RETIREMENT PLAN 

INVESTING

Clearer Information on 

Consideration of 

Environmental, Social, 

and Governance 

Factors Would Be 

Helpful

Report to Congressional Requesters

May 2018

GAO-18-398

United States Government Accountability Office
United States Government Accountability Office

Highlights of GAO-18-398, a report to 

congressional requesters

May 2018

RETIREMENT PLAN INVESTING

Clearer Information on Consideration of 

Environmental, Social, and Governance Factors 

Would Be Helpful

What GAO Found

Few retirement plans in the United States incorporate environmental, 

social, and governance (ESG) factors into their investments according to 

available data. ESG factors that may affect investment returns include 

climate risk, executive compensation, and workplace safety issues 

among others. According to GAO’s interviews with seven asset 

managers, inconsistent data and regulatory uncertainty create challenges 

to incorporating ESG factors in plan investment management. However, 

those plans considering ESG factors use various strategies to do so (see 

figure). Asset managers and plan representatives said they incorporate 

ESG factors to better manage risks and improve performance.

Strategies Used to Incorporate ESG Factors into Investment Management

The retirement plans GAO reviewed in France, the Netherlands, and the 

United Kingdom (UK) reported using integration and other strategies to 

incorporate ESG factors across their investments, particularly to address 

the risk of climate change. For example, the UK’s National Employment 

Savings Trust—a defined contribution plan—used an ESG integration 

strategy in developing its default fund for participants who are 

automatically enrolled and do not select another investment. As part of 

their ESG strategies, representatives from these plans described targeted 

efforts to address climate risk related to financial performance. These

representatives also said they are subject to governmental policies that

encourage plans to address ESG risks.

In the United States, the Department of Labor’s (DOL) guidance for 

private sector plans identifies ESG factors as proper components of 

investment analysis, but does not fully address uncertainties plans may 

face. In particular, sponsors of defined contribution plans face uncertainty 

about whether they may use ESG factors in a qualifying default fund—a 

widely used option in which a fiduciary is generally not liable for 

investment losses. DOL’s mission includes assisting and educating plan 

fiduciaries. Providing clearer information about how to use ESG factors 

would help fiduciaries better understand whether and how to consider 

these potentially material risks. DOL is also considering steps to collect 

data on the use of ESG factors by retirement plans.

View GAO-18-398. For more information, 

contact Charles A. Jeszeck at (202) 512-7215 

or jeszeckc@gao.gov.

Why GAO Did This Study

ESG factors have emerged as a way 

for investors, such as retirement plans, 

to capture information on potential 

risks and opportunities that may 

otherwise not be taken into account. 

For example, climate change is

expected to have widespread impacts 

according to a key federal study and

may pose significant financial risks for 

long term investors, such as retirement 

plans that must manage risk to provide 

benefits for many years to come. A 

number of large plans in other 

countries have adopted ESG 

strategies, but less is known about

their use among U.S. plans. Given the 

emerging use of ESG factors, GAO 

was asked to examine how such 

factors are used by retirement plans in 

the United States and other countries.

GAO examined: (1) the use of ESG 

factors by U.S. retirement plans, (2) 

the use of ESG factors by selected 

retirement plans in other countries, and 

(3) DOL’s guidance on the use of ESG 

factors by private sector U.S.

retirement plans. GAO reviewed 

available private sector survey data 

and other documentation and

interviewed government officials, asset 

managers, and plan representatives in 

the United States, France, the 

Netherlands, and the United 

Kingdom—from retirement plans that 

were identified as leading examples in 

the use of ESG factors.

