Institutional investors were most interested in climate and biodiversity issues as to environmental concerns and as to social concerns they looked most at diversity, equity, and inclusion. To boost their services to institutional investors, advisors may want to familiarize themselves with how companies and funds report these factors, as well as the new SEC rules.
ESG has long been a hot topic for advisors collaborating with individuals. Now, new research shows that institutional investors are prioritizing ESG in their decisions too. But there are concerns about what qualifies. With a new rule coming from the SEC on greenwashing, advisors may want to dig deeper with their institutional clients. Here’s what you need to know to help your institutional clients.
We’ve discussed aspects of ESG over the last five years and for good reason. Socially Responsible Investing (SRI) has been a large mover in the investing field. When folks talk about ESG factors in choosing investments, they refer to environmental, social and governance aspects of a company. It’s a broad term and the breadth causes troubles.
Back in 2021, we discussed a rising problem in the industry concerning “greenwashing”.[1] “Just as the consumer products watchdogs have asked for clearer labeling standards for consumer products … consumer watchdogs and environmental groups are also asking for better labeling for the SRI industry. In an October 18, 2019 letter… watch dog groups called for the SEC to start a rulemaking process to standardize ESG and to make a rule to add coherence to the issue.” The delay by the SEC in addressing that request led to state and federal initiatives to create clarity.[2] Despite the concern over greenwashing, institutional investors strongly consider ESG in their decision making. “It’s estimated that 90% of institutional investors find that investment plans that incorporate ESG factors will perform as well as traditional ones.”[3] Plan managers were greenlighted to consider these factors by DOL rulings in the last five years.[4]
This Summer, the SEC finally responded to the requests for an organized rulemaking on ESG and investing. According to the SEC, “The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.”[5] The SEC’s proposed rules (which could take some time to become final) relies on the Names Rule to require that a funds with a stated intention in their name (like a climate fund, or a green fund) must have 80% of their assets in investments that align with the name. The proposed rules will also make obtaining those ESG-related disclosures easier.Advisors may want to consult with their compliance and legal counsel on these developments.
These rules are potentially overdue, as ESG has been a rising interest in investing overall. New research from Morningstar Indexes and Sustainalytics found that institutional investors managing pension funds now see ESG as “a fundamental element of investing, not some esoteric approach that could damage potential returns.”[6] Those institutional investors, according to that survey, also seeking out “more tools, resources and data on ESG to inform their investment decisions.” Additionally, of the various ESG factors, institutional investors were most interested in climate and biodiversity issues as to environmental concerns and as to social concerns they looked most at diversity, equity, and inclusion. To boost their services to institutional investors, advisors may want to familiarize themselves with how companies and funds report these factors, as well as the new SEC rules.
[1] https://www.bcgbenefits.com/blog/esg-and-blm and https://www.bcgbenefits.com/blog/greenwashing-investment another aspect of this problem is “woke-washing.” We discuss it here: https://www.bcgbenefits.com/blog/woke-washing. ESG may include female-led governance, which can raise similar issues called "pinkwashing.” You can read more on that here: https://www.bcgbenefits.com/blog/female-led-indexes. Companies have been using social responsibility initiatives to help reignite their employees after the pandemic. Those efforts would not be green or woke washing. Details about those programs are in this article: https://www.bcgbenefits.com/blog/corporate-social-responsibility
[2] https://www.bcgbenefits.com/blog/state-and-local-legislation
[3] https://www.bcgbenefits.com/blog/socially-responsible-investing
[4] https://www.bcgbenefits.com/blog/sustainable-investing
[5] https://www.sec.gov/news/press-release/2022-92 for further discussion, see https://www.whitecase.com/insight-alert/sec-proposes-amendments-rules-regulate-esg-disclosures-investment-advisers-investment or https://www.hklaw.com/en/insights/publications/2022/06/sec-esg-rulemaking-wave-continues-with-proposed-rule
[6] https://www.plansponsor.com/esg-integral-defined-benefit-plans
These articles are prepared for general purposes and are not intended to provide advice or encourage specific behavior. Before taking any action, Advisors and Plan Sponsors should consult with their compliance, finance and legal teams.
Before leaping into the unknown, we recommend a thorough examination of your plan. Because we are experts in the field, we know the marketplace and know what your existing vendor is capable of offering. Through this examination, we can help you optimize the service you receive.
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