Sustainable investment options are drawing interest, especially from millennials

MANY 401(K) PLAN SPONSORS are considering whether ESG mutual fund investment options belong in their 401(k) plans. The following discussion takes a look at the factors to consider in deciding whether to add ESG funds to a plan.

Are plan sponsors allowed to offer ESG funds?
Many plan sponsors are confused about whether it is even legal to offer ESG funds in their 401(k) plans.
A Department of Labor (DoL) ruling late in the Trump presidency appeared to discourage 401(k) plan sponsors from offering funds that considered ESG criteria.
In March of this year, President Joe Biden’s Department of Labor advised that it would not enforce the Trump era ESG rule cited above and would eventually issue additional guidance.
Currently, there is no prohibition against offering
401(k) investment options that include ESG elements. The general consensus about the Trump DoL ruling is that it was completely out of touch with what is happening in the marketplace. The feeling is that the Biden DoL will issue guidance that is accepting of ESG investing.
What do ESG, SRI and “sustainable investing” mean?
These terms can be confusing. There are a number of abbreviations that are used to describe investing with a social conscience.
ESG is an abbreviation for environmental, social and governance, the major sustainable investing criteria.
The overall approach of investing with a social conscience is referred to as sustainable investing. The concept of sustainable investing includes a full spectrum of socially responsible investing, or SRI approaches.
The most basic sustainable investing strategy is exclusionary, which seeks to avoid investment in things like tobacco. A middle of the road approach is the inclusion


of ESG factors in the analysis of investment options. The most committed sustainable investing approach is impact investing which seeks to generate a measurable social or environmental impact along with a financial return.
The terms socially responsible investing and sustainable investing are often used interchangeably. They basically mean the same thing: investing with a social conscience. Sustainable investing is the current phrase used most often to describe investing with a social conscience.

Where should my plan start with sustainable investing?
Plan sponsors who wish to wait for the guidance on ESG investing that the Biden DoL will provide don’t have to ignore sustainable investing in their 401(k) plans.
An easy way for employers to start discussing sustainable investing with employees is to begin to report the Morningstar Sustainability Rating for each of the mutual funds in their 401(k) plan. Discussion about these ratings can easily be added to your employee education sessions as well. As an advisor, you can obtain the ratings for the funds and provide these for your client.

Three reasons to include ESG funds
I am not going to tell you that your clients or their management teams will become better people by adding ESG funds to their 401(k) plan. Nor will I say that it is the right thing to do or that we all should have a more elevated social conscience. These are the reasons why anyone should consider adding ESG funds:

     1. Better performance
     That’s right, funds that are constructed using ESG
criteria have been shown to outperform. These studies have shattered the long-held belief that in order to invest with a social conscience you must sacrifice investment performance. Not true, not anymore.
It’s reasonable to ask where the outperformance
is coming from. The main ESG factor contributing to outperformance is governance. Those companies that score high on governance end up being better managed and, logically, the best-run companies in any industry generate higher profits.
2. The workforce believes in sustainable investing Do your clients have any millennials working for them?
     Studies show that 90% of millennials want to align their investments with their values. In addition, 87% of millennials will analyze an investment’s ESG factors before investing in it, while 76% of older millennials believe climate change is a serious threat.
Believe it or not, 77% of millennials say ESG criteria are their top investing priority when considering an investment. And, if a plan offers ESG investments, 90% of plan participants say they will invest in them, according to a recent study.
If a company employs a lot of millennials, it has a workforce that believes in sustainable investing. Offering ESG funds in a 401(k) may not make anyone a better person, but it will result in a workforce placing a higher value on a 401(k) plan.
3. Everyone is doing it
     Nobody should manage their lives or their 401(k) plans based upon what everyone else is doing, but you can’t ignore what is happening with sustainable investing. Many large corporations have developed social responsibility statements and goals. This is not a trend that is going to fade away.
Anyone who adds ESG funds to a 401(k) plan right now is not an early adopter. If a client waits, their plan may lag the market in terms of plan design. To maintain a leading-edge 401(k) plan, employers should at least begin talking about sustainable investing with employees.

ROBERT C. LAWTON, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others.
Lawton may be contacted at (414) 828-4015 or