DCIIA Statement Regarding Sustainable Investing in Defined Contribution Plans
Thursday, June 25, 2020
Posted by: Karen Witham
In the wake of the Department of Labor’s newly released proposed rule on “Financial Factors in Selecting Plan Investments,” it is clear there is a need for greater education, discussion and research on ESG investing in DC.
DCIIA has already started this discussion with the publication of Sustainable Investing in Defined Contribution Plans: A Guide for Plan Sponsors, in May 2019. (The paper and publications from our members related to ESG can be found in the ESG topic of our online Resource Library, which is available to any interested parties.) In it, we discuss past Interpretive Bulletins issued by the Department of Labor. We also note the following:
Sustainable investing is a framework for investors to examine companies from the perspective of long-term viability and ethical impact. This framework allows investors to evaluate a company’s exposure to, and ability to address, ESG-related risks and opportunities.
Today, sustainable investing is affiliated with more than just values-based organizations, and it is increasingly independent of moral stances. Instead, many modern investment approaches consider ESG factors in order to identify companies with the strongest prospect for long-term success, focusing on value, not values.
Many academic and industry research studies provide a clear rationale for incorporating ESG factors into investment decision-making. Academic studies that have analyzed the relationship between ESG factors and performance have found a strong correlation with alpha, beta, and portfolio value.
Studies have demonstrated positive benefits from ESG themes, such as improved net-of-fee performance relative to non-ESG-themed funds, and increased portfolio value, when overweighting high-ESG-rated stocks without incorporating a values-based screening approach.
Other evolving factors playing a part in the ESG discussion for DC plans include:
Product, historical track record, and benchmark availability
Impact of climate change, the coronavirus pandemic, and other macro factors
Participant interest and engagement
DCIIA will be convening a working group to further discuss the proposed rule and implications for DCIIA’s community, including DC plan sponsors and plan fiduciaries, and we will explore opportunities to close existing knowledge and information gaps on sustainable investing.
Lew Minsky, President and CEO, DCIIA
Michelle Rappa, Chair, DCIIA ESG Subcommittee