4 Tips For Introducing ESG Investments Into Your Retirement Plan
Responsible investing is changing the business world.
Sustainable and social impact investment assets in Canada reached $3 trillion in 2022. Global numbers were even higher. In 2016, FSRA highlighted it as a requirement for pension plans that are registered to describe if or how they adhere to ESG when making investment decisions. Today most investment managers have some type of framework surrounding ESG and can describe how it is part of their investment selecting process. Understand how your investment manager integrates ESG criteria through engagement and dialogue with the investment managers
If your organization isn’t considering ESG investment options in its retirement plans, your plan participants may be thinking about it. In fact, more than 7 in 10 Ontario Pension Plan participants believe ESG should be an important consideration in plan investments. And half of those plan participants say making a positive impact on the world is just as important as strong returns. Environmental and sustainable investing has had the lion’s share of interest in a short time, partly due to the fact it is more measurable, and the metrics are reported publicly. The Social component has also received increased attention by plan members.
Introducing: ESG Investments
Business leaders use ESG concerns as a guide when making decisions for their organization and for the investments within the plans they provide. Each aspect of ESG pertains to specific ways that an organization impacts their world, including:
- Environment: Climate change, greenhouse gas emissions, deforestation
- Social: Working conditions, local communities, employee relations
- Governance: Executive pay, corruption, board diversity
Key Considerations for New ESG Investors
ESG funds have been seen with significant caution. As a new category of investing, plan sponsors worry that these funds:
- May unnecessarily inject politics into their plan
- May underperform and invest in areas that may add more risk.
- Whether these so-called “ESG funds” adequately reflect their specific ESG principles, remember by selecting an ESG fund you are delegating the decision of how ESG is defined.
Doing appropriate research before including them in your portfolio is just good business practice.
When opening the door to new ESG investment options in your retirement plan, keep these considerations in mind:
- Learn & Grow: Share information on ESG investing with plan participants. This information should include not only basic information on ESG investments but also the reasons your organization decided to include these funds in your retirement package. Be sure to include information on why investors like these funds and the effect on participants’ portfolios.
- Consider the Data: Plan participants are always more interested in investment options that speak to them. Survey participants to learn what is most important to them, and select a fund that fits those interests. For example, if environmental interests are top of mind for a majority of your audience, choose a fund that champions businesses that have focused on shrinking greenhouse gas emissions or other climate change issues.
- Do Your Research: ESG funds must be subject to the same rigorous investment selection and monitoring as any other investment. Don’t select a fund just because “ESG” appears in its name. Learn all you can about the investment and be sure it meets your requirements before including it in your portfolio.
- Focus on Finances: Similarly, a “virtuous” company that doesn’t perform well will only disappoint investors. Expect the same returns – or better! – as you would from any other fund and share that economic rationale with plan participants. Demonstrate to them that you can be a wise investor and also expect good things from the companies you invest in.
Remember that ESG investing may be imperfect. The stakeholders all have different priorities, whether those priorities are related to financially relevant outcomes or social issues. You may not find a single fund that makes everyone happy. At the end of the day your investment options need to earn the return required to meet the retirement objectives.
