach, which may include the prohibition of certain transactions or exposure.
To learn more about Janus Henderson’s corporate responsibility efforts, please visit our IMPACT report.
Fiduciary aspects for retirement plans also need to be considered. Some outside the US have said plan sponsors have a fiduciary duty to consider ESG when making investment menu decisions. Adding to the confusion was a recent DOL Field Assistance Bulletin (2018-01) which left many puzzled since it noted that “fiduciaries must not too readily treat ESG factors as economically relevant” but also that plan sponsors could certainly use ESG as a criteria when making investment decisions.
An uptick in pro-transparency, pro-sustainability legislation in the U.S. could open the gates wider, along with continued regulatory reform in Europe and elsewhere. However, it remains to be seen whether these trends will make a lasting impact on plans stateside.
2Source: Principles for Responsible Investment, https://www.unpri.org/pri
Subscribe for relevant insights delivered straight to your inbox