The last year or two has been marked by rising inflation and geopolitical unrest. In times of strain, investors are often clearer in their priorities. The same timeframe has shown an increase in socially conscious investing. In fact, Environmental, Social and Governance (ESG) investments in Canada hit nearly $3 trillion for the third year in a row.

With the growth of such investments, it makes sense that plan members are beginning to ask whether ESG investments are an option for their employee retirement plans. Yet plan sponsors are finding themselves lacking the right information or are unprepared for the question. A significant number of Canadian pension plans have implemented ESG criteria, however, the quality of ESG  investments varies widely. And despite the growth, many HR teams find it difficult to articulate what or how ESG investments might be integrated to their plans.

An ESG Primer

Socially conscious investing stems from a desire to effect positive change in the world, a desire that has been around for a long time. Even the term ESG is roughly 20 years old, stemming from issues first mentioned in a UN report back in 2006. These ESG investments refer to the ways companies take care of their impact on the world. Generally, companies are judged based on three criteria, including:

1. Environment, i.e., climate change, greenhouse gas emissions, deforestation
2. Social, i.e., working conditions, local communities, employee relations
3. Governance, i.e., executive pay, corruption, board diversity

These investments operate like any other holdings in an investment fund, but they tend to include only businesses that score well on the ESG metrics. And today, there is mounting evidence that comparative returns may be achieved.

5 Tips to Make the Right Choice

Retirement plans are more wary of risk than most investment options, and ESG investments do come with risk. However, a thoughtful, data-driven approach to ESG goes a long way toward mitigating that risk.

When considering which ESG investment options to include in your retirement plan, keep these five tips in mind:

1. Remember the primary goal.

A retirement plan at its core must provide plan members with a reliable way to save money for the future. A socially responsible fund must also make money for its investors. If an investment option is not performing, it is not a good choice to add to your portfolio.

2. Do your homework.

A fund can call itself an ESG investment, but it may not reflect your definition of ESG or your criteria of what should or should not be in the fund. Plan sponsors need to adhere to the same rigorous fiduciary investment selection and monitoring process as any other potential investment.

3. Gather the data.

If your organization is a nonprofit working to combat climate change, you may assume that environmental issues are top priority for your employees. Similarly, if your organization is involved in cancer research, you may want to offer funds that exclude tobacco. Consider setting up an employee survey to help determine what is important for your members.

4. Share information broadly.

Plan participants should receive education on ESG investing — what it is, the reasons it might make sense for individual investors and the potential effect on participants’ portfolios. Business leaders and HR staff should share their ideas about ESG as well. It’s important that plan members understand what drives their investment choices.

5. You can’t make everyone happy.

Some ESG funds focus on environmental concerns, while others social issues or responsible governance. There is no single fund that will meet everyone’s needs. Your responsibility is to select the best options to meet the needs of your plan members.

ESG investing can help to align investment portfolios with personal values and broader societal priorities by considering factors beyond financial performance. It can be a win-win proposition for everyone involved.

Joe Connolly is Senior Vice President in the investment consulting group of global insurance brokerage Hub International. He has over 25 years in the investment industry and specializes in pension and investment consulting. Joe works with clients across all sectors, including post-secondary schools, multi-employer pension plans, unions, religious organizations, trusts and foundations and Indigenous clients.