What GAO Recommends

GAO is making two recommendations 

to DOL, including that DOL clarify 

whether the liability protection offered 

to qualifying default investment options 

allows use of ESG factors. DOL neither 

agreed nor disagreed with GAO’s 

recommendations.
Page i GAO-18-398 Retirement Plans’ Use of ESG Factors

Letter 1

Background 4

Few U.S. Retirement Plans Incorporate ESG Factors into 

Investment Management and Those Doing So Use a Range of 

Strategies 13

Plans in Other Countries Reported Using Strategies to 

Systematically Incorporate ESG Factors and Providing Public 

Disclosures 25

DOL Has Provided Limited Information on How Retirement Plans 

May Incorporate ESG Factors 37

Conclusions 43

Recommendations for Executive Action 44

Agency Comments and Our Evaluation 44

Appendix I Objectives, Scope, and Methodology 48

Appendix II Key Features of ESG Strategies for 

Selected Retirement Plans in France, 

the Netherlands, and the United Kingdom 51

Appendix III Comments from the Department of Labor 55

Appendix IV GAO Contact and Staff Acknowledgments 57

Tables

Table 1: Examples of Environmental, Social, and Governance

Factors 5

Table 2: Strategies Used by U.S. Retirement Plans to Incorporate 

Environmental, Social, and Governance (ESG) Factors 

into Investment Management 20

Contents
Page ii GAO-18-398 Retirement Plans’ Use of ESG Factors

Figures

Figure 1: Examples of Environmental, Social, and Governance 

(ESG) Factors Identified as Being Material for Two 

Sectors 6

Figure 2: Amount of U.S. Based Assets of Institutional Investors in 

which Environmental, Social, and Governance (ESG) 

Factors, Including Climate Change, Are Incorporated, 

2014 to 2016, in 2016 Dollars 9

Figure 3: Total Number of Private Sector Defined Benefit and 

Defined Contribution Retirement Plans in the United 

States, 1975-2015 12

Figure 4: Steps Taken by Selected Retirement Plans in France, 

the Netherlands, and the UK to Incorporate 

Environmental, Social, and Governance (ESG) Factors

into Investment Decisions 30
Page iii GAO-18-398 Retirement Plans’ Use of ESG Factors

Abbreviations 

ABP Stichting Pensioenfonds ABP 

APG Algemene Pensioen Groep

DNB Dutch National Bank

DOL Department of Labor

EBSA Employee Benefits Security Administration

ERISA Employee Retirement Income Security Act of 1974

ESG environmental, social, and governance

NEST National Employment Savings Trust

OECD Organisation for Economic Co-operation and Development

PRI Principles for Responsible Investment

QDIA Qualified Default Investment Alternative 

RAFP Régime de Retraite Additionnelle de la Fonction Publique

SASB Sustainable Accounting Standards Board

TPR The Pensions Regulator

TSP Thrift Savings Plan

UK United Kingdom

US SIFThe Forum for Sustainable and Responsible Investment

This is a work of the U.S. government and is not subject to copyright protection in the 

United States. The published product may be reproduced and distributed in its entirety 

without further permission from GAO. However, because this work may contain 

copyrighted images or other material, permission from the copyright holder may be 

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Page 1 GAO-18-398 Retirement Plans’ Use of ESG Factors

441 G St. N.W.

Washington, DC 20548

May 22, 2018

The Honorable Brian Schatz

United States Senate

The Honorable Gerald Connolly

United States House of Representatives

The Honorable James Langevin

United States House of Representatives

Retirement plans have investment timeframes spanning decades and 

must manage investment risks to provide benefits for workers for many 

years to come. Climate change has increasingly been recognized as an 

important long-term investment risk by some retirement plans and other 

investors because it is expected to have widespread economic impact. 

Climate-related impacts have already cost the U.S. economy billions of 

dollars, and these costs are expected to rise in the future, according to 

the Office of Management and Budget and the U.S. Global Change 

Research Program.1 The use of environmental, social, and governance 

(ESG) factors has emerged as a way for investors, such as retirement 

plans, to capture information on climate change and other potential risks 

and opportunities that may otherwise not be taken into account in 

financial analysis, which investors use to select and manage investments. 

