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NEPC Survey: Defined Benefit and Defined Contribution Plans Both in Beginning Stages of Incorporating ESG Investing

July 23, 2018

Survey of Plan Sponsors Shows:

  • One-Third of Plan Sponsors Aren’t Implementing ESG, but Are Interested in It
  • Financial Factors Remain the Focus when Evaluating Potential Investments
  • Healthcare Institutions Ahead on ESG Versus Corporate Counterparts
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BOSTON, July 23, 2018NEPC, LLC, one of the industry’s largest independent, full-service investment consulting firms, today announced the results of its latest survey of corporate defined benefit and defined contribution plan sponsors, including healthcare organizations. This survey focused on the use of and attitude toward environmental, social and governance (ESG) investing.

According to the survey, the majority (88%) of plan sponsors have not incorporated ESG into their DB or DC plans. However, nearly a third (29%) of respondents said that while they have not yet implemented ESG into their plans, they are interested in it. Of the 12% of respondents who have incorporated ESG, most (70%) are DC plans, and more than half (62%) are healthcare-focused organizations.

 “The survey findings solidify our belief that institutional investors can capitalize on opportunities created by ESG as long as it makes sense for them,” said Brad Smith, partner in NEPC’s Corporate Practice. “Right now, for example, a big focus for DB plans is closing funding gaps, and while ESG may reduce risk over time, these plan sponsors often prioritize purely financial factors versus sustainability to drive excess returns. On the contrary, it was not surprising to see healthcare adopting ESG at higher rate than its corporate peers, given the nature of the industry and the fact that many of these organizations are mission-driven or faith-based. Many healthcare organizations have historically included a socially-responsible investment option within their DC plan, which is likely the reason why the survey findings show more ESG adoption by DC plans than other plan types.”

Click here for an infographic highlighting the survey’s primary findings.

The majority (94%) of the DB plans surveyed are not incorporating ESG today. However, nearly a third (28%) may be interested in ESG in the future. More than half (59%) state long-term risk and return factors are their most important consideration when evaluating a potential investment, followed by diversification (39%).

“Plan sponsors that want to consider incorporating ESG should remember that the concept is rooted in strategy and process, not investment products,” said Kelly Regan, senior consultant at NEPC. “Incorporating ESG is a journey with a variety of implementation approaches, and interested parties should explore the best course of action to meet their specific goals and objectives. Important factors when heading down this path is to start with education, as well as evaluate if ESG is already part of their current investment manager lineup. Plan sponsors may be surprised to find that managers who were selected for financial reasons also incorporate material ESG factors into their investment process.”

The DB and DC plan respondents who are not currently interested in ESG cited financial reasons as their rationale. More than a third (38%) of these respondents said they only consider financial factors in their portfolios, while a quarter (27%) said they would need more data on ESG’s impact to performance.

 The majority (84%) of the plan sponsors surveyed that are not including ESG factors today said they haven’t been asked by DC plan participants to consider incorporating ESG.

“Millennials are emerging as a generation that favors ESG relative to others, so as they become a larger part of DC programs, it’s not unreasonable to expect more requests for ESG-related investment options,” Smith added. “However, there are many additional factors aside from participant demand that need to be considered when contemplating the addition of an ESG investment option to a DC plan – not the least of which is ERISA guidance on the topic.”

Click here for an infographic highlighting how healthcare organizations are considering ESG factors.

About the Survey

This survey was conducted online by NEPC’s Corporate and Healthcare Practices in June 2018. The survey had 69 respondents who offer 119 plans. Sixty-five percent of respondents were corporations, while 35% were healthcare organizations. Copyright is held by NEPC.

About NEPC, LLC

NEPC® is an independent, full-service investment consulting firm, providing asset allocation, manager search, performance evaluation, and investment policy services. We work with discerning investors on both an advisory and discretionary basis. We service 360 retainer relationships (1), representing assets of $1 trillion with approximately $62.2 billion in alternative assets, from our offices in Boston, Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Portland and San Francisco. We encourage your comments and feedback, as well as any inquiries you may have about our firm or our consulting services. Learn more at www.nepc.com/focus-areas/corporate.

(1) statistics as of 1/1/18

Read the online press release here.

 

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