ESG Options in DC Plans

ESG Options in DC Plans

ESG Options in DC Plans? Morningstar can help you find them. President  Trump’s Department of Labor aims to limit ESG investing in retirement plans, although even law firms recognize the need for ESG research. Fund flows and investor interest remained high according to Morningstar’s research, even amid the year’s earlier market downturn.  Insights from Morningstar discuss how the Presidential election outcome may impact ESG investing.

The following can help you find ESG options in DC plans, despite political turmoil.

ESG Options in DC Plans: Morningstar Helps You Find Them

Do Investors Have ESG-Investing Options in Their DC Plans?” by Samantha Lamas and Steve Wendel looked at defined-contribution (DC) plans for access to sustainable funds.  They used Morningstar Sustainability Ratings to identify the ESG risks of the funds in their 401k lineup.

The authors examined ESG options in DC plans using three different approaches to ESG investing that are not mutually exclusive:

  • Sustainable Funds: Investments for which ESG incorporation and impact are an intentional focus of their investment process.
  • ESG Consideration Funds: Traditional funds that now declare that they consider ESG when making investment decisions in their offering document or regulatory filings.
  • Morningstar Sustainability Rating: A measure of a funds ESG related risk. The Sustainability Rating is depicted by globe icons where a low ESG risk score equals 5 globes and a high ESG risk score equals 1 globe

Key Takeaways

  • Despite rising investor demand, few plans use sustainability funds as a core part of their process. As of 2016, only 4.5% of DC plans included at least one investment offering that qualifies as an intentional sustainable fund.
  • With the growing movement toward ESG factors, more and more traditional funds are “considering” ESG factors as part of their investment criteria. In 2016, 22% of DC plans include at least one fund that now “considers” ESG factors among others.
  • When DC plans don’t contain an ESG-focused fund, investors can still use Morningstar Sustainability Ratings to find funds with low ESG risk. Authors found 71% of DC plans included at least one fund with a high Morningstar Sustainability Rating, regardless of whether the fund has an intentional ESG mandate.

Conclusion

In summary, ESG options in DC plans may not be explicit. Morningstar Sustainability Ratings can help you find them. Morningstar Analyst Rating for funds and Quantitative Rating for funds are available only to Premium members on Morningstar.com so I could not test their veracity myself.

However, Morningstar’s new ESG Screener is a free fund screening tool. It allows investors to set search filters based on popular categories of sustainability preferences and find funds whose descriptions and prospectuses meet their criteria. For individual stocks, try Sustainalytics.

Download the research. Find a summary here on Morningstar.com.

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