Do employees really want ESG options in their retirement plans?
According to a new survey, 76% of people do not know that ESG stands for environmental, social and governance, however, 54% were extremely worried about climate change.
More than two-thirds of Americans want to invest their money in a way that creates a better climate future, according to a survey from Sphere, but relatively few have that option with their current retirement plan, and most are unaware that such options exist.
The Sphere survey illustrates how investment fund options in the environmental, social, and governance (ESG) area are relatively new to investors, and how much work is left to be done in educating investors about ESG options. Although 77% of respondents want to invest in a better climate future, 76% of those surveyed did not know what ESG means.
“It’s clear that most workers are very confused about ESG investing,” says Shlomo Benartzi, behavioral economist and Professor Emeritus at UCLA. “They literally don’t even know what the letters stand for. Is the ‘E’ for economics, the environment or maybe entertainment? As an industry, we need to help participants, advisors and sponsors make informed choices.”
Strong demand, limited supply
Recent research from the Plan Sponsor Council of America found that only 3% of plans offer an ESG fund as an investment option for employees. The Sphere survey found that when asked what ESG stands for, the top answer was “Economic Stock Growth.”
But the respondents are concerned about climate change. The survey found that 54% of respondents said they were extremely or very worried about climate change. Another 26% were somewhat worried.
Despite their interest, many investors do not know if they have an ESG option. The Sphere survey found that 70% of those surveyed did not know whether there was an ESG fund option in their 401(k).
Upsides to ESG investing
Research by Sphere indicates that climate-friendly investing can improve 401(k) plans by both protecting long-term savings and by increasing participation among employees, when they feel they can have an impact with investments.
The company’s research also finds that excluding fossil fuel investments protects investors from “stranded asset risk” – the risks that future pressure (such as public pressure and regulation) to end fossil fuel extraction will devalue key assets for oil, gas, and coal companies.
Sphere officials pointed to the Schroders 2022 U.S. Retirement Survey, which found that 74% of defined contribution plan participants who lack or don’t know if they have ESG investment options in their plan said they would or might increase their contribution rate if offered ESG options. That number was up from 69% who said the same in 2021.
That study also found:
- The vast majority (87%) of plan participants said they want their investments to be aligned with their values.
- 78% said they believe companies that are socially responsible (ESG-focused) will have better results over time than companies not socially responsible.
- Of the 31% of 401(k) plan participants who knew their plan offered ESG options, nine out of 10 invested in those options, and almost three-quarters (73%) estimated they allocate 50% or more of their assets to socially responsible choices.
Greenwashing concerns
There are still concerns about the growth of the ESG movement—this article in Bloomberg
noted that definitions of what constitutes an ESG fund (sometimes called “sustainable funds”) remain fuzzy. But, the article added, the movement is for real: “Assets are set to balloon to $50 trillion by 2025 from about $35 trillion, according to estimates from Bloomberg Intelligence,” the article said. “The growth has been spurred by record-breaking fund inflows amid concerns about climate change and other societal issues.” The article added that in Europe, authorities are imposing stricter rules on what can be considered a sustainable fund,
In the US, the SEC has proposed new rules requiring funds to provide better definitions and measurement of ESG goals and progress. This opinion piece in Forbes goes over a list of problems with funds that claim to be ESG-friendly but are more likely “greenwashing” or selling themselves as more environmentally friendly than they really are.
“Neither regulators nor analysts nor the companies themselves have a standard for scoring ESG. In the absence of standards, swindlers are free to profit from the label. The SEC is right to address these abuses, but more must be done,” writes Wal van Lierop, President & CEO at Chrysalix Venture Capital.