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Wealth Generation

ESG & Your Retirement Plan: Bridging The Gap

An annual survey by the Plan Sponsor Council of America found just 2.9% of retirement plans in 2020 offered ESG or socially responsible fund options. Not only are there few options to choose from, but it appears most investors are deciding to not to invest in the few options they have. Only 0.1% of all money invested in 401(k) plans were held in these ESG plans.

Is demand for ESG investments really that low or is there something we're missing here? If the demand does exist, why aren't we seeing more investors incorporate ESG options into their retirement plans?

Let's dive into it.

Demand for ESG Investment Opportunities

Let’s forget about dollars or investments for a moment. There is growing universal interest in doing more for the planet. Around 80% of people are willing to make some changes to their livelihoods to reduce the effects of global warming, and that trait is being seen across the globe. More people prefer to buy and use sustainable goods than ever before, as internet searches for sustainable goods have increased 71% over the past five years.

Aside from dedicated savings plans for retirement, people are willing to put their money where their mouth is. ESG assets held by individual investors grew from $3 trillion in 2018 to $4.6 trillion in 2020, and people of all ages are investing in sustainable opportunities. A recent Workiva survey found 72% of investors between the ages of 18 and 34 years old want to know whether a company meets their social and moral beliefs before investing. Meanwhile, 64% of investors ages 36 to 55 consider ESG factors when investing. - the same survey found 61% of people aged 56 to 73 want to engage in ESG investing to encourage companies to be good citizens.

Large investment firms are also following suit. In fact, 72% of institutional investors are already invested in ESG and 77% of professional investors believe ESG factors are "an integral part of sound investing". It’s also becoming more and more common to see institutional investors implementing ESG strategies. All but one of the largest 50 asset managers signed onto the United Nations Principles for Responsible Investment, a network of institutional investors working to integrate ESG factors into investment portfolios. Two-thirds of those asset managers have already begun advocating for ESG growth by publishing research on ESG topics including climate change, human capital, and biodiversity.

Driving Competitive Returns

Many surveys have shown that investors are typically willing to sacrifice higher returns for greater social impact in their investments. While noble, this mindset is proving to be unnecessary. Over the past three years, sustainable funds returned an average of 18.2% - beating the 15.5% return of non-ESG funds during the same period. An estimated 6 out of 10 sustainable funds delivered higher returns than comparable non-sustainable funds over the past 10 years.

Think recessions slow ESG investments? Think again. A study of 26 diverse ESG ETFs and mutual funds found 19 funds outperformed the S&P 500 during the first year of the coronavirus pandemic. An additional four funds were within 2% of matching the S&P 500’s performance. Companies with higher corporate social responsibility ratings had stock returns 4%-7% higher than companies with low ratings during the 2008 recession. ESG companies in the S&P 500 have also shown a strong history of avoiding insolvency and business closures, as 90% of S&P 500 companies that filed for bankruptcy between 2005 and 2017 had an environmental and social rating of “average” or below.

Addressing The Issues

If investor demand and investment returns aren’t the issue, why isn’t ESG more prevalent in retirement plans? There’s a couple things at play. First, advisors seem to underestimate their clients' interests.. Although almost three-fourths of investors have cited interest in ESG options, the most common reason why financial advisors didn’t adopt ESG strategies in their client’s portfolios was a lack of client interest. It doesn’t help that only 12% of investors say they’ve heard about sustainable investing options from their personal financial advisor.

Second, investors don’t know how to get involved. Nearly 75% of investors reported being unaware of the different ways of investing in responsible or sustainable opportunities. Last, there’s misconceptions about accessibility. Most asset managers incorrectly believe interest in ESG investing is limited to their highest net worth clients. In reality, flexible investment opportunities through FarmTogether with varying maturity dates and fractional ownership make ESG investing more accessible than ever.

Legislative Changes On The Way

Another reason for slothy incorporation of ESG in retirement plans is the uphill legislative battle the options have faced. In 2020, the Trump administration enacted a rule requiring 401(k) plans and pension funds to make investment decisions solely on economic factors. This didn’t entirely exclude ESG options from retirement plans, but it limited the metrics allowable for deciding whether to offer a plan. Some of the most important parts of an ESG plan - such as measurements on the real world impact on the environment the investments would make - weren’t allowed to be looked at.

Based on over 8,000 comments submitted to the Department of Labor (DOL) in response to the rule, an estimated 95% of public investors were opposed to the rule. One opponent to the rule was Joe Biden, as he issued an executive order early in his presidency instructing the DOL to reverse Trump’s ruling and allow for wider suitability review of ESG plans. A recent bill submitted by Senate Democrats is further attempting to legalize ESG adoptions in retirement plan offerings.

Why ESG In Retirement Makes Sense

Investments for retirement should be flexible, safe, and successful - and sustainability investments provide investors all three. Want flexibility with many options to choose from? More new products are being offered now than ever before. 196 new products were launched during the last quarter of 2020 alone, and 256 funds were repurposed or rebranded as sustainable during 2020. In addition, ESG opportunities like the UPCO2 token are only just beginning to leverage blockchain opportunities.

ESG investments are also proving to be safer investments than other options. ESG investments provide greater returns than their peers in the same industry while also demonstrating lower volatility. Companies with higher ESG scores are also proving to be a predictor for which companies will experience less stock price volatility in future periods. There’s even evidence of a linear relationship between ESG ratings and investment performance - as a company’s ESG rating increases, their stock outperforms companies with poorer ESG scores..

Farmland As A Retirement Vehicle

Farmland investments absolutely meet every criteria of a retirement asset. Over the past 20 years, farmland investments have had an average return of 12.1%. Farmland is among the least volatile assets. Farmland assets are expected to yield future asset appreciation due to the combination of high investor demand and long-term decreasing supply. Flexible opportunities arise all the time including the recent Goldenrod Pecan Orchard offering.  Farmland and farm-related investments are even eligible for direct purchase though IRAs. There may not be many ESG investing opportunities through traditional retirement plans, but farmland is continuing to be a strong option for long-term investing and saving for retirement.

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Interested in learning more about farmland as an asset class? Click here to read our FAQ or get started by visiting ways to invest.


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Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.

Sara Spaventa
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