In addition to climate change, high-profile events involving large publiclytraded companies in the financial services and oil and gas production 

sectors have highlighted the potential negative impact on financial 

performance when ESG factors, such as cybersecurity and accident and 

safety management, are not well-managed. Whether or not retirement 

plans consider the projected impacts from climate change and other ESG 

risk factors could affect investment returns and, in turn, the financial 

health of retirees. To address such risks, a number of large retirement 

plans in Europe have adopted ESG investment strategies. Less is known 

about the extent to which ESG strategies are used by U.S. retirement 

 1 As we reported in September 2017, extreme weather and fire events cost the federal 

government over $350 billion over the preceding decade and these costs will likely rise in 

the future as the climate changes, according to the Office of Management and Budget and 

the U.S. Global Change Research Program, respectively. See GAO, Climate Change: 

Information on Potential Economic Effects Could Help Guide Federal Efforts to Reduce 

Fiscal Exposure, GAO-17-720 (Washington, D.C.: Sept. 28, 2017).

Letter
Page 2 GAO-18-398 Retirement Plans’ Use of ESG Factors

plans, particularly private sector retirement plans which are overseen, in 

part, by the Department of Labor (DOL).

You asked us to review retirement plans’ use of ESG factors in 

investment management. This report examines (1) the use of ESG factors 

by retirement plans in the United States, (2) the use of ESG factors by 

selected retirement plans in other countries, and (3) DOL’s guidance on 

the use of ESG factors by private sector retirement plans in the United 

States.

To examine retirement plans’ use of ESG factors in the United States, we 

reviewed available surveys of plans or plan service providers that 

included relevant data. We identified two reports based on surveys with 

relatively large sample sizes that only included defined contribution 

plans.2 We also reviewed other reports based on survey data that 

included both defined contribution and defined benefit plans, but which 

had substantially smaller sample sizes and/or included other types of 

investors, such as endowments and foundations.3 In addition, we 

conducted a literature review of studies that analyzed the financial 

performance of ESG strategies in the United States and were published 

in peer-reviewed academic journals or publications from 2012 through 

2017. The literature review included 11 studies, of which 9 studies 

conducted empirical analyses of investment scenarios with a collective 

total of 1,288 scenarios analyzed. (For more information on the studies 

we examined with data on the prevalence of the use of ESG factors, see 

appendix I.)

We also conducted structured interviews with asset managers for 

retirement plans (i.e., service providers that manage the investment of 

plan assets) and additional interviews with ESG service providers (such 

as firms that provide research and ratings on ESG factors) to gather 

information on the types of ESG strategies used by retirement plans, the 

goals of such strategies, and their experience with implementation. We 

contacted asset managers ranked to be among the largest 10 in 2016 

 2 A defined contribution plan, such as a 401(k), is a retirement plan in which participants 

accumulate savings in an individual account based on employee and/or employer 

contributions and the investment returns earned on the account.

3 Unlike in a defined contribution plan, in a defined benefit plan assets are managed 

collectively by the plan and a participant is typically provided a monthly benefit upon 

retirement based on a formula that takes into account factors such as an employee’s 

salary, years of service, and age at retirement.
Page 3 GAO-18-398 Retirement Plans’ Use of ESG Factors

(the most recent available data at the time of our review), according to 

Pensions & Investments, and 7 of the 10 agreed to participate in our 

structured interviews.4 In addition, we interviewed representatives of six 

public sector retirement plans and reviewed plan documentation on their 

use of ESG factors in investment management. These included the five 

largest U.S. public sector retirement plans based on the amount of assets 

under management for 2016 as reported by Pensions & Investments—

one federal plan, three state plans, and one municipal plan—and one 

smaller state plan, at the recommendation of the National Association of 

State Retirement Administrators, which established a task force to study 

ESG investing.

