Do ESGs Fit Into Our Retirement Plan?

Insight By
Mike Iley
Topic
Retirement Plans

What is Environmental, Social, and Governance Investing?

ESG is a way to build a more ethical portfolio. These are non-financial factors investors use to measure an investment or company's sustainability. Environmental factors look at the conservation of the natural world, social factors examine how a company treats people both inside and outside the company, and governance factors consider how a company is run.  

  • Environmental: greenhouse gas (GHG) emissions, climate change, renewable energy, energy efficiency, waste management, etc.
  • Social: human rights, labor standards, workplace health and safety, employee relations, diversity, consumer protection, etc.  
  • Governance: board structure, size, diversity, skills and independence.

Efforts that reflect a company’s commitments, like ESG investments and sustainable purposes, can project not only a positive brand image but also continually work to align company goals with investments and employer loyalties with employee values.  

Four Types of Involvement

Now, don’t feel like you need to adjust your investment lineup right this moment. As a fiduciary, you have a duty to act in the best interest of the plan and its participants. Before diving into sustainable investing, decide on which, if any, of the four approaches your investment lineup might want to take.[1]

  • ESG Integration is the most conservative option for firms entering the landscape. This approach considers ESG factors along with others when creating investment profiles, with the primary goal of achieving promising returns.  
  • Exclusionary Investing entails the exclusion of certain companies or sectors that do not reflect a company’s sustainability values. An example would be not investing in the tobacco industry, as many have done in response to health concerns and the related environmental impact.  
  • Inclusionary Investing focuses on actively seeking out ESG-centered entities to invest in as opposed to rejecting certain companies or sectors.  
  • Impact Investing is the most engaged strategy, where a company dedicates its investing practices to achieving a positive difference in an environmental or social arena in addition to producing returns for its employees.  

What Do You Believe In?

To get an idea of what sustainable topics you, your firm, and your employees are interested in, consider reviewing the United Nations Sustainable Development Goals (SDGs).[2] These goals “address the global challenges the world faces, including poverty, inequality, climate change, environmental degradation, peace and justice”.[3]  

Examples of the SDGs:

  • Good Health and Well Being
  • Gender Equality
  • Affordable and Clean Energy
  • Decent Work and Economic Growth
  • Sustainable Cities and Communities
  • Climate Action

Identifying your firm’s values and objectives can help reveal the best ways to align with those of current and future employees.  

Looking to the Future

As new generations enter the workforce, they expect diverse and sustainable portfolios. More than 85% of all investors now express interest in ESG investments, specifically those addressing global warming and climate change.[4] This percentage increases with each younger generation - the future of the American workforce. Sustainability, the impact of plastic on the oceans, data fraud and theft are also top considerations for consumers interested in ESG fund investment.[5]    

ESG funds may be a promising element of 401(k) investment lineups for plans, employers and employees in the coming years. Consider if and how they represent your firm and its employees, but more importantly, how they may or may not fulfill your fiduciary duty to act in the best interest of your plan and its participants.  

Insight By
Mike Iley
Managing Director
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File Number

4286433.1

Topic
Retirement Plans
Published on

February 7, 2022

updated on

February 7, 2022

Disclosure

This article is for educational purposes only. The tax and legal references attached herein are designed to provide accurate and authoritative information with regard to the subject matter covered and are provided with the understanding that LoVasco Consulting Group is not engaged in rendering tax or legal services. If tax or legal advice is required, you should consult your accountant or attorney. LoVasco Consulting Group does not replace those advisors.

Securities and Investment Advisory Services offered through M Holdings Securities, Inc., a registered broker dealer and Investment Advisor, member FINRA / SIPC. LoVasco Consulting Group is independently owned and operated.

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