Meeting the Demand for ESG Investment Options

Surveys show that employees and plan participants, particularly millennials, are requesting investment options in their 401(k) plans that implement ESG – Environmental, Social & Governance – investment principles. This motivation springs from a desire to use retirement assets as a force to address global and societal issues such as climate change, work-force issues, pay equity and others. ESG is gaining in popularity and momentum.

In an era of labor shortages employers need to be focused on and attentive to, the sensitivities of their employees. Human resource professionals bring extensive experience and best practices (including market-based best practices) to these challenges.

However, when it comes to using retirement plans to address employee satisfaction, care needs to be taken not to run afoul of ERISA principles. In other words, often decisions affecting employees and the work force are evaluated against the business judgment rule. Great latitude is extended to corporations under the business judgment rule.

Once ERISA qualified plans enter the picture, chances are high that the plan sponsor is stepping into the world of ERISA and the fiduciary standard of care. Specifically, plan sponsors who want to adopt ESG investment principles should do so NOT because of employee pressure, but rather because ESG is a prudent investment tool and is in the best interest of plan participants.

Note, meeting employee demands and executing prudent decisions are not mutually exclusive.  With due care, both goals can be achieved. It is critical however, that the decision always be grounded in prudence.

Therefore, before adopting ESG principles (whether out of employee pressure or otherwise) fiduciary committees must undertake (and document) a review of the benefits of ESG screens.  Furthermore, ERISA counsel should be consulted to assure that the any proposed changes reflect procedural prudence by following the processes set forth in the plan documents.

Significant energy can swirl around topics such as ESG. Notwithstanding the economic temptation to meet employee pressures, extra care needs to be taken when plan sponsors are acting in a fiduciary capacity. For the plan sponsor, half the battle lies with remembering that it is acting in a fiduciary context, the other half lies in seeking the appropriate counsel.


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