Defined contribution sponsors are slow to offer ESG options in their investment lineups. The traditionally cautious industry remains worried that changes in political leadership will cause changes in ESG rules. They are also concerned about inconsistent benchmarks, the fear of poor performance and the desire to simplify — rather than expands their investment lineups.
That's the conclusion of an annual survey issued Wednesday by Pacific Investment Management Co. LLC covering 27 institutional consulting firms with assets of $6.2 trillion for 4,558 clients, primarily large plans.
"There's a lot of uncertainty on the regulatory side," said Rene Martel, Newport Beach, Calif.-based managing director and head of retirement, referencing the "flip-flopping" of the Department of Labor's ESG rules between the Trump and Biden administrations.
When PIMCO asked institutional plan consultants about the impact of the Biden administration's rule allowing for ESG considerations in DC plans, which took effect in January, all said there was no change in their approach. Fifty-two percent said they will continue to recommend ESG funds while 48% said they won't recommend them.
"Many plans don't want to be first," said Joseph Szalay, a New York-based senior vice president and specialist in PIMCO's defined contribution practice.
"Expectations remain low," said Mr. Szalay, referencing the consultants' comments in the survey about their clients' willingness to add ESG options.
When asked what percentage of clients would add an ESG option within one year, 81% of the consultants predicted 5% or fewer clients would do so. Another 15% said 5% to 10% of clients would add an ESG option, while 4% predicted more than 10% of clients would do so.
Sponsor interest picked up slightly when consultants were asked about client behavior within two years. Fifty-four percent said 5% or fewer clients would add an ESG option; 27% said 5% to 10% of clients would offer ESG investments; and 19% said more than 10% of clients would do so.
The survey said the biggest hurdles for sponsors offering ESG investments were uncertainty about changes in congressional leadership (70% of consultants); lack of consistent rating of ESG products (59%); a desire for greater lineup simplification (52%); and perception of underperformance (41%). Multiple answers were permitted among seven categories.