Corporate retirement plans in the United States are much less likely to employ socially responsible investing strategies in their portfolio investments than are public pension plans, according to a new report by global financial services company BNY Mellon. Concerns about ERISA and fiduciary roles, along with “lack of interest” and “performance tradeoff,” were most often cited as the reasons corporate plan investors are not adopting this approach.
The BNY Mellon third-quarter 2012 report, “Trends in Environmental, Social, and Governance Investing,” found 35 percent of public pension funds that responded to its survey have embraced SRI strategies, compared with 27 percent of foundations and endowments and 16 percent of corporate retirement plans. In early 2012, BNY Mellon surveyed its asset-owner client base of more than 1,100 institutions, focusing on if, how and why clients incorporate an SRI approach in their investing. Respondents were broken down by plan type and segmented by size and world region.
Overall, 24 percent of investors answering the survey said they used SRI or ESG methods, representing more than $200 billion in assets under management in the United States and Europe. The survey had 13-percent response rate, which could mean that the overall number of its clients implementing SRI strategies may be even lower than the report indicates, BNY Mellon said.
SRI integrates environmental, social, governance and ethical issues into financial analysis and decision making. Although screening remains the most prevalent strategy adopted by clients employing SRI methods, this investment philosophy has evolved beyond just using “negative screening” to avoid investment in companies or sectors with objectionable activities. It now includes more proactive practices such as impact investing, shareholder advocacy and community investment.
The report also said that 80 percent of investment firms surveyed that have adopted SRI analysis think there is no tradeoff in performance when decisions are based on SRI principles, although 22 percent of the corporate retirement fund respondents without an SRI strategy in place said they fear that there is.
Firms that said they use SRI investment methods most often said they were motivated to do so by organizational values—followed by legislative pressure, in the case of the public pension funds. “So it would seem that some endowments, foundations and public pensions see a link between their firms’ organizational values and their investments that corporate pensions potentially do not,” the report concluded.
The primary reason corporate retirement plans that were surveyed and lack an SRI strategy said they do not have one was “lack of interest”; 61 percent of the non-SRI investors gave this response. From that same group, 22 percent said that concerns over performance tradeoff kept them from engaging in SRI investment analysis. The report’s authors said, “whether these two responses are related is not discernable through our survey, however, it is possible that some lack of interest has been driven by the performance consideration.”
Although not the most significant driver, several U.S. corporate retirement plans said they could not participate in SRI/ESG investment strategies because of ERISA, which requires fiduciaries to ensure they are investing plan assets solely in the interest of participants and beneficiaries and for the exclusive purpose of providing benefits and paying plan expenses. Fiduciaries must act prudently and must diversify the plan’s investments in order to minimize the risk of large losses. While ERISA seemingly does not prevent a fiduciary from investing in ESG/SRI strategies alone, steps must be taken to ensure compliance with the requirement that it act prudently.
Finding out More
For more information on investment management issues for 401(k) retirement plans, see Tab 410 of The 401(k) Handbook.