From the foundational to the most complicated, there is a range of decisions and strategies for plan sponsors to consider regarding ESG investments and their retirement plans.
The DOL guidance has reframed ESG-related risks as financial risks to organizations and investments in those organizations rather than merely considering them as distinctly environmental/social issues. Mitigating these risks is a critical part of an investment strategy, and it is important to evaluate and understand these risks in all products within a retirement plan.
Reframing the discussion from “ESG products” to “ESG considerations” of all investment products can help plan sponsors integrate their best thinking throughout the lineup, rather than creating separate processes for different types of investment vehicles.
To help support many of the inquiries we receive from plan sponsors and their advisors, we are pleased to issue this framework. It joins Evaluating ESG Funds in Light of New Guidance: A Fiduciary’s Guide as resources to help sponsors navigate the fiduciary landscape related to their consideration of ESG options.
- All investing is subject to risk, including the possible loss of the money you invest.
- Diversification does not ensure a profit or protect against a loss.
- ESG funds are subject to ESG investment risk, which is the chance that the stocks or bonds screened by the index provider for ESG criteria generally will underperform the market as a whole or, in the aggregate, will trail returns of other funds screened for ESG criteria. The index provider’s assessment of a company, based on the company’s level of involvement in a particular industry or the index provider’s own ESG criteria, may differ from that of other funds or of the advisor’s or an investor’s assessment of such a company. As a result, the companies deemed eligible by the index provider may not reflect the beliefs and values of any particular investor and may not exhibit positive or favorable ESG characteristics. The evaluation of companies for ESG screening or integration is dependent on the timely and accurate reporting of ESG data by the companies. Successful application of the screens will depend on the index provider’s proper identification and analysis of ESG data. The advisor may not be successful in assessing and identifying companies that have or will have a positive impact or support a given position. In some circumstances, companies could ultimately have a negative impact, or no impact.