WSJ: Should ESG Funds Be In Retirement Plans?

Few 401(k) plans have an ESG investing option. We asked advocates on each side to make their best case for why that should—or shouldn’t—change.

By By Aaron Yoon Sept. 16, 2021 11:00 am ET

Just 2.6% of 401(k) plans had an ESG option as of the 2019 plan year, according to the Plan Sponsor Council of America.

Investors are pouring record amounts of money into mutual funds and exchange-traded funds that screen holdings based on environmental, social and governance (ESG) factors.

Yet, odds are most people won’t find an ESG fund option in their 401(k) retirement-savings plan. Just 2.6% of 401(k) plans had an ESG option in 2019, according to the latest data from the Plan Sponsor Council of America.

Amid lobbying from Wall Street, the Labor Department this year declined to enforce a Trump-era rule that would have made it harder to add ESG funds to retirement accounts. Whether and when more definitive guidance is coming remains to be seen.

Proponents say there is no good reason to keep ESG funds out of 401(k) plans. Opponents say adding such funds to 401(k)s would be a breach of fiduciary responsibility because there is no global standard for defining and measuring ESG performance.

Offering employees the option of investing in environmental, social and governance (ESG) funds in their 401(k) retirement-savings plans is essential. If individuals are making clear that they want the option to invest this way, there is no good reason to deny them the opportunity to do so in their 401(k) accounts.

Overall demand for ESG investing is growing. According to fund researcher Morningstar Inc., a record $51.1 billion flowed into U.S. sustainable funds in 2020, more than double the amount in 2019 and nearly 10 times the total for 2018.

The argument that ESG funds serve only a “feel good” purpose, but don’t produce adequate returns, is a misconception. Research that I conducted with colleagues showed that firms with good ratings on “financially material” ESG issues—that is, ESG issues that are relevant to the sector in which a company operates—deliver superior stock returns. Similarly, an analysis from S&P found that from March 2020 through March 2021, 19 ESG-themed exchange-traded funds and mutual funds with more than $250 million in assets under management outperformed the S&P 500 by anywhere from 0.2 to 27.9 percentage points.

Clearly, not only is ESG a bona fide investment strategy, but the growing demand means adding such funds to 401(k) lineups might even encourage more people to participate in their employer-sponsored retirement-savings plan.

That said, choosing ESG funds wisely can be a challenge.

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