ESG and Retirement Plans with Anna West of Anna West Consulting
Can sustainable and responsible investment options lead to better retirement outcomes for 401k plan participants? Andhow has the regulatory landscape evolved? Anna West from Anna West Consulting addresses these questions and much more in this weeks episode!
This transcript has been edited for clarity.
Dan Carreno, Ethos ESG
Thank you for joining us for another edition of The Ethos ESG Podcast, where we break down the latest developments in the world of sustainable and responsible investing. I am Dan Carreno and with me today is the newly minted Director of Business Development at Ethos ESG, Britney Damico. Brittany, how are you doing today?
Brittany Damico, Ethos ESG
I'm doing great.
Dan Carreno, Ethos ESG
Our guest today is Anna West of Anna West Consulting. Anna, how's it going today?
Anna West, Anna West Consulting
It's going great. Thank you so much for having me.
Dan Carreno, Ethos ESG
We asked Anna to come on to the podcast today to talk specifically about the ESG realm and the retirement plan space. Before we get into our round table discussion, Anna, did you want to share a little bit about your background?
Anna West, Anna West Consulting
Absolutely. I have been in the sustainable investing space for more than a decade. My background has been in investment consulting. I worked with a large investment consultant for many years, advising retirement plans on ESG and sustainable investing. And for the last several years, I've been doing that on my own as a consultant for A West Consulting. It is a really interesting space to be in because the topics are varied. The regulatory landscape keeps you on your toes,and it's a topic I'm really excited about.
Dan Carreno, Ethos ESG
Before we do that, just to set the stage, I was recently thumbing through the Schroders 2022 US Retirement Survey, and I thought it would be interesting to chat about some of the stats. 74% of defined contribution plan participants who do not have an ESG option currently in their plan said they would increase their participation rate and their contribution rate if they had that ESG option. 87% said that they want their investments aligned with their values. 78% of respondents believe that they would get better investment results from ESG-focused funds. And then finally, the last thing that I wanted to mention here is that the Head of Defined Contribution at Schroder's, Deb Boyden, said that ESG could become a significant factor in improving participant retirement readiness. Your thoughts on this, Anna.
Anna West, Anna West Consulting
The figures are high at 75%, 85%, and almost 90%, but it is consistent with overall trends in ESG adoption. There's a lot of space here for plan sponsors to ramp up their communications around ESG. If this is what their plan participants are saying they want, then let's make sure we're messaging to the plan participants when they have an option. I think we have space for more studies here. There's this wave of demand from participants, but then you put in an option that has some sort of sustainable flavor in the plan, and assets are just not accruing there. I love this study because there's the broader trend that sustainable investing is seeping from a more institutional to the retail audience. Investors want to vote with their dollars when they're buying food, when they're buying sunscreen, when they're buying baby clothes. They want to vote with their dollars when they're investing in their retirement plan too. And this is a huge opportunity for plan sponsors to attract employees, retain employees, and do all of these things to remain competitive.
Dan Carreno, Ethos ESG
One of the other stats that I didn't mention is that 31% of respondents said that they are aware that there is an ESG option in their retirement plan. And out of those individuals, nine out of 10 said that they are actively allocating and putting money into that option. But based on your comments, it sounds like there's not that much accruing in these funds. So is it that these respondents are may be younger, and there's really just not that much in the way of contributions going into those particular funds?
Anna West, Anna West Consulting
I would also be curious to see who the population is that was surveyed. You typically see younger workers prefer ESG. Women prefer ESG. I'm throwing out research from the industry that I've seen over time. Again, how do you communicate this? Is this a competitive fund that also meets environmental goals, or is it just an ESG integration fund where maybe there is no separate, sustainable related goal? Maybe the participants have no idea that there is actually something that is using ESG from a financially material perspective in their plans. I would say there's been more interest in adding ESG funds to a defined contribution plan for populations of workers that can more easily align on certain values. I'll give you an example: healthcare workers. You might find that it's easier to get folks in the healthcare field to agree that they don't want to invest in tobacco or the obesity epidemic. I think you would find higher adoption rates at some of those more specific companies where maybe there's an organic alignment around a mission.
Brittany Damico, Ethos ESG
And in the Schroders survey, it had talked about the ESG preferences of the people who were sampled in the study. And it came up that 51% were focused on employee welfare and a living wage. So the social component actually outweighed things like climate.
Anna West, Anna West Consulting
I think that's fantastic because I personally don't want to build my retirement fund on somebody else's terrible labor experience. But I think there's that bigger picture of what is best practice in the DC space for getting assets into a fund. You have to communicate to participants about things like equity and bonds. People really have displayed inertia. You kind of set it and forget it with your retirement plan, right? So ESG is an opportunity to engage with participants. I don't know that ESG is some magic wand or the silver bullet that's going to keep your average employee engagement with the plan. There are not many ESG funds that are qualified default investment alternatives, and that's where the assets are going to flow. That's where the assets really start to accumulate over time. You could potentially engage with employees when they're hired or during a plan reset. I think to put it in that broader context of what we have learned in the DC world as best practice for increasing contribution rates, make sure there's a good balance of assets and the right allocation for risk level. Then putting the ESG piece into that sort of puzzle for the best outcomes for plan participants in retirement.
