Wind turbines will operate on Wednesday 3 March 2021 at the Gouda wind farm along a twilight road in Gouda, South Africa.
Dwayne Senior / Bloomberg via Getty Images
ESG growth
Investor demand for ESG funds has grown strongly over the past few years.
Investors poured $ 51.1 billion in net new money into such funds in 2020, a record and more than double the previous year, according to Morningstar.
Such funds may, for example, invest in energy companies that are not dependent on fossil fuels, or in enterprises that promote racial and gender diversity.
Money managers also offer new ESG funds to investors. According to Morningstar, the number of sustainable funds available to U.S. investors increased to nearly 400 last year – up 30% from 2019 and nearly quadrupling over a decade.
Trump rules
Yet a small percentage of retirement plans for workplace provide ESG funds.
About 3% of the 401 (k) plans have an ESG fund, according to the Planning Citizens’ Council of America. A fraction of the plan assets (a tenth of 1%) are held in such funds.
Workplace retirement plans – one of America’s largest wealth pots – represent a huge untapped growth.
The Labor Department’s criterion does not explicitly call for or prohibit ESG funds in 401 (k) plans. According to experts, this could already impede a defective survey.
The Trump era requires that employers – who make decisions about 401 (k) investments – only consider factors such as the risk and return of a fund (rather than characteristics such as social or environmental value) when making 401 (k) funds choose. Otherwise, employers could provoke more legal scrutiny.
The Labor Department also explicitly allowed employers to automatically enroll workers in an ESG-focused fund. Automatic enrollment has become an increasingly popular way to encourage workers to invest in a 401 (k).