Environmental, social and governance investing is getting a closer look from defined contribution stakeholders as a potential way to increase participant engagement and participation, provide diversification, achieve higher long-term returns and manage risks.
Driving this closer look is a feeling among more investors, particularly younger ones, that they would like their investments to encourage companies to behave in sustainable and responsible ways, said Jon Hale, Chicago-based director of sustainable investing research at Morningstar Inc. in Chicago.
Also driving the interest in ESG today, Mr. Hale said, is the idea that "incorporating ESG criteria into the investment process is an enhancement ... that can result in better performance."
Unlike the older idea of socially responsible investing, which took a purely values-based approach, an "investment-related" theme is driving the field today, Mr. Hale said.
Alex Bernhardt, Seattle-based head of responsible investment, U.S., at Mercer, added "the advent of the chief sustainability officer and corporate focus on sustainability that's been paid over the past few years ... has percolated into benefits management and retirement plans."
Among the potential benefits of aligning a company's DC plan with its sustainability strategy is increased employee engagement and participation, Mr. Bernhardt said.