To examine how retirement plans in other countries incorporate ESG 

factors, we reviewed documentation and interviewed representatives from 

selected plans in France, the Netherlands, and the United Kingdom, as

well as government officials, service providers, and stakeholders. To 

select these plans, we conducted an initial review of retirement plans in 

countries highlighted for their use of ESG factors in available literature 

and consulted with experts at the Organisation for Economic Cooperation and Development and the Council of Institutional Investors. The 

selected plans included two hybrid defined benefit plans and one defined 

contribution plan that each use different ESG strategies.5

To examine DOL’s guidance for retirement plans’ use of ESG factors in 

their investment management, we reviewed the relevant DOL guidance 

and other documents published by DOL. This included the interpretive 

bulletins that document DOL’s interpretation of the relationship between 

fiduciary responsibilities, such as the duty to act solely in the interest of 

plan participants and prudently invest plan assets, and potential use of 

ESG factors. We also interviewed DOL officials to discuss interpretive 

bulletins and the status of potential changes to information collected from 

retirement plans. In addition, we included questions about the interpretive 

 4 Pensions & Investments is an industry publication for institutional investors, such as 

retirement plans. See: Pensions & Investments, “Money Managers/Managers by TaxExempt Institutional,” in P&I Research Center, accessed June 26, 2017, 

http://researchcenter.pionline.com/rankings/money-manager/specialreports/te-instl?year=

2017. The Pensions & Investments ranking was based on assets under management for 

U.S. institutional tax-exempt clients, which include retirement savings plans, endowments, 

and foundations.

5 Hybrid defined benefit plans generally allow adjustments to both contributions and 

benefits depending on the plan’s funding level. Upon retirement, the plan typically 

provides monthly income to participants.
Page 4 GAO-18-398 Retirement Plans’ Use of ESG Factors

bulletins in our structured interviews with asset managers to gather 

information on their understanding and perspectives on DOL’s guidance.

We conducted this performance audit from January 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.

Investors are reported to increasingly use environmental, social, and 

governance (ESG) factors to assess a wider range of risks and 

opportunities that may otherwise not be taken into account in financial 

analysis.6 ESG factors like climate change impacts, workplace safety, and 

executive compensation may be considered relevant to a company’s 

expected financial performance and thereby to its value to shareholders. 

For example, some investors believe that companies with good corporate 

governance practices—like well-designed incentives in how executives 

are compensated—are better managed and will perform better financially 

over time and thereby deliver better long-term value to shareholders. 

Several organizations focused on investment issues like the Sustainable 

Accounting Standards Board (SASB), the CFA Institute, and the United 

Nations-supported Principles for Responsible Investment (PRI) have 

identified examples of ESG factors, as shown in table 1.7

 6 For example, see US SIF: The Forum for Sustainable and Responsible Investment, 

Report on US Sustainable, Responsible and Impact Investing Trends (2016) and the 

United Nations supported Principles for Responsible Investment (PRI) 2017 Annual 

Report.

7 SASB is a U.S. non-profit organization with a mission of developing and disseminating 

sustainability accounting standards. SASB aims to integrate its standards into disclosures 

which must be filed by publicly-listed companies with the U.S. Securities and Exchange 

Commission. The CFA Institute is a membership organization that seeks to set 

professional standards for investment management practitioners and broadly engage 

other finance professionals through their interest and interactions with the investment 

management industry. The PRI is a non-profit organization supported by the United 

Nations that works to understand the investment implications of ESG factors and to 

support its international network of investor signatories in incorporating these factors into 

their investment and ownership decisions.

Background
Page 5 GAO-18-398 Retirement Plans’ Use of ESG Factors

Table 1: Examples of Environmental, Social, and Governance Factors 

Environmental Social Governance

Climate change impacts and greenhouse 

gas emissions

Labor standards Board composition

Energy efficiency Human rights Executive compensation

Renewable energy Employee engagement Audit committee structure

Air, water, or resource depletion or pollution Customer satisfaction Bribery and corruption

Waste management Community relations Whistleblower programs

Biodiversity impacts Data protection and privacy Lobbying

Gender and diversity Accident and safety management

Source: GAO analysis of documentation from the CFA Institute, Sustainable Accounting Standards Board, and the Principles for Responsible Investment. | GAO-18-398

While terminology is not consistently defined in the industry, for purposes 

of this report we focus on the use of ESG factors in investment 

management where these factors are considered to be material to an 

investment’s financial performance.8 This approach differs from other 

approaches that prioritize ethical or moral goals and may focus on 

divesting from certain companies or products based on such criteria. 

