Perceived barriers to adoption created by recently proposed regulation aren’t stopping most defined contribution investment-only (DCIO) asset managers from increasing their environmental, social, and governance (ESG) marketing and distribution efforts.
Cerulli Associates notes that the Department of Labor proposed new regulations will place undue barriers to adoption of ESG products. Nearly half of DCIO asset managers surveyed by the firm consider the DOL’s proposal one of the most significant barriers to adoption of ESG products in DC plans.
However, Cerulli found that 56% of DCIO asset managers expect to increase these efforts during the next 12 months.
“For now, implementing ESG-themed products within a plan’s QDIA is not a viable option from a fiduciary standpoint. However, DC asset managers relate that some of their plan sponsor clients continue to express interest in ESG investments,” Shawn O’Brien, senior analyst at Cerulli, said in a statement.
Furthermore, many asset managers tout performance-related benefits to incorporating ESG criteria into their investment analysis, even within non-ESG-branded funds.
“Many asset managers stand behind the financial merits of ESG,” O’Brien added. “Some asset managers tell us they employ ESG screening processes or incorporate ESG factors into their investment analysis across all of their funds. Three-quarters of asset managers cite mitigating risk as a top reason for incorporating ESG criteria into their investment analysis and more than two-thirds indicate incorporating ESG criteria leads to improved alpha opportunities.”
On top of these regulatory headwinds, retirement plan providers suggest confusion related to ESG investing has also contributed to a lack of adoption by DC plans.
Cerulli suggested that in the absence of universally accepted definitions and terminology, providers should consider taking a step back to address the fundamentals of ESG investing in order to facilitate more nuanced discussions with their DC clients.
“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 concluded. “Moreover, helping plan sponsors articulate and document investment decisions related to ESG products—and ensuring those decisions are consistent with the plan’s IPS—will be particularly important given the current regulatory environment and the litigious nature of the DC market.”