Driven by increasing media coverage and inquiries from employees, a growing number of employers are evaluating whether—and how—to integrate responsible investment approaches into their retirement plans.

The potential benefits of integrating environmental, social, and corporate governance (ESG) approaches into retirement plans are twofold. First, doing so can lead to stronger risk-adjusted returns for retirement plan participants’ and beneficiaries’ assets. Second, participant surveys and evidence show that employees—especially younger ones—tend to save more for retirement when offered investment options that reflect their values. Given the strain that societal aging and longer retirements are putting on pension assets in many advanced markets, strategies that increase retirement savings are critical.

Fiduciaries may wish to examine including responsible investment options within their organization’s retirement plan. However, as their respective committees review and consider recommendations to the board (and shareholders, if necessary or appropriate) on establishing or changing retirement plans, many organizations deal with questions about integrating ESG investment approaches into their retirement plans.

Recent research by Mercer Investment Consulting and the World Business Council for Sustainable Development focuses on three key areas of concerns for many organizations as they consider implementing ESG approaches into retirement plans:

  • Regulations. In most regions of the world, understanding and acceptance of ESG’s significance in long-term investment performance is generally increasing among financial regulators. In the United States, by contrast, recent policy shifts by the Department of Labor have resulted in a notable lack of clarity around whether and how plans governed by the Employee Retirement Income Security Act of 1974 (ERISA) can consider ESG factors in investments, a challenge the US Government Accountability Office (GAO) has acknowledged directly. Until such issues are addressed more definitively, US retirement plan fiduciaries may have a (potentially unwarranted) belief that their responsible retirement initiatives could face added regulatory scrutiny.
  • Responsible Investment Performance. A common perception among investors is that considering ESG factors in decision-making necessarily involves sacrificing some measure of investment performance in the pursuit of values alignment. However, studies show ESG integration approaches to investing can produce positive or, at worst, neutral outcomes. For example, studies by the US GAO have found a neutral or positive relationship between ESG considerations and financial returns compared to otherwise comparable investments. Another study by the US Department of Labor found incorporating ESG factors into investments typically produced performance comparable to, or better than, investments that did not incorporate ESG.
  • Fiduciary Duty Considerations. A fairly common element of fiduciary duty across major jurisdictions is duty of loyalty, which requires that the retirement plan is run solely in the best interests of beneficiaries and participants in the plan. A secondary, but nonetheless essential, fiduciary duty requirement is the prudent person rule. The Organisation for Economic Cooperation and Development defined the prudent person rule as requiring retirement plan fiduciaries to invest on beneficiaries’ behalves with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent person acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims.

While our staff are not lawyers, it is our belief that responsible retirement approaches are not in conflict with either of these two core fiduciary duties—rather, such approaches can enhance them. For duty of loyalty, given that ESG integration practices are generally employed by investors seeking to broaden the scope of investment analysis to include material ESG risks that may not be evident in financial statements, ESG integration is focused on improving investment outcomes for participants and can therefore be interpreted as acting solely in plan participants’ and beneficiaries’ interests. Similarly, it makes sense that a prudent person would consider as many material data points as possible, and therefore ESG integration (or the consideration of material non-financial data in making investment decisions) aligns with the prudent person rule.

Integrating responsible investment approaches into corporate retirement plans represents an exciting opportunity to align the interests of plan sponsors, participants, and beneficiaries in potentially enhancing plan participant outcomes.


Max Messervy is a senior associate and responsible investment consultant at Mercer Investment Consulting.