sustainable investing

77% of millennials say they are the most important factor


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Do you employ anyone from the millennial generation? They would be your employees age 23 to 38 who represent close to one-third of the global population.

A recent survey found that 77% of millennials said socially responsible investing (SRI) factors — environmental, social and governance (ESG) — were the most important item they consider when making an investment decision.


What are SRI, ESG and sustainable investing?


ESG factors comprise the environmental impact of a company; how it socially interacts with its employees customers and communities; and how a company is governed, managed and led.

These criteria represent the major socially responsible investing factors used to evaluate an investment option and make up the core of a socially responsible investing approach (now most often referred to as sustainable investing).


Morningstar’s sustainable investing ratings


In 2016 Morningstar, whose Morningstar Ratings for mutual funds rate past investment fund performance using a star scale, introduced sustainability ratings to gauge a mutual fund’s adherence to sustainable investing principles.

Found in the “Portfolio” section of a mutual fund’s online information quote, the Morningstar Sustainability Rating for a fund is reflected in globes. The sustainability rating scale parallels Morningstar’s star scale, with 1 the worst and 5 the best score an investment fund can receive.

In 2019 Morningstar enhanced their sustainable rating process to become more focused and comparable across industries. And in late 2020 Morningstar added a rating which shows the commitment level of a fund’s management team to sustainable investing.


Trump’s DoL issued a confusing final rule


In an effort to provide guidance to plan sponsors choosing investments for their retirement plans, the Department of Labor (DoL) issued a final rule in November of 2020 that described “pecuniary” and “non-pecuniary” factors that decision-makers should take into account when evaluating plan investment options.

Some observers feel that the latest ruling weakened the support the DoL seemed to provide to a sustainable investing approach with its Interpretive Bulletin 2015-01. Others feel that the final rule provides a solid middle ground that may motivate more retirement plan sponsors to consider sustainable investing factors.

In my experience, when there is a ruling or law that can be interpreted in significantly different ways by the community it impacts, it is generally a bad ruling or law.

The growth and acceptance of sustainable investing is undeniable. Normally, the marketplace is way ahead of government — and sustainable investing is no exception.

After the final ruling was released and following the election, several Democrats introduced bills in Congress designed to promote the acceptance and use of sustainable investing criteria in selecting investment options.

In addition, support in the Biden administration appears to be building to encourage greater reliance on sustainable investing analysis when choosing investments.


What plan sponsors should do now


1. Ask the investment adviser who works with your 401k plan to share Morningstar’s Sustainability Ratings for your funds in the performance reports presented to your investment committee. Begin considering Morningstar’s Sustainability Ratings when you review the performance of your funds and choose new investment options, while complying with the DoL’s new final ruling.

2. Update your employee education programs to discuss Morningstar’s Sustainability Ratings for your funds.

3. Communicate to your plan participants, on a regular basis, the sustainability ratings of the investment funds in your 401k lineup.

Many of your employees are interested in making life decisions that reflect their respect for the environment, social justice and sound governance.

Make your 401k plan more relevant to them, and demonstrate your company’s commitment to sustainable practices, by sharing the Morningstar Sustainability Ratings of the investment funds in your plan.

Because participants place a high level of importance on this information, plan sponsors who share it are likely to have 401k plans that are more highly valued by their employees.

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About the Author

Robert C. Lawton, AIF, CRPS is the founder and President of Lawton Retirement Plan Consultants, LLC. Mr. Lawton is an award-winning 401(k) investment adviser with over 30 years of experience. He has consulted with many Fortune 500 companies, including: Aon Hewitt, Apple, AT&T, First Interstate Bank, Florida Power & Light, General Dynamics, Houghton Mifflin Harcourt, IBM, John Deere, Mazda Motor Corporation, Northwestern Mutual, Northern Trust Company, Trek Bikes, Tribune Company, Underwriters Labs and many others. Mr. Lawton may be contacted at (414) 828-4015 or bob@lawtonrpc.com.

About Lawton Retirement Plan Consultants, LLC

Lawton Retirement Plan Consultants, LLC (LRPC) is a Milwaukee, Wisconsin-based independent, objective Registered Investment Adviser (RIA) providing investment advisory, fiduciary compliance, employee education, provider management and plan design services to employer retirement plan sponsors. The firm specializes in Socially Responsible Investment (SRI) strategies for retirement plans and is a pioneer in the field. LRPC currently has contracts in place to provide consulting services on nearly a half billion dollars in plan assets. For more information, please contact Robert C. Lawton at (414) 828-4015 or bob@lawtonrpc.com or visit the firm’s website at https://www.lawtonrpc.com. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser.

Important Disclosures

This information was developed as a general guide to educate plan sponsors and is not intended as authoritative guidance, tax, legal or investment advice. Each plan has unique requirements and you should consult your attorney or tax adviser for guidance on your specific situation. In no way does Lawton Retirement Plan Consultants, LLC assure that, by using the information provided, a plan sponsor will be in compliance with ERISA regulations. Investors should carefully consider investment objectives, risks, charges and expenses. The statements in this publication are the opinions and beliefs of the commentator expressed when the commentary was made and are not intended to represent that person’s opinions and beliefs at any other time. The commentary does not necessarily reflect the opinion of Lawton Retirement Plan Consultants, LLC and should not be construed as recommendations or investment advice. Lawton Retirement Plan Consultants, LLC offers no tax, legal or accounting advice, and any advice contained herein is not specific to any individual, entity or retirement plan, but rather general in nature and, therefore, should not be relied upon for specific investment situations. Lawton Retirement Plan Consultants, LLC is a Wisconsin Registered Investment Adviser and accepts clients outside of Wisconsin based upon applicable state registration regulations and the “de minimus” exception.