As younger investors show a stronger desire to tie their investments to their values, environmental, social, and governance (ESG) strategies have taken an increasingly important role in discussions within the fund industry. While fund providers try to prove their socially responsible bona fides in more institutional markets, the Department of Labor issued guidance on how ESG funds interact with the fiduciary duties of plan sponsors set forth by ERISA. This guidance specified that fiduciaries cannot prioritize non-financial criteria over fundamental return and risk factors when evaluating options. ESG providers have pointed to both the financial and non-financial benefits of the strategy, pointing out periods like the peak of the pandemic downturn as one where such strategies outperformed. Nonetheless, this issuance will likely serve as a hurdle towards the future growth of ESG plans.
This regulatory clarification arrives in a market that has seen shifting fortunes over the past decade. Figure 1 below displays assets held in 401(k) plans over the last ten years. Total assets reached $26.3 billion as of the end of 2017 before pulling back in 2018. The most immediate cause for this downturn was the decline across the broader long-term fund market in December 2018, as concerns about escalating trade wars combined with perceptions of an overly aggressive interest rate raising policy from the Federal Reserve. With socially responsible strategies being primarily equity-oriented, they were more heavily affected by that sudden market downturn.
Figure 1: ESG Assets in 401(k) Plans