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For all the Hype, Almost No U.S. Plans Factor in ESG

Corporate and health care pension funds express some interest in environmental, social, and governance investing if they’re asked. But their actions tell another story.

Environmental, social, and governance factors carry little weight among American private-sector plan sponsors, according to a new poll by consulting firm NEPC.

Just 12 percent of U.S. corporate and health care retirement plan representatives said they had incorporated ESG criteria into their manager selection processes. When defined contribution plans were excluded, only 6 percent considered ESG.

The survey included 69 plan sponsors overseeing 119 defined benefit and defined contribution plans.

“There has been limited ESG adoption,” said Kelly Regan, a senior consultant at NEPC and member of the firm’s impact investing advisory committee. Where there has been more implementation of ESG factors has been among health care plans, which Regan said tend to be more mission-based.

Among those not using ESG criteria, 38 percent said they only focus on financial factors. Twenty-seven percent said they need more data on how ESG impacts performance.

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While few plan sponsors actually incorporate ESG factors when hiring managers, many more talked as if they might . Twenty-nine percent of all surveyed plans said they were interested in exploring ESG, with DC plans reporting slightly more interest than traditional pension funds.

Like other non-users, those expressing interest said they wanted more education on ESG factors and evidence on how they effect returns. Some also said they needed further guidance from the Department of Labor, which enforces the Employee Retirement Income Security Act (ERISA). The DOL’s most recent stance on the issue was “neutral to negative,” according to NEPC partner Brad Smith.

“I was actually surprised by the number of respondents who were still interested in ESG post-DOL bulletin,” he said.

At NEPC, Smith and Regan said they emphasize that clients should approach ESG as a process, rather than as a product. The consulting firm has for the last year or so been conducting a formal review of its manager universe in an effort to provide clear ESG ratings to clients.

“We’re trying to better identify which managers are using ESG and whether those factors lead to better returns or better risk management,” Smith said. “At the end of the day we want to help clients make informed investment decisions.”

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