Retirement plan advisers likely won't know when environmental, social and governance investing — also known as sustainable investing and impact investing — factors will be of interest to clients. That's why they need to develop a plan in the event clients want to discuss incorporating ESG into their investment menu.
And since
ESG investing is becoming more popular, chances are a client will come calling sooner rather than later. There was close to $9 trillion invested in ESG strategies as of the en of 2016, marking a 33% increase over two years, according to the most recent
report from the Forum for Sustainable and Responsible Investment looking at the U.S. market.
To help, here are three steps retirement plan advisers should be taking to prepare for these future conversations.
First, take the advice of Jon Hale, global head of sustainability research at Morningstar Inc., and select the terminology that best defines what ESG means for you. Then develop an elevator pitch describing what ESG means to you as an adviser and what aspects are most important to you. This part is essential — you'll want to have a talk track that is yours and not repeated from someone else. Clients can always tell if you believe in something or are just trying to sell what's current.
If you don't believe ESG factors should be part of a defined-contribution-plan investment menu, then this is the place to back up that belief with statistics or other evidence of why ESG should be excluded.
(More: How advisers can navigate ESG investing in 401(k) plans)
Second, consider how (or whether) you will integrate ESG factors into your investment policy statement. Some advisers create custom investment policy statements for their clients while others take boilerplate statements and customize them. Figuring out which metrics you'll use to measure ESG factors and then developing a process will be helpful once you start having the conversation with clients.
Third, understand to what extent you'll be restricted in implementing these ESG factors given the funds available on the record-keeping platforms you use. If you commonly use a record-keeping platform that has a limited investment menu, it may be harder to find funds that pass your ESG factors, with the result that the prior discussion with the client will fall on its face.
To ensure you come out of the gates successfully, review the full menu of funds available on the record-keeping platforms to be certain that you can find funds that meet the ESG factors you will recommend to clients. Or start investigating which platforms are most friendly in terms of allowing ESG funds on their available menus.
While these are not all the items you'll need to consider, I believe it's a good start.
Also, remember that right now it is easy to dismiss this topic as something that is here today and gone tomorrow. I'm sure this is what many people thought when the first target-date fund was developed in the early 1990s. Fast-forward to today, and TDFs are the dominant player in gathering new assets within defined-contribution plans. Imagine being the person who dismissed target-date funds as an investment product that wouldn't last. You don't want to be that person when it comes to ESG.
Aaron Pottichen is the senior vice president of Alliant Retirement Consulting.
