October 03, 2011
Pension Funds in US Slow to Add Sustainable Investment Options
by Robert Kropp
US SIF survey of ESG uptake by defined contribution plans reveals that while most respondents have
little or not understanding of sustainable investment, most expect an increase in interest in next
The conclusions of the groundbreaking Fiduciary II report of
2009—that "Advisors to institutional investors have a duty to proactively raise ESG (environmental,
social, and corporate governance) issues within the advice that they provide, and that a
responsible investment option should be the default position"—followed the more conservative
conclusions of its 2005 predecessor, the Freshfields report.
While Freshfields concluded
that the consideration of ESG criteria falls within the bounds of the fiduciary duty of asset
owners, it also concluded, in the words of a recent report, that "pension funds' fiduciary duties…only
permit the consideration of an ESG criterion, if this process has no detrimental financial
On the other hand, according to the report, an academic paper authored by
Hoepner, Rezec, and Siegl, Freshfields also determined "that pension funds are legally required to
consider an ESG criterion, if there is a clear consensus amongst beneficiaries in favor of this
criterion or the criterion is believed to be financially beneficial."
In their paper, the
authors propose "a realistic prudent investment test" by analyzing over 1,500 firms from 26
developed countries over a 77-month period, using corporate responsibility ratings supplied by EIRIS, and conclude "that pension funds'
fiduciary duties do not appear to prohibit the integration of environmental responsibility criteria
into their investment processes."
Indeed, the authors continue, "Our results provide zero
indications that the integration of aggregated or disaggregated corporate environmental
responsibility criteria into investment processes has detrimental financial performance effects for
pension funds concerned about the environment. Not a single portfolio with an average or above
average degree of environmental responsibility underperforms its benchmarks at any common
Such findings give context to a recent survey of uptake by defined
contribution (DC) pension plans in the US of sustainable investing options for their participants.
While inclusion of such options were reported by 14% of respondents—they numbered three percent of
the 13,000 plans contacted for the survey—an additional 13% are either discussing a sustainable
investment option or intends to add such an option within two to three years. Eighty-four percent
expect that demand for such an option by participants will increase or at least remain constant
over the next five years.
The findings of the survey, commissioned by US SIF: The Forum for Sustainable and Responsible
Investment and authored by Mercer,
dovetails somewhat with the academic paper by Hoepner et al, when the former asks respondents to
describe barriers to adding a sustainable investment option to their offerings. The most common
reason given was lack of participant request, but the second most often cited reason was fiduciary
"For this group of plan sponsors, fiduciary concerns may overlap with, and stem
from, their perception that SRI funds underperform," the report states. "It seems reasonable to
suggest that if plan sponsors were more aware that SRI funds in general do not underperform non-SRI
funds of similar asset classes and styles, their fiduciary concerns would lessen."
respondents, the majority of which were corporations offering 401k plans, also acknowledged in
almost 60% of cases that they had little or nor understanding of sustainable investment products
and indices. On the other hand, non-profit, mission-based, or public organizations in which a
sustainable investment philosophy is more likely to be embedded in the culture were more likely to
provide such options in their offerings.
When the question of what needs to be addressed
before sustainable investment options become more widespread, the unfamiliarity with the practice
becomes more evident. More than 60% of respondents said that further demonstration of comparable
performance would be needed, and another 40% sought clarification of fiduciary duty. Perhaps the
academic report by Hoepner et al might represent a first step in providing such assurance.
Principals involved in the report acknowledged that a better understanding of sustainable
investing by providers of defined contribution plans is an essential element in the uptake of the
practice. Craig Metrick, US Head of Responsible Investment for Mercer, said, "Given the large
number of plan sponsor respondents who admit to little or no knowledge of SRI products and indices,
education is clearly a critical and a significant opportunity."
And Lisa Woll, US SIF CEO,
said, "The retirement industry regularly analyzes the overall investment composition of DC plan
assets; however, plan sponsors and participants have had little concrete information about the
availability of sustainable and responsible investing options."