Sustainable investing has become more important to all types of investors in the past few years. And now, many in the retirement plan industry expect plan sponsors will include more environmental, social and governance (ESG) investments in their plans since the Department of Labor (DOL) has issued a proposed rule that is more amenable to ESG investments in retirement plans than regulations issued by the previous administration.
Much of the focus on ESG investing has been on equity investments. However, defined benefit (DB) plan sponsors following a liability-driven investing (LDI) strategy allocate heavily to fixed income, as do defined contribution (DC) participants who are nearing retirement. Other DC plan participants, even those in target-date funds (TDFs), also invest a portion of their accounts in fixed income for diversification.
In a paper, “An Asset Owner’s Guide to Fixed-Income ESG Integration,” Josh Palmer, head of fixed-income ESG research at Willis Towers Watson in London, says one-third of all U.S. assets under professional management now use sustainable investing in their strategies. He notes that fixed-income ESG investments are already on the market, and the number of such funds continues to rise.
He says plan sponsors can look at investment labels and how they are marketed to find options, then do their due diligence to make sure those choices are appropriate. They can also engage with managers that run non-labeled ESG products with the aim of improving their ESG reporting. This will enable them to see how they are integrating ESG factors, if at all.
Plan sponsors can find green bonds, corporate debt issued by sustainable companies and debt with proceeds used for sustainable projects, Palmer says. “The U.S. is one of biggest issuers of green debt,” he says. “There is green infrastructure debt and green real estate debt—for example, financing the construction of offices with a low carbon footprint.”
Palmer adds that green bonds are more common in DC plans because these investments require lower management fees and are more liquid.
“There are labels on ESG fixed-income investments as there are for ESG equity investments,” says Brendan McCarthy, head of defined contribution investment-only (DCIO) at Nuveen. “For example, one of our top-selling and top-performing ESG fixed-income investments is our Core Impact Bond Fund.”
The Willis Towers Watson paper notes that the “ESG integration framework for fixed income has historically been opaque, either overly reliant on an equity model or not specific enough on what ESG metrics are relevant for bonds.” It says the diversity of the asset class, which includes corporate bonds, sovereign bonds, securitized credit and private debt, requires plan sponsors to take a nuanced approach to ESG investing.
The paper says asset owners’ …….