ESG: It’s a Mess!

INSIGHTS

ESG: It’s a Mess!

By: Mitch Shames

With $39 trillion captured in U.S. retirement plans, it is not surprising that some people ask the question; “why can’t we do some ‘good’ with all that money?” In fact, that question has been asked for decades. Back in the 1960’s, driven by political protests, the Vietnam war, and the apartheid regime in South Africa, socially responsible investing gained currency. Eventually, in 2004, socially responsible investing morphed into Environment Social and Governance (ESG) when Koffi Annan introduced a set of principles to the CEO’s of 50 major financial institutions.

Today, ESG has been reduced to a political hot potato. Starting with the Obama presidency, the Department of Labor has introduced proposed regulations either supporting or prohibiting plan fiduciaries from taking ESG considerations into account when investing plan assets. True to form, the Biden administration filed supportive regulations which were eventually challenged and overturned by a court.  

Given that litigation around these regulations continues to play out, fiduciaries would be well advised that any reliance on these regulations might be risky at best.

However, all is not lost. Commentary and research is showing that many of the issues highlighted by ESG are not merely a matter of “social do-goodism” but rather can go to the issue of evaluating the quality and reliability of a corporation’s current and projected earnings.  In other words, focusing on various ESG issues are tantamount to focusing on real business issues and their impact on earnings. Certainly, even the most skeptical about ESG would likely admit that the evaluation of earnings is a critical component of any active investment management strategy and worthy of evaluation by a plan fiduciary.  

As an example, just recently the Wall Street Journal reported that the Federal Reserve Bank has launched a Pilot Program evaluating whether the largest banks face risks related to climate change. In other words, charged with monitoring the resilience of the banking system, the Federal Reserve, has determined that climate change may raise specific systemic risks and that it is worthwhile to assess these potential risks.  

The approach by the Fed seems not to be an extreme position. In fact, it appears prudent and reasonable. As any knowledgeable fiduciary knows, prudence and reasonableness, are the watchwords of the fiduciary decision-making process.

Therefore, it would seem that the best possible approach for fiduciaries would be to avoid the extremes of the political positions and instead focus on a middle of the road reasonable approach. Remember, plan fiduciaries are charged with the responsibility of investing plan assets “solely in the interest of plan participants”. When it comes to ESG, explore with asset managers and advisors how they might evaluate the risks and earnings impact associated with various ESG issues as business matters (impact on earnings), not as matters of social activism. Seems there is little fiduciary risk attributable to focusing on the potential risks and returns related to plan investments.

If you would like to speak with us about your ESG concerns, please feel free to reach out. We would love to hear from you!

 

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Who Will Get It Right On Lifetime Income: Plan Consultants or Financial Services Firms?

INSIGHTS

Who Will Get It Right On Lifetime Income: Plan Consultants or Financial Services Firms?

By: Mitch Shames

Retirement plan consultants regularly conduct client surveys. Recently, they have consistently been reporting that plan sponsors have little interest in lifetime income products. (various annuity-type options associated or imbedded within investment options) On the other hand, leading financial services firms, including household names in insurance and mutual fund products, have invested enormous resources, over the course of the last three to five years in developing sophisticated products which address the income needs of retirees.

Who is going to be correct?

Reading the tea leaves – Plan Sponsor, an informational and educational organization devoted to serving retirement plan decision-makers, will be holding its annual conference this June in Orlando and is devoting significant conference time to lifetime income products. In fact, I’ll be speaking at the conference and please track me down and introduce yourself.

While I’m not a betting man (good thing because I’m a professional fiduciary), my gut tells me that both the financial services firms and Plan Sponsor have done their market research. They don’t devote significant resources to a topic on a whim. Furthermore, financial services firms were spot on in introducing mutual funds and then eventually target date funds into the retirement savings market. History suggests that plan sponsors pay attention to these developments.  

If you would like to speak with us about how Harrison Fiduciary goes about implementing and signing off on lifetime income products for retirement plans, please feel free to reach out. We would love to hear from you!

 

INSIGHTS

Stay up-to-date with the latest news and resources.

Plan Sponsors Must Focus on Cybersecurity - How Broad Are Their Fiduciary Shoulders?

Cryptocurrencies: Not Yet Ready for Primetime

ESG Doesn't Trump Fiduciary Principles

GET IN TOUCH

Let’s talk about the best options for you and your plan participants.