If you’re struggling to recruit or retain talent, especially women, diverse talent, or Millennials, you may have a tool in your toolbox that you haven’t used yet.
One of the many unexpected consequences of the covid economy has been that all talent is re-evaluating their jobs, their careers, how they spend their time and their money, and gaining clarity on their values.
So why are 401(k) plans and other pension plans so slow to adopt ESG, which is investing based on environment, social and governance criteria? According to the National Association of Plan Advisors, only 2.9% of 401(k) plans offer an ESG option.
Some plan administrators claim that ESG options don’t have the financial returns. But that argument is outdated. The venerable financial ratings and analytics firm Moody’s wrote on February 23, 2021 that, “Environmental, social and governance (ESG) themed investments have become one of the best performing investment categories in recent years, paving the way for continued growth of this strategy.”
In that report, Moody’s Vice President Stephen Tu added that, “The experience of 2020 will help remove investors’ worry that ESG investing means giving up returns, which has been a widespread barrier to growth in ESG products.”
Do you want to recruit and retain women? Think ESG
“The winds of investing in the U.S. are starting to shift and women, it turns out, are a driving force behind the change.” MarketWatch reported recently. Women have always spent their money based on values, though now women have a lot more financial resources to invest and are making their mark, big time.
“I think there’s more that’s happened in probably the past two years in the sustainable and ESG investing space than probably has in the prior 20 years,” veteran wealth advisor Kathleen McQuiggan told me on my podcast recently. She’s an advisor at Artemis Advisors and formerly headed Global Women’s Investing and the Global Women’s Index Fund at Pax World Investments.
A recent RBC Wealth Management study of their U.S.-based clients found that “female clients are almost twice as likely as their male counterparts to say it is important that the companies they invest in integrate ESG factors into their policies and decisions….[and are] more likely to prioritize ESG impact when considering what companies or funds to invest in, while male clients are much more likely to prioritize financial performance.”
It’s not just women; all employees want this option. As PlanSponsor reported in May, 2021, “Ninety percent of participants who are aware of environmental, social and governance options in their plan’s lineup say they invest in them,“ especially Generation X and Millennial employees. Sarah Bratton Hughes, head of sustainability, North America at Schroders, told PlanSponsor that, “There is much more of a focus on how companies are treating all their stakeholders, and the pandemic is bringing to light how that impacts investment returns, as well as individuals over the long term.”
One company’s experience putting ESG in their 401K plans
It took Pirelli’s Vice President of Public Affairs and Sustainability, Maureen Kline, a winding road to get there.
“In 2015, I began to recognize that offering an ESG option as part of Pirelli’s U.S. subsidiary’s defined contribution plan lineup could be an effective way to provide plan participants with enhanced retirement outcomes that reflect a longer term perspective on risks and opportunities,” she told me recently on my Electric Ladies podcast.
Her route started at their human resources department, which she said was supportive, but at the mercy of the Defined Contribution Investment Committee and their investment consultant. She said one hurdle was a confusion about terminology – “sustainable” investing vs. “socially- responsible” investing.
Then, she when she was asked to join the Defined Contribution Investment Committee in the third quarter of 2016, she found the committee was receptive, but had reservations. “I found that the committee, and its key service providers, were interested in the topic of ESG, but not fully familiar with it, and a question was raised about whether there could be a trade-off between financial performance and ESG performance.” After the plan’s investment consultant did their own research and reported their findings to the committee, they finally added an ESG option to their 401(k) plans in Q3 2017.
“We looked at what would be a good ESG fund to introduce that had a good performance record and was a financially good option to choose,” Kline explained, “And so we were able to introduce that and it’s done well.”
The largest retirement plan in the U.S., for the federal workforce, is now on board too. “In June, the federal Thrift Savings Plan (TSP), which operates as a defined contribution plan for 6.3 million federal civilian employees and members of the armed services, said it would offer ESG funds in a new mutual fund window that will include over 5,000 funds” which be available in Q2 2022, according to Barrons.
This was made possible when President Biden issued an executive order on May 20, 2021 requiring all federal government retirement plans to consider climate-related risks in their investments (after declining to enforce a Trump administration rule limiting them).
What can you do at your company?
Kline said it’s all about education. As her experience illustrates, it requires navigating a maze of decision makers who have a fiduciary responsibility to best serve the needs of their employees. The first step? “Employees should ask their HR benefits person. Probably lodging a written request would be helpful,” Kline suggested.
Ask them about the process to get it done, which likely includes a benefits committee, their investment advisor, and analyzing the specifics. They may not know about ESG investing as an option for 401(k) plans yet, so you might send them information about it, including this and other articles.