Environmental and social investment causes, once the near-exclusive province of hippies and tree-huggers, have migrated deep into the mainstream of investing, yet such strategies are rarely seen as options on employer-sponsored retirement plans.
The most recent data from the Forum for Sustainable and Responsible Investment show that U.S. domiciled assets under management in socially responsible investment strategies reached $6.57 trillion at the end of 2014, up 76% from two years earlier.
Morningstar Inc. now counts 182 mutual funds and 30 exchange-traded funds, for a total of $3.8 billion, that are focused on social and environmental causes.
But according to
The Vanguard Group, only 9% of all defined-contribution retirement plans offered a socially responsible domestic equity fund in 2014.
It might be easy to assume the dearth of such funds on retirement plan menus is due to the performance drag that comes with placing social causes ahead of investment performance. But that would be wrong.
As Blaine Aikin, chief executive of fi360 Inc.,
detailed in his Fiduciary Corner column in
InvestmentNews earlier this month, mutual funds applying environmental, social and corporate governance screens often are being blocked by plan fiduciaries, including financial advisers, who might not fully understand the rules regarding ESG investments.
Part of the blame goes to the Department of Labor, which initially published a murky ruling in 2008 that was widely interpreted as advising extreme caution when it came to environmental, social and governance funds. A common interpretation was that, all things being equal, a fund applying ESG screens could be used as a tiebreaker.
CHILLING EFFECT
That ruling, which proved to have an unintentional chilling effect on the inclusion of ESG funds in company-sponsored retirement plans, was updated by the DOL in October to stress that ESG strategies might, in fact, add to investment performance.
In the meantime, last summer Morningstar contributed its own subtle endorsement of ESG influences by applying ESG scores to the underlying holdings of the mutual funds and exchange-traded funds that it tracks.
This move both highlights the growing interest in ESG issues and potentially lays the foundation for all funds effectively coming under the aegis of ESG measurements.
The DOL might have fumbled the message in its first two attempts, but it is still ultimately a message in support of a wider breadth of investment options for individuals saving for retirement. That's something all fiduciaries should be supporting.
