EBRI Issue Brief

ESG Investment Options in Public DC Plans

Feb 24, 2022 10  pages


Increasing consideration of sustainable investing in retirement plans has been driven by growing recognition of climate change and evolving consumer preferences, as well as innovations in both data and investment products, heightened regulatory focus, and continued media coverage. As a first step toward providing objective research on this topic, this Issue Brief studies the adoption of one kind of sustainable investment — environmental, social, or governance (ESG)-themed investment options — among public defined contribution (DC) plan participants.

To study the prevalence and adoption of ESG investing in employer-sponsored retirement plans, we use data collected by the Public Retirement Research Lab (PRRL). In this Issue Brief, we study the ESG investment decisions of approximately 32,000 participants in public-sector defined contribution retirement plans. We show that using plan-level aggregate values to assess individual participants’ ESG investment decisions gives an incomplete picture in assessing participant preferences. While dollar allocations to ESG funds at a plan level may be small (on average, 2.7 percent in our sample), we find an overall ESG adoption rate of 31 percent and an average ESG allocation for ESG-investing participants of 14 percent.

In addition, we find differences of ESG adoption relative to gender, age, tenure, and account balance among public retirement plan participants. We show that women are statistically significantly more likely to invest in ESG funds relative to men. Older participants, longer-tenured participants, and those with higher account balances are less likely to invest than their younger and less well-off counterparts. However, despite the general decline in ESG participation rates with age, we document that variation in ESG allocations across participants tends to increase with age.

This analysis provides an opportunity to begin a discussion on how plan design and governance impact not only sustainable investing within retirement plans but potentially engagement as well. We would expect these findings to apply to the experience of private-sector workplaces when active choice is present. Areas for future research could include the relationship between ESG prevalence and overall plan participation rate as well as participant preferences considering investment characteristics and participants’ incomes.