“Should I invest in the world I’m in? Or the one I want?” asks an advertisement from UBS AG. The wealth management ad defines an evolving approach to sustainable investing (first called exclusion, then integration, and then impact). The question of sustainable investing clearly sits on a high fulcrum for retirement plan fiduciaries, when contrasted with “traditional investing” which is typically understood to focus on maximizing financial gains with little to no explicit consideration of social or environmental impact.
But last October, the Department of Labor redefined sustainable investing by issuing an Interpretive Bulletin (IB 2015-01) that gives ERISA plan fiduciaries the green light to complement “traditional investing” with sustainable investing models that include socially responsible strategies. Fiduciaries may consider environmental, social, and governance (ESG) criteria as complements to economic analysis. In the case where the economic merits of two investments justify both investments, a fiduciary can consider ESG criteria as the tie-breaker in that investment decision. These strategies might exclude companies with unsustainable characteristics or ESG strategies that include best-in-class selection of companies exhibiting best practices in corporate social responsibility.
With ERISA fiduciaries, which includes investment managers of pensions, 401(k)s, and retirement funds, now free to evaluate investments on these non-financial merits, retirement investors can expect to be provided more information about ESG issues in their retirement accounts. Much of the wealth management press has written about the ardent interest of high net worth “Millennials” to invest with an eye toward societal impact and their personal ethical values. But average worth Millennial retirement
investors and even Gen X’rs share interests in investing with values and impact. This should not be so difficult to imagine when you look at world issues today, ranging from global warming, to drought, to terrorism.
The application of ESG investing tools and analysis allows investment managers to cross-check their economic investment decisions against the company or portfolio’s ESG rating. These ESG scores have matured as they have garnered seven years of data points and have been applied to investments with improving methodologies. Today’s ratings combine numerous elements captured from government fillings, NGO disclosures, and corporate self-reporting from an increasingly wide array of sustainability criteria. All of this newly–available information makes the data more relevant to investors and potentially correlative to superior financial performance.
The sophistication behind these ratings has also deepened as it has been calibrated to the relevance of the scoring criteria to the industry or region of a given company’s business. These indicators are further cross–referenced to matrices shaped by the companies or institutionally by organizations like the Sustainable Accounting Standards Board (SASB). Relevance and materiality are important because not every sustainability issue may impact every company. Wastewater might be more impactful to a company or its community in manufacturing compared to the banking or insurance industries, for example. There are, however, issues that can have a universal impact, such as global warming which has impacts ranging from agricultural production all the way to catastrophe modeling that predicts natural disasters at insurance companies.
Ask yourself this: Are you willing to give up 0.5% return to save the planet?
The great news today is that you don’t have to concede that 0.5%.
In fact, you might post a gain on the broad market financial benchmarks and do it with lower risk. Formidable research over the last three years has shown this to be the case. The obstacle that remains is only the morass of marketing on Wall Street. I encourage retirement investors to look at their pension, 401(k), or state retirement plan, and ask, what impact is my retirement portfolio making on the world? And then ask your plan fiduciary: how can I measure it? If they can not answer this, tell them that the Department of Labor says they should.
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