ESG is already in 401(k)s – just look beyond the name
by CHRIS KARAM, CIMA®
Chief Investment Officer
As Published in InvestmentNews – RPA Convergence
(See publication here: https://www.rpaconvergence.com/esg-401k-name/)
This past week was a memorable one for me. My youngest child of three reached double digits and we celebrated her 10th birthday in style. Candidly, her brother and sister were probably left wondering about the quality of their own birthday celebrations, but we will deal with that one as parents another time. Last week was also memorable professionally not for anything remarkable happening with the equity markets, new business, or a new team member [which were all positive], but rather I noticed my e-mail inbox filling up with ESG investing messages on Earth Day. I do not recall a similar volume of correspondence received during this time in previous years.
It served as inspiration for me to share my thoughts with RPA Convergence readers and to express what many RPAs are missing about ESG investing. Specifically, it is not about whether you should recommend ESG to clients, it is instead about realizing the ESG factors your plan sponsor clients already own. It is easy to get lost in the volume of ESG information and the politically charged regulatory pendulum on which it rests. Yet we here in the United States [and I am writing this as a skeptical, yet data driven Midwestern RPA] need to be aware how money managers are accounting for ESG even if the product does not have “ESG” or “Socially Aware” or “Sustainable” explicitly written in its names. In fact, many well-known commonly utilized managers have ESG mandates by prospectus, but not in their names. Many others have been identified by Morningstar’s Sustainalytics database with 5 Globe ratings [similar to a 5-star rating for performance, but instead a 5-Globe rating for adherence to ESG criteria].
Much of the great commentary and analysis I read last week talked about how ESG strategies can no longer be branded as ones which sacrifice performance. Their typically heavier allocation to the technology sector and underweight profile towards the traditional energy sector [fulfilling the “E” in ESG] has greatly strengthened relative performance when looking back over the recent past. Common Morningstar equity asset classes in 401(k) menus include Large Growth, Large Value, and Foreign Large Blend. We scanned the Morningstar database for the number of options in these categories that earned the 4 or 5 Globe rating and below is what we found.
| Asset class | Number of 4/5 Globe Strategies (includes multiple share classes) | Number with Key Words “Sustainable,” “Responsible,” “ESG,” or “Social” in their name | Percent of 4/5 Globe Open Ended Products with Key ESG Words |
| Large growth | 370 | 26 | 7.0% |
| Large value | 273 | 4 | 1.5% |
| Foreign large blend | 178 | 32 | 18.0% |
The overall number of Morningstar 4/5 Globe rated strategies is approaching 25% of the overall US Open Ended database. Many asset managers will tell you during due diligence meetings how they incorporate ESG factors into their stock or bond selection process and I would urge RPAs to ask the following questions during those meetings:
1. How do you incorporate ESG factors into your stock selection process?
2. Does your research team insist that companies they follow provide more detailed
ESG disclosures?
3. How do you make suggestions to companies about improving their ESG profile?
As a husband and father of one son and two daughters, I’d like to teach my children responsible conservation skills and demonstrate the values of sustainability. As RPAs, we should be illustrating how a plan sponsor’s roster of current investment managers are managing ESG factors. This can be a goal by next year’s Earth Day.
Important Disclosures:
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (“IFP”), IFP Securities LLC, dba Independent Financial Partners, and its advisors believe to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Opinions expressed are subject to change without notice and do not consider the particular investment objectives, financial situation, or needs of individual investors. Past performance is no guarantee of future returns. Investors cannot invest directly in an index. Diversification and asset allocation do not guarantee returns or protect against losses.