Dan Carreno, Ethos ESG
Do you feel like many advisors and consultants are still a little wary about the regulatory landscape?
Anna West, Anna West Consulting
You're touching on the elephant in the room. There are two perspectives. I think advisors and consultants are looking at things too short term. What is going on right now with this particular administration? The regulatory approach to sustainable investing and ESG in the US has seesawed back and forth depending on which administration is in office, and it's been whiplash for plan sponsors. They really want the best retirement outcomes for their employees. They don't want to breach their fiduciary duty. They don't want litigation risk. That's been a bigger theme than what ESG can do for my plan. It's all kind of been held up by this. I think over time, despite different administrations leaning one way or leaning another, the letter of the law has not changed just because it's a sustainable investment option. You still have to do your due diligence. It still has to pass rigorous tests for risk and return parameters. Then let's start looking at ESG parameters.
Brittany Damico, Ethos ESG
What would you propose then to move the needle forward over the next five to 10 years?
Anna West, Anna West Consulting
So I'm looking into my crystal ball. I think we're going to be hitting our tipping point and moving forward. I think we've made tons of progress in the data and analytics field. We're getting a lot better at managing ESG and benchmarking for reviews on a quarterly basis. I think that is a huge step forward. We've had a few early adopters who have moved forward. That's where I'd like to see more research. Once you introduce ESG into your retirement plan, then what happens? Who's engaging with the plan more? How are retirement outcomes changing? But I think it's better communications and better reporting. Then the consultant and advisor community will get more comfortable with the regulatory atmosphere, and we will have the guidance we need to pursue this in a prudent fashion.
Dan Carreno, Ethos ESG
So Anna, thank you again for sharing your insights. Were going to start wrapping up here, but before we do, we're going to play a quick round of ESG Trivia. And are you guys all set? Do you have your fingers on the buzzer? This company was removed from the S&P 500 ESG Index earlier this month.
Brittany Damico, Ethos ESG
Tesla.
Dan Carreno, Ethos ESG
Yep. So S&P provided a little bit of context on the lack of a low carbon strategy, there being evidence of racism and poor working conditions in some of the factories. I'm curious what you guys think about that.
Anna West, Anna West Consulting
It's interesting because some people think of Tesla as a darling of ESG. Electric cars. Low carbon future. But you have to look deeper than just whatever is your kneejerk reaction. I think it's great that we're not satisfied with the surface story.
Dan Carreno, Ethos ESG
ESG means very different things to different people. If you are primarily concerned with renewable energy growth and promoting sustainable transportation, then you probably love Tesla. If your primary motivation is around addressing inequality in the workplace and workers' rights, you might hate Tesla. If you look in Ethos ESG's database, there's a huge disparity in terms of how Tesla looks on things like innovation and renewable energy growth versus some more of those social aspects. I think this is where personalization and customization in ESG analysis is so important.
Brittany Damico, Ethos ESG
I think it really comes back to having the availability of data. We can make educated decisions based on our own values.
Dan Carreno, Ethos ESG
Next question. So sticking with the S&P 500 ESG Index, this very controversial vertically integrated oil company is currently included in that ESG index.
Anna West, Anna West Consulting
Exxon.
Dan Carreno, Ethos ESG
Yes. ESG is so nuanced, and it can be very confusing to people. They might understand Tesla being removed but ask why Exxon would be in there. The industry needs to do abetter job of educating people about how these indexes are constructed. Right? Many of these indexes and scores are looking at peer groups. So within the peer group of vertically integrated oil companies, then according to S&P, Exxon is not the worst player in that space. I.e., they gain inclusion into the index. ESG is nuanced. It's messy. But can we stop pretending like this is different from any other facet of the financial world? Whether it be free cashflow yield and price to book or carbon footprint and social data, its all nuanced and messy. It's good to have the data, and we're going to come to different conclusions when we look at it.
Anna West, Anna West Consulting
Thank you for saying it because it's the truth. ESG gets extra scrutiny where a lot of these other practices are just accepted. We're going to come to different conclusions when looking at the same data.
Dan Carreno, Ethos ESG
This was a fantastic conversation. I really appreciate you coming on and giving us some of your insights into the world of ESG and 401ks. Thank you for tuning in, and we will be back soon with another episode of The Ethos ESG Podcast.
This content is for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in this podcast constitutes a solicitation, recommendation, endorsement, or offer by ethos ESG or any third-party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.