ESG In Defined Contribution Plans

by NEIRG NEWS | Feb 21, 2020

Environmental, Social and Governance (ESG) investing is garnering attention in Defined Contribution (DC) Plans due to participant demand. As a result, Plan Sponsors are evaluating the ESG landscape and available investment options. To ensure a thorough evaluation, we recommend taking the following four steps: Define, Approach, Implement and Measure.

ESG investing has been evaluated and widely discussed among nonprofits for over a decade. Now, we’re seeing heightened interest in DC plans, driven by demand from participants.

Here we create a blueprint for Plan Sponsors to follow when evaluating ESG investing in a DC Plan.


The most efficient method to study the ESG landscape is to look at the current levels of investment, peer practices and steps to prepare for action.

  •  Assets Invested. Assets in ESG investments rose to $12 trillion in 2018, up from $8.7 trillion in 2016. ESG funds saw $5.5 billion of net flows in 2018, the third consecutive year of record net flows.
  •  Peer Practices. A recent study by PIMCO tops the list of additional recommended core strategies to add to a DC investment program. And, as many as 20 percent of Vanguard clients, with over 1,000 participants, offer an ESG fund. While Plan Sponsor adoption has increased, we have yet to see an increase in participant utilization.


We encourage Plan Sponsors to think of ESG investing as a four step process: Define, Approach, Implement and Measure.

  1. DEFINE. ESG covers topics that range from climate change and carbon usage to human rights and religious beliefs. The graphic below helps define the area(s) of focus within ESG.

Although clients may have different ESG priorities, Plan Sponsors can define the area of focus by looking at their company’s ESG efforts and emulate them within the DC Plan.

The United Nations launched 17 Sustainable Development Goals (SDGs) in 2015. The SDGs provide a shared blueprint for peace and prosperity for people and the planet, now and into the future. Increasingly, investment managers are adopting these SDGs as a framework for measuring the ESG impact of their portfolio companies. Therefore the SDGs help define the focus for ESG investments within a DC Plan.

2. APPROACH – Once a Plan Sponsor has defined the area(s) of focus within ESG, it is important to understand the investment approaches available and which is best suited for the DC plan. Four approaches are cited below.

Exclusion and Integration approaches work well within DC plans. An exclusionary approach is best geared toward investors who have a clear and distinct area of focus; whereas integration is better suited for investors looking to create a positive effect through their investments. Proxy voting is effective only when a DC plan has sufficient assets to utilize separate account managers in lieu of mutual funds. In these larger plans, we encourage clients to utilize a third-party firm to vote proxies in line with the ESG policy on behalf of the DC Plan. It is also important to review the cost of these services.

Impact investing is often done in private investment structures and may not be an appropriate approach within smaller DC plans given the illiquidity and higher fees associated these structures.

3. IMPLEMENT – After narrowing the area(s) of focus and approach to ESG investing, we recommend the following steps to implement ESG in a DC plan:

 4. Make decisions through the lens of a fiduciary. The first step is to ensure the Committee considers the philosophy and process for ESG investments. ESG mandates can take different forms, so the Committee should perform a thorough evaluation of active versus passive approaches and the screening process employed by each manager. This should be done in tandem with the overall design of the investment menu and vehicles available to the DC Plan and comply with guidance from the Department of Labor which states returns should not be sacrificed for social policy goals.

 5. Explore how ESG can be incorporated into the Investment Policy Statement (IPS). We recommend discussing with your ERISA counsel any changes needed to the IPS when implementing ESG investing in a DC Plan. This will help ensure all fiduciary considerations are accounted for.

 6. Add a dedicated ESG offering. Engage the Plan’s recordkeeper to add the dedicated ESG mandate to the investment lineup. When an ESG offering is added, to promote participant awareness, we recommend a review of participant communication and education materials.

 7. Measure– As with any DC Plan option, it is important to monitor both quantitative and qualitative metrics to evaluate a manager’s performance. Performance should be measured against a broad based benchmark as opposed to a narrow set of metrics. For example, we suggest the evaluation of the performance of an active U.S. large cap growth fund with an ESG focus against the Russell 1000 Growth® Index and other ESG and non-ESG large cap growth peers.

Increasingly, ESG investing is gaining traction from Plan Sponsors, participants and investment managers. It can be integral in a DC Plan’s investment menu and the four steps process of Define, Approach, Implement and Measure discussed here allow a Plan Sponsor to employ a thoughtful, thorough and prudent process.

Prepared by Broadridge Investor Communication Solutions, Inc.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable – we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice