Fiduciary Duty in the 21st Century – Untangling Stakeholders for Broader Impact: ERISA Plans and ESG Incorporation

Published September 2018

In September 2018, United Nations Environment Programme Finance Initiative (UNEP FI), the Principles for Responsible Investment (PRI), and The Generation Foundation in collaboration with Godeke Consulting released Untangling Stakeholders for Broader Impact: ERISA Plans and ESG Incorporation.

This report explores the United States private sector retirement market that is regulated through the Employee Retirement Income Security Act of 1974 (ERISA) and the policy, governance and specific stakeholder factors that could drive the growth of ESG assets.

The US accounts for the largest share of pension assets globally. Increasingly, US investors are incorporating environmental, social and governance (ESG) factors into their investment decisions. However, the country lags its peers in private sector retirement assets managed with explicit regard for ESG factors.

In recent years, defined contribution DC plans have replaced defined benefitDB plans as the dominant structure for private pension plans. This shift has created an agency problem, with misaligned incentives as plan sponsors determine plan structures and investment options, but the beneficiaries bear the investment risk. While the path to driving ESG incorporation in DB plans is clearer, depending primarily on the actions of institutional players, decision making in DC plans is increasingly driven by individual beneficiaries.

Recommendations in this report focus on stakeholder engagement, rather than policy. Growth in ESG assets will depend on untangling the roles, incentives and challenges of the key ERISA plan stakeholders.

As decision making becomes less centralized, the continued growth of ESG options in ERISA plans will depend upon grassroots engagement strategies and aligning the business objectives of plan sponsors with the preferences of plan beneficiaries.

Recommendations to untangle the stakeholder chain depend upon motivating plan sponsors to embrace change. The primary leverage point is the value of aligning plans with corporate values, which is increasingly recognized as a way to engage and increase participation by and contributions of millennial plan beneficiaries.

This becomes the foundation for convincing ERISA plan sponsors that it is part of their fiduciary duty to incorporate ESG into plan investments.

 

Download and read the full ERISA Plans and ESG report here.

Learn more about Fiduciary Duty in the 21st Century here.