By Dieter Holger
Investors looking for more sustainable-investing funds in their
retirement plans could be in for a wait.
The U.S. Labor Department in June proposed a rule that would
make it more difficult for funds focused on so-called do-good
investments -- meaning they select securities based on
environmental, social and governance (ESG) factors -- to be
included in 401(k) plans. The department says the rule, which could
take effect as early as Jan. 1, is needed to protect workers from
investments that aren't in their best financial interests.
The rule would require retirement-plan providers to choose
investment products based solely on financial considerations to
avoid "inappropriate investments that sacrifice investment return,
increase costs or assume additional investment risk to promote
non-pecuniary benefits or objectives." In the "rare" case an ESG
investment is "economically indistinguishable" from a non-ESG
investment, the plan provider would have to explain why the ESG
selection is in the financial interests of the client, according to
the proposal.
In 2018, only 2.8% of 401(k)s offered an ESG fund in their
lineups, according to the American Retirement Association's Plan
Sponsor Council of America, a trade group. Considering many
Americans do most of their investing through their 401(k)s, that
could help explain why sustainable investing still accounts for
just a fraction of overall U.S. fund assets despite dozens of
surveys that suggest investors want such options.
Even as dedicated ESG funds remain sparse in 401(k) lineups,
some investment pros say ESG investing has subtly gained ground in
retirement plans as more workers look to ESG data to inform their
investment choices.
"It is making its way more through a side door," says Chris
McKnett, co-head of sustainable investing at Wells Fargo Asset
Management, pointing to funds that don't identify specifically as
ESG but claim to at least consider ESG factors when picking stocks
or other investments.
Last year, 564 funds listed ESG as a consideration in their
prospectuses, up from just two in 2016, according to Morningstar.
Research firm Opimas, meanwhile, says assets under management in
North American funds that leverage ESG data swelled to some $17.7
trillion this year from $9.8 trillion in 2016.
Lawyers say any fund that claims to even consider ESG data as
part of its investment process could get caught up in the proposed
Labor Department rule, as could the few dedicated ESG funds already
offered in retirement plans.
There is "no grandfather rule exempting funds already in a
plan," says Kurt Lawson, partner at global law firm Hogan Lovells,
though the government "might give in to pressure and grant
one."
Non-ESG funds, meanwhile, might have to drop any claim that
sustainability is part of their investment process if they want to
avoid the extra scrutiny, says Vadim Avdeychik, a lawyer at Paul
Hastings LLP.
Many of those who expressed opposition to the Labor Department's
proposed rule during the 30-day public comment period argued that
it singles out ESG investments unfairly for heightened scrutiny,
unnecessarily burdens investment firms and is based on a flawed
idea that ESG sacrifices returns , according to an analysis by
trade group US SIF: The Forum for Sustainable and Responsible
Investment and other organizations. The report found that 95% of
8,737 comments opposed the rule.
"The proposal creates an overly prescriptive and burdensome
standard," BlackRock Inc., the world's largest money manager, said
in its comment to the department. "We find that ESG has much in
common with existing quality metrics, such as strong balance
sheets, suggesting that ESG-friendly portfolios could be more
resilient in downturns."
In response, a Labor Department spokesman says, "The department
is carefully considering all the thoughtful comments it received on
the proposed rule," which he said will help in "crafting the best
possible path forward."
Some 37% of investors in a Wells Fargo survey released in April
indicated that one of the top reasons they haven't gotten involved
in sustainable investing is because there are no sustainable funds
in their 401(k) plans or their adviser hasn't offered them one.
"It does appear on its face a supply-and-demand mismatch," says
Mr. McKnett.
Brent Black, a 35-year old engineer in Columbus, Ohio, says
having no sustainable funds in his 401(k) is a big hurdle for
him.
"I like the idea of being able to invest in a corporation that
takes these things very seriously," says Mr. Black, whose latest
401(k) is managed by T. Rowe Price Group Inc. But "most of the
money that I am investing on a yearly basis can't be invested in
any sustainable funds."
A spokesman for Baltimore-based T. Rowe Price says that ESG is
used across the firm's strategies and that it plans to expand its
lineup of sustainable funds.
Whether ESG funds are overperforming or underperforming as a
category has been a matter of debate in recent years, mainly
because there is no one definition of what makes a fund an ESG
fund. Still, The Wall Street Journal reported in May that 70% of
ESG funds across all asset classes performed better than their
traditional counterparts during the first four months of the year,
buoyed by investments in big tech and the fact that they have less
exposure to oil stocks.
"Now is a good opportunity as any to do more" with ESG
investing, says James De Silva, a 37-year-old software engineer in
the Detroit area. Despite ESG funds sometimes charging higher fees,
he says investing through his 401(k) "is an easier sell" because of
the employee match.
Fidelity Investments, the largest provider of 401(k) plans in
the U.S., is among the big wealth managers that say demand for
sustainable investments isn't going away.
As of December 2019, 16% of the 401(k) plans Fidelity manages
offered an ESG fund in their lineups, up 15% from 2018, and 5.6% of
plan participants held the funds, the company says. Still, overall
assets in these funds remained low at 1.1% of total
investments.
"Our plan sponsors have recognized this growing preference among
their workers, and some have responded by making ESG funds
available," says Christopher Herman, head of investment
strategists, workplace investing, at Fidelity.
He says that the Labor Department's proposal "lacks clear
definition" for what money managers should consider and that
Fidelity has requested changes for a more straightforward
explanation.
"The proposal will not achieve the department's goal to provide
clarity, " Mr. Herman says.
Mr. Holger is an ETF/ESG markets reporter for Dow Jones
Newswires in Barcelona. Email him at
dieter.holger@dowjones.com.
(END) Dow Jones Newswires
October 04, 2020 20:48 ET (00:48 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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