5 Reasons to incorporate ESG principles into your employee benefits
Your retirement plan participants save because they're concerned about their future—but that's not their sole concern. They also increasingly want investments that align with their values and fuel the change they want to see in the world. This is the sentiment behind the rising interest in Environmental, Social, and Governance (ESG) principles in investments, employee benefits and retirement plans.
Not so long ago, ESG products were considered niche. But investors, led by Millennials, have started to demand value from their investments beyond returns. Today, one in four invested dollars takes ESG factors into account.1 In fact, ESG assets may represent half of all professionally managed investments within the next five years.2
For plan sponsors and employers that want to remain competitive — meeting this demand is imperative. Organizations that prioritize ESG as part of their employee benefits, retirement plan investment options and broader workplace culture may stand out as employers of choice for the next generation. Consider these five ways that ESG principles can help your employees and organization.
1. ESG plans can help improve employee engagement and retention
Engaging and retaining employees is essential for business performance and healthy workplace culture. Incorporating ESG investment options into your retirement plan can help boost engagement and encourage employees to remain with your company. A recent Voya Financial survey revealed that 41% of full-time employees are more likely to stay with their employers if their retirement plan includes ESG-focused products.3 Furthermore, 42% of the survey respondents said they're more likely to stay with an employer who applies ESG principles to workplace benefits.4 The latter includes:
- Utilizing environmentally friendly plan services (environmental).
- Offering plans designed to encourage broad-based participation (social).
- Prioritizing plans that have diverse plan committees, reasonable fees, and sound investment policies (governance).
2. ESG can also boost recruitment efforts
ESG not only helps retain employees, but it's also a powerful tool for attracting top talent. Investments that consider environmental, social, and governance factors have broad appeal. For instance, 70% of 401(k) participants are interested in retirement plan options that positively impact ESG issues.5 As previously mentioned, the interest is especially growing among younger employees. Ninety-five percent of Millennial employees are interested in ESG investments—an increase of 9% from 2017.6 Generation Z will likely follow suit. To recruit the best prospective employees, employers need to provide benefits that address the candidate's values. In doing so, companies can also differentiate themselves as organizations that walk the ESG talk across all aspects of their company, from hiring to culture to benefits.
3. ESG options can help boost retirement plan participation
Offering a company-sponsored retirement plan is the first step toward encouraging your employees to save for the future. The next step? Getting as many employees to participate as possible. This is another area where ESG can make a difference. Voya's survey shows that 76% of respondents would be more likely to enroll or participate in a workplace retirement plan if it offered ESG investment options.7 Increasing the accessibility to ESG investments might encourage those who haven't enrolled to finally come aboard. But the participation perks don't stop there. Sixty-three percent of survey respondents said that they'd recommend a plan that included ESG options to other employees.8 And once they are enrolled, 60% of employees said they'd be more likely to engage with plan tools if the plan included ESG investments.9
4. ESG helps participants save even more
The ability to align retirement investments with values is a powerful motivator for many plan participants. In addition to improving plan engagement, ESG investment options can also help boost a plan's overall savings rate. In fact, 60% of Voya survey respondents said that they'd likely contribute more to a plan that valued ESG.10 With the average 401(k) savings rate at 7%, a boost from ESG offerings could help participants accelerate their savings and build up their balances that much faster.11
5. ESG can improve plan economies and yield cost savings
Taking a longer view, the impact of ESG investment options may increase plan participation not just at the employer level but across the country. More employees participating in the plan can help improve plan economies, yielding cost reductions that benefit employers and employees. The demand for ESG is also spurring an increasing number of ESG investment products. An estimated 200 new funds with ESG investment mandates will debut over the next three years.2 The groundswell of support and desire for ESG ends up boding well for the entire ecosystem, from plan sponsors to investors to employees and ultimately the planet.
Advancing ESG in retirement plans
As awareness of environmental, social, and governance issues grows, investors and employees want investment options that reflect their priorities and values. By incorporating ESG into your benefits and retirement plan, you may be in the best position to meet your participant's needs, enhance the reputation of your organization, and help build a more ethical and sustainable world in the process.
One of the latest advancements in the industry has been the introduction of DALBAR's ESG-Certified Retirement Plan.12 This yearly certification process evaluates a plan's success in the application of defined ESG principles more broadly to their retirement plan. This third-party certification ensures the plan operates according to a defined set of ESG principles, including:
- Automatic enrollment and online capabilities,
- A review of environmental factors such as paper suppression,
- Social factors from matching contributions to phone center capabilities and
- Governance measuring things like reasonable plan fees, regulation compliance and a sound investment policy
At Voya, we are proud to be the first publicly-traded company to have attained the ESG Retirement Plan Certification from DALBAR — earning five out of five stars for the retirement plan we offer our own employees.
Reach out to your Voya Relationship Manager to learn more about implementing ESG principles into your employee benefits and retirement plan solutions.
1. Deloitte, Advancing environmental, social and governance investing: A holistic approach for investment management firms, February 2020
2. Deloitte, Advancing environmental, social and governance investing: A holistic approach for investment management firms, February 2020
3. Voya Participant Experience Survey Report, January 2021
4. Voya Participant Experience Survey Report, January 2021
5. Voya Consumer Insights and Research, 2020
6. Morgan Stanley Institute for Sustainable Investing, Sustainable signals, July 2020
7. ESG Principles and Certification Report, July 2020
8. Voya Consumer Insights and Research, July 2020
9. Voya Consumer Insights and Research, July 2020
10. Voya Consumer Insights and Research, 2020
11. Are Your Retirement Savings On Track, US News and World Report, November 9, 2020
12. DALBAR, Inc. is a leading financial services market research firm that performs a variety of ratings and evaluations of practices and communications, committed to raising the standards of excellence in the financial services and healthcare industries. DALBAR is a separate entity and not a corporate affiliate of Voya Financial®. The DALBAR ESG Certification criteria fall into 3 categories: Environmental (Paper Suppression, Automatic Enrollment, Online Capabilities), Social (Premature Withdrawal Options, Matching Contributions, Phone Center Capabilities, Pre/Post Retirement Support) and Governance (Reasonable Plan Fees, Compliance with Applicable Regulations, Sound Investment Policy, Investment Review, 3rd Party Requirements). There is an annual fee for ESG Plan Certification which is uniform for all participants in the program and based on the number of participants in the plan (<1,000 participants is $500, 1,000 - 10,000 participants is $2,500, >10,000 participants is $5,000). The DALBAR ESG Certification does not reflect actual client experiences or outcomes and is not indicative of future performance. While Voya provided assistance to DALBAR in developing the ESG certification, Voya plays no role in the evaluation process. This fact has been disclosed to the extent it may be perceived as a possible conflict of interest.