Market Overview

NEPC Survey: Defined Benefit and Defined Contribution Plans Both in Beginning Stages of Incorporating ESG Investing

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Survey of Plan Sponsors Shows:

-- One-Third of Plan Sponsors Aren't Implementing ESG, but Are
Interested in It

-- Financial Factors Remain the Focus when Evaluating Potential
Investments

-- Healthcare Institutions Ahead on ESG Versus Corporate Counterparts

NEPC,
LLC, one of the industry's largest independent, full-service investment
consulting firms, today announced the results of its latest survey of
corporate defined benefit and defined contribution plan sponsors,
including healthcare organizations. This survey focused on the use of
and attitude toward environmental, social and governance (ESG) investing.

According to the survey, the majority (88%) of plan sponsors have not
incorporated ESG into their DB or DC plans. However, nearly a third
(29%) of respondents said that while they have not yet implemented ESG
into their plans, they are interested in it. Of the 12% of respondents
who have incorporated ESG, most (70%) are DC plans, and more than half
(62%) are healthcare-focused organizations.

"The survey findings solidify our belief that institutional investors
can capitalize on opportunities created by ESG as long as it makes sense
for them," said Brad
Smith
, partner in NEPC's
Corporate Practice
. "Right now, for example, a big focus for DB
plans is closing funding gaps, and while ESG may reduce risk over time,
these plan sponsors often prioritize purely financial factors versus
sustainability to drive excess returns. On the contrary, it was not
surprising to see healthcare adopting ESG at higher rate than its
corporate peers, given the nature of the industry and the fact that many
of these organizations are mission-driven or faith-based. Many
healthcare organizations have historically included a
socially-responsible investment option within their DC plan, which is
likely the reason why the survey findings show more ESG adoption by DC
plans than other plan types."

Click
here for an infographic highlighting the survey's primary findings.

The majority (94%) of the DB plans surveyed are not incorporating ESG
today. However, nearly a third (28%) may be interested in ESG in the
future. More than half (59%) state long-term risk and return factors are
their most important consideration when evaluating a potential
investment, followed by diversification (39%).

"Plan sponsors that want to consider incorporating ESG should remember
that the concept is rooted in strategy and process, not investment
products," said Kelly
Regan
, senior consultant at NEPC. "Incorporating ESG is a journey
with a variety of implementation approaches, and interested parties
should explore the best course of action to meet their specific goals
and objectives. Important factors when heading down this path is to
start with education, as well as evaluate if ESG is already part of
their current investment manager lineup. Plan sponsors may be surprised
to find that managers who were selected for financial reasons also
incorporate material ESG factors into their investment process."

The DB and DC plan respondents who are not currently interested in ESG
cited financial reasons as their rationale. More than a third (38%) of
these respondents said they only consider financial factors in their
portfolios, while a quarter (27%) said they would need more data on
ESG's impact to performance.

The majority (84%) of the plan sponsors surveyed that are not including
ESG factors today said they haven't been asked by DC plan participants
to consider incorporating ESG.

"Millennials are emerging as a generation that favors ESG relative to
others, so as they become a larger part of DC programs, it's not
unreasonable to expect more requests for ESG-related investment
options," Smith added. "However, there are many additional factors aside
from participant demand that need to be considered when contemplating
the addition of an ESG investment option to a DC plan – not the least of
which is ERISA guidance on the topic."

Click
here for an infographic highlighting how healthcare organizations are
considering ESG factors.

About the Survey

This survey was conducted online by NEPC's Corporate and Healthcare
Practices in June 2018. The survey had 69 respondents who offer 119
plans. Sixty-five percent of respondents were corporations, while 35%
were healthcare organizations. Copyright is held by NEPC.

About NEPC, LLC

NEPC® is an independent, full-service investment consulting firm,
providing asset allocation, manager search, performance evaluation, and
investment policy services. We work with discerning investors on both an
advisory and discretionary basis. We service 360 retainer relationships1,
representing assets of $1 trillion with approximately $62.2 billion in
alternative assets, from our offices in Boston, Atlanta, Charlotte,
Chicago, Detroit, Las Vegas, Portland and San Francisco. We encourage
your comments and feedback, as well as any inquiries you may have about
our firm or our consulting services. Learn more at http://www.nepc.com/focus-areas/corporate.

1statistics as of 1/1/18

Please note that all investments carry some level of risk. No investment
strategy or risk management technique can guarantee returns or eliminate
risk in any market environment. Please contact NEPC for current
information about our views of the economy and the markets. Past
performance is no guarantee of future results.

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