Today’s generation of investors have a radically different mindset than any that have come before. In the past, investors were mostly concerned about their financial statement’s bottom line. Today, younger investors come with different priorities.
More and more are asking not only “what” their investments made, but “how” those profits were generated. For example, a recent Voya Financial survey found that 73% of respondents said the idea of ESG investing was “very” or “somewhat” appealing. Our data also revealed that 76% of individuals said they would be “much more” or “somewhat more” likely to enroll in their workplace benefits if they applied ESG principles, and 60% would be likely contribute more to an ESG-aligned retirement plan if one were available.
Based on these stats, it is incumbent on our industry not only to increase options for ESG investing, but also to work to enact policy changes that make ESG investing easier.
Rules and regulations that seek to restrict ESG investments are short-sighted and ultimately negatively impact investors. Instead, we need to focus on ways we can ensure that the environmental, social and governance benefits that these investments can provide are recognized as also being good for long-term returns.
From a business standpoint, this is also a tremendous opportunity for asset managers and financial advisers. How big is the market opportunity for ESG? So much so that, according to industry data provided by Morningstar, in 2019 alone, mutual funds and exchange-traded funds with a focus on sustainability raked in $20.6 billion of total new assets.
We have seen this demand firsthand. Our institutional clients, consultants, and retail intermediaries increasingly ask us about our processes for integrating ESG factors, such as board diversity or companies’ environmental records, into our investments and capabilities. More and more, ESG considerations are table stakes to get into the next round of pitching for a client mandate.
Knowing that this demand exists and will only increase, shouldn’t regulators do everything possible to make ESG investing easier? Sadly, this is not the case.
For example, the Department of Labor recently proposed a rule that would create stricter limits for ESG investing in retirement plans. The proposed rule would subject ESG factors, among all the possible qualitative investment criteria, to heightened restrictions that would expose ESG investors to additional liability and narrow the circumstance in which ESG investing is permitted.
The DOL says this rule would assist Employee Retirement Income Security Act fiduciaries to navigate ESG investment trends and separate the legitimate use of risk-return factors from “inappropriate” investments that, according to the DOL, may “sacrifice return, increase costs, or assume additional risk to promote non-pecuniary benefits or objectives.”
The DOL has also grouped all ESG investments together, despite there being varying approaches that view such investments differently, including, for example, faith-based, exclusionary, impact or thematic, rather than simply looking at ESG broadly as risk and opportunity.
This view is short-sighted and will have a chilling effect on ESG investing. Voya submitted a comment letter to the DOL concerning its proposed amendments, which we feel ignore both the needs of retirement plan savers along with the exact pecuniary benefits that ESG investments can provide.
This is because ESG investing is not just about “doing the right thing,” but also can provide opportunities for enhanced investment returns. Recent experience has shown that ESG investments have historically outperformed broader markets, particularly in times of market stress. For example, in the first quarter of 2020, seven out of 10 sustainable equity funds finished in the top half of their Morningstar categories, and 24 of 26 ESG-tilted index funds outperformed their closest conventional counterparts.
Fulfilling fiduciary obligations and ESG investing are not mutually exclusive — contrary to the DOL’s assertion. Ultimately, we believe that ESG factors may help identify material financial risks and opportunities and can drive better long-term investment performance.
Over the long term, ESG factors can help identify companies that are well positioned to succeed commercially, and thus have the potential to outperform financially. We therefore believe the proposal would harm ERISA investors, not protect them.
Rather than putting the DOL’s thumb on the scale to discourage consideration of ESG factors, we believe the DOL should affirmatively recognize and support the role that ESG factors can play in an ERISA fiduciary’s investment process.
Christine Hurtsellers is CEO of Voya Investment Management.