Looking beyond traditional financial analysis
There’s a growing trend within the investment industry that reflects an increasing awareness of looking beyond traditional financial analysis. Known broadly as responsible investing, the practice encompasses a broad swath of philosophies and approaches that assess a company’s impact on the environment, its employees and the varied communities that it touches as rigorously as its financial returns.
Yet while some may brush off such developments as feel-good investing, some of the dynamics behind the rising prominence of responsible investing could push the subject onto the radar of business owners and managers.
Altogether, assets managed within the responsible investing sphere jumped 76 percent in the U.S. between early 2012 and early 2014, according to The Forum for Sustainable and Responsible Investment, a trade association also known as the US SIF Foundation. The organization said that the $6.57 trillion in such investments equaled more than one of every six dollars invested professionally in 2014. By comparison, in 2012, it was one of every nine dollars under management.
Impressive growth to be sure, but just as importantly, one of the key drivers cited in the report was client demand. That is, for the money managers who shared the reasoning behind their decision to incorporate environmental, social and governance (ESG) analysis into their investment analysis process, client demand scored higher than fulfilling a mission or meeting value propositions. The incorporation of ESG factors accounts for about two thirds of money managed in the responsible investing universe.
Given the prominence of client preferences, it could be just a matter of time before an employee walks up to you or your HR manager and asks “what kind of responsible investment choices do we have within our 401(k) plan?”
It’s a fair question, and since there could be other employees wondering the same thing, it merits some attention. To address it, consider taking the following steps:
1. Review what you currently offer—Given the growth of ESG integration in the money management industry, it’s possible that the investment options in your retirement plan today do incorporate some type of responsible investment factors. Some are more robust than others, however, so understanding how ESG analysis is used will help you determine the current landscape.
2. Investigate options—With the expansion of money managers’ consideration of ESG factors, you may seek out different investments based on what is important to you and your employees. For example, money managers who emphasize social and community criteria may zero in on exposure to Sudan or potential human rights violations; those who emphasize governance issues may focus on the competence of boards of directors or excessive executive pay; and those who gauge environment matters may measure climate change factors or clean technology advances.
3. Determine viable choices—As with any investment, differences between money manager styles, fees and accessibility can affect your willingness to invest. To help narrow your choices, develop criteria—perhaps with a group of employees—and work through what might fit in your retirement plan with your retirement plan advisor or consultant.
4. Promote the new offerings—Once you’ve settled on any addition(s) to your company retirement plan, share the news with the entire company. For a potentially greater impact, enlist employees who’ve discussed the issue of responsible investing with you in the past.
Of course, no one requires that your company retirement plan offer participants responsible investing choices, but depending on who’s raising the issue—and how loudly that it’s being done—it could be an issue you need to tackle in the near term. Nonetheless, with a bit of research and employee input, a reasonable path is possible.