Working with investment managers on optimal asset mixes and maximizing returns long has been important for employer retirement plan sponsors and committees. But in recent years it also has become advisable for those overseeing fund managers to understand responsible investing principles — at the same time they have become more important for many plan participants.
Awareness of the basics of this investment philosophy and the ways it can affect returns is knowledge plan fiduciaries need to make investment decisions that best serve their plans’ objectives.
"Long-term fiduciaries should educate themselves on the fundamental arguments for and against [environmental, social and governance], and think critically about its meaning for the institutions they serve,” said a white paper titled "From SRI to ESG: The Changing World of Responsible Investing” the Commonfund Institute issued in September. The institute provides research and educational activities for an investment management firm that serves nonprofits, health-care organizations, educational endowments and foundations.
Terminology can sometimes get in the way of a clear understanding of this investment approach. There are three main categories of responsible investing, according to the report:
- Socially responsible investing, a portfolio construction process that attempts to avoid investments in certain stocks or industries through negative screening based on defined ethical guidelines;
- Impact investing, which involves investing in projects or companies with the express goal of effecting mission-related social or environmental change; and
- Environmental, social and governance investing, which involves integrating ESG factors into fundamental investment analysis to the extent that they are material to investment performance.
Some common concerns for plans about responsible investing include the impact of ESG investing on performance, its interaction with fiduciary duty and potential liability and its application to different asset classes that may be offered to or held for participants. The Commonfund Institute report emphasizes a need for caution when discussing responsible investment alternatives with third-party fund managers: "Preliminary studies suggest that while integrating ESG issues into fundamental investment analysis procedures can improve investment performance, it is too early to draw comprehensive conclusions.”
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