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Environmental, Social and Governance (ESG ) Investing

Growing Interest:
ESG investments have generated a growing interest from the investing community driven by shifting demographics, increasing global climate and resource risks, and regulatory changes.

  • Studies have shown that Millennials and female investors have led the charge in the growing interest in sustainable investing. This has been of particular importance given the ever increasing role both segments play within the economy.
  • Rising environmental, social, and corporate governance concerns across the globe as of late has pushed investors to place greater emphasis on these investments.
  • Government and industry organizations have positively altered their views towards ESG investing; i.e. the 2015 Department of Labor ruling that cleared up previously discouraging guidelines for socially responsible investments within retirement plans.

Studies have shown that ESG focused investments can positively contribute to investment returns while also mitigating some risk. Deutsche Bank examined 2,200 studies of sustainable investing and found positive correlations between strong ESG practices and corporate financial performance for companies in every region of the world. Those positive correlations held up across all the asset classes it examined—equities, bonds, and REITs.

Additionally, researchers at the University of Oxford proved this thesis in a comprehensive study that combined the findings of 200 empirical ESG studies. The findings were as follows:

  • 90% of the studies on the cost of capital showed that sound sustainability standards lower the cost of capital of companies.
  • 88% of the research showed that solid ESG practices result in better operational performance of firms.
  • 80% of the studies showed that stock price performance of companies is positively influenced by good sustainability practices.

Utilization Remains Low:
Utilization rates remain low amongst defined contribution plans and participants. According to the statistics published by Vanguard’s “How America Saves 2017,” only 8% of all surveyed defined contribution plans offer a socially responsible investment option while a minimal 3% of participants actually invest in the given option.

ESG investing has evolved dramatically over the years, from a simple screening process that eliminated certain industries to one that seeks to identify companies that are leaders in sustainable and responsible business practices. We have now even seen the launch of ESG Target Date Funds.

Recent years have brought an expanding array of metrics for evaluating ESG practices and that trend will likely continue. The lack of standardization in the terms and methodologies used to evaluate these strategies has added a level of complexity to the due diligence process though. In addition, ESG is a broad topic covering many areas and factors, from improving human rights practices to reducing a company’s carbon footprint. It might be a difficult process for plan sponsors to align the values of the company/participants with the appropriate ESG investment.

Going Forward:
PEI will continue to monitor the evolving industry trend of ESG investing. Although current utilization remains low within the defined contribution space, we have experienced an uptick in the number of client discussions surrounding the topic. Please contact your dedicated PEI consultant if this is a topic that would be of interest to you.