Asset managers are ramping up their efforts to offer ESG products in retirement accounts despite efforts by federal regulators to put limits on these types of products, according to a new report by Cerulli Associates.
The Boston-based research firm found that 56% of surveyed defined contribution plan asset managers intend to expand the marketing and distribution over the next year of investment products focused on environmental, social and corporate governance issues (ESG).
The managers are moving ahead despite new regulations proposed by the U.S. Department of Labor in June that would force ERISA fiduciaries to defend their use of ESG products in retirement accounts and ban the use of ESG-themed funds as default plan offerings, the report said.
Critics of the proposal contend the rules are meant to intimidate plan sponsors that are offering ESG products and aid fossil fuel and manufacturing companies that are typically shunned by such funds. In Cerulli's survey, 48% of direct contribution plan asset managers cited the DOL proposal as one of the most significant barriers to adoption of ESG products in retirement plans.
Yet managers say they are still going forward with plans to expand offerings because there is still demand from plan sponsors, even though plans are essentially blocked from using ESG funds as default selections.
"For now, implementing ESG-themed products within a plan's QDIA (qualified default investment alternative) is not a viable option from a fiduciary standpoint," said Shawn O'Brien, senior analyst at Cerulli, in a press release. "However, DC asset managers relate that some of their plan sponsor clients continue to express interest in the ESG investments."
O’Brien also noted that, aside from customer demand, managers also see inherent performance benefits to using ESG strategies in their funds.
About 75% of asset managers cited risk mitigation as a reason for using ESG strategies, while 68% touted ESG's ability to boost alpha opportunities. The survey also found that about 51% of 401(k) participants have no opinion on ESG investment products.
“Many asset managers stand behind the financial merits of ESG. Some asset managers tell us they employ ESG screening processes or incorporate ESG factors into their investment analysis across all of their funds,” said O’Brien in the remarks.
Cerulli, however, stated that there's still a lot of confusion in the market about how exactly ESG investing works. Part of the problem is a lack of universally accepted terminology and definitions in the sector.
“There seems to be a lingering confusion among plan sponsors and participants about how ESG investing works. Managers should seek to educate DC plan sponsors and intermediaries on the various methods of ESG investing and illustrate how their firm’s product fits within the broader ESG landscape,” O’Brien said. “Moreover, helping plan sponsors articulate and document investment decisions related to ESG products—and ensuring those decisions are consistent with the plan’s [investment policy statement]—will be particularly important given the current regulatory environment and the litigious nature of the DC market.”