This week, we dig into one of the hottest topics in the investing world – how to do well by doing good. Sustainable investing has been growing rapidly over the past few years, but most of the action thus far has been among institutional and high-net worth investors. Here’s what I have been wondering: when will this break into the world of retirement investing?
My guest on the podcast is an expert on social investing – Meg Voorhes, director of research for US SIF: The Forum for Sustainable and Responsible Investment. Meg leads the production of US SIF’s biennial, flagship report, Sustainable and Responsible Investing Trends in the United States.
I wrote on the topic of social investing last fall for The New York Times. Broadly speaking, this category includes any investing motivated by a social purpose. The first waves came back during the 1960s era of shareholder activism, divestment initiatives and impact investing. The early fund offerings often focused on a single, narrow area of investments, or only on exclusion of specific investment categories, such as fossil fuels. More recently, we’ve seen the advent of funds that screen for environmental, social and governance factors — so-called E.S.G. investing. Most E.S.G. mutual funds rely on ratings systems that score securities for their exposure to indirect financial factors, including a company’s environmental impact, governance policies or how it treats employees or monitors its supply chains. The funds either underweight or eliminate securities that fund managers expect to have high risk associated with those factors, or tilt toward those that an investor believes will have a positive impact.
Morningstar reported this week that U.S. sustainable funds attracted new assets at a record pace in 2019. Estimated net flows into open-end and exchange-traded sustainable funds totaled $20.6 billion for the year; that’s nearly four times the previous annual record for net flows set in 2018.
When will sustainable investing to start popping up in 401k plans? That question intrigues me for a couple reasons. First, I think sustainable investing is a great way for the market to signal to corporations that they must improve their performance on things like climate change, workforce diversity and management and general social responsibility. Making social investing options available inside 401k plans would be a very good thing, because this is where average investors have their money parked. And, there’s a lot of it – $8.5 trillion is sitting in in 401ks; by comparison, all sustainable investing amounts to just over $12 trillion.
Surveys show that workplace retirement savers are very interested in using their retirement savings to make the world better in areas like climate, gun control, tobacco abatement and reproductive rights. A Morningstar study published last year found that more than 70 percent of the United States population has “at least a moderate interest” in sustainable investing. The appetite is especially strong among younger workers: A Natixis survey of 401(k) plan participants last year found that 67 percent of millennials would be more likely to contribute, or increase their plan contributions, if they knew their investments were contributing to social good.
But less than 5 percent of 401k plans include sustainable mutual fund choices, and they hold less than 1 percent of total plan assets.
There are several important reasons for this. Retirement plan sponsors are required by law to offer investment choices that produce the best financial results for plan participants. That’s their fiduciary duty. A case is starting to build that you can, in fact, have your cake and eat it too – studies by Morningstar are finding that sustainable investing choices do as well as standard investments, and in some cases better. But that message is just starting to find its way into conversations with plan sponsors. And the guidance on this topic from regulators has anything but clear.
Then there are the facts on the ground in terms of how 401k plans are evolving. 401ks are very much the domain of target date funds these days. These are funds that automatically adjust your investment balance as you get closer to retirement, and they usually are composed of passive, very broad-based index funds. Vanguard projects that by 2023, 70% of participants in plans that it administers will be using target date series. So that statistic tells you everything you need to know here – if sustainable investing is going to take off, it needs to be blended into target date series.
That’s starting to happen, as I noted in my New York Times story. Ron Lieber, who writes the Your Money column at the Times, added another interesting perspective last week with a story examining what 401k participants can do to push their employers to add socially-responsible investment options to their plan menus.
I asked Meg to talk about what needs to happen next for sustainable retirement investing to get off the ground.
The podcast is part of the subscription RetirementRevised newsletter. Subscribers have access to all the podcasts, plus my series of retirement guides on key challenges in retirement. Each guide is paired with a podcast interview with an expert on the topic; the series already covers Social Security claiming and the transition to Medicare, and how to hire a financial planner. The most recent looks at the critical decision between Original Medicare and Medicare Advantage.
Readers also get my weekly summary and analysis of key developments in retirement. This week, it includes analysis of the latest polling of voters on Medicare for All, why we’re headed for a severe shortage of geriatricians to care for the elderly and an ill-advised plan to let ordinary retirement savers invest in risky private equity deals.