Some issues may be important to investors for moral or ethical reasons, 

but they may not be material to an investment’s financial performance. 

Materiality generally refers to issues that an investor may reasonably 

consider to significantly affect the financial performance of an 

investment.9

Whether a particular ESG factor is considered material by investors may 

vary by sector of the economy. To illustrate, figure 1 displays various 

 8 Various terms such as responsible investing, sustainable investing, and socially 

responsible investing can be used to describe investment strategies that may focus on 

either or both financial performance or ethical or moral goals. In this report, we focus on 

the use of ESG factors where it is considered to be material to financial performance and 

not in the context of achieving non-financial objectives. 

9 The materiality standard, as articulated by the U.S. Supreme Court for disclosure of 

information under the federal securities laws, provides that information is material if there 

is a substantial likelihood that a reasonable investor would consider it important in 

deciding how to vote or make an investment decision, or, put another way, if the 

information would alter the total mix of available information. See TSC Industries, Inc. v.

Northway, Inc., 426 U.S. 438, 449 (1976) and Basic Inc. v. Levinson, 485 U.S. 224 (1988). 

The Securities and Exchange Commission generally requires publicly-traded companies 

to disclose in periodic reports, among other things, known trends, events, and 

uncertainties that are reasonably likely to have a material effect on the company’s 

financial condition or operating performance through annual and other periodic filings.
Page 6 GAO-18-398 Retirement Plans’ Use of ESG Factors

ESG factors identified as material by SASB for the oil and gas 

exploration/production sector and the software and information 

technology services sector. For companies in the oil and gas 

exploration/production sector, poor accident and safety management 

practices pose a risk that could negatively affect financial performance.

Companies in the software and information technology services sector, 

meanwhile, face systemic risk management issues regarding the number 

of service disruptions and the total amount of customer downtime.

Figure 1: Examples of Environmental, Social, and Governance (ESG) Factors Identified as Being Material for Two Sectors

Note: These factors were determined to be material in that they are expected to significantly affect the 

financial performance of an investment.

Climate change may be a particularly important ESG factor for long-term 

investors in the United States, such as retirement plans. Indeed, some of 

the largest asset managers in the United States have made climate risk 

and related disclosures a key engagement priority—that is, an issue they 

focus on when filing or voting on shareholder resolutions and meeting 

with management of companies held in their investment portfolios. As we 

reported in 2017, national-scale studies have found that climate change 
Page 7 GAO-18-398 Retirement Plans’ Use of ESG Factors

could result in significant negative economic effects in the United States, 

and some effects will likely increase over time for most of the sectors 

analyzed.10 Similarly, a 2017 report by the Environmental Protection 

Agency (EPA) projected considerable financial losses from climate 

change impacts that vary by economic sector.11 Certain sectors, such as 

energy and transportation, may be impacted by a transition towards a 

lower-carbon economy and away from a heavy reliance on fossil fuel 

energy, driven by potential changes in consumer preferences or taxes on 

carbon emissions. For companies and their investors, such a transition 

could result in assets that become “stranded,” that is, assets that, due to 

a change in the marketplace, experience a premature devaluation 

resulting in a loss of value for investors.

12 In the energy sector, for 

example, changes due to climate-related policies or widespread adoption 

of lower-carbon technologies could limit future demand for fossil fuels and 

thereby lower the value of fossil fuel company reserves. Retirement plans 

may be vulnerable to these and other climate risks given their direct and 

indirect investments across economic sectors as well as their longer 

investment time horizons.13

Academic research on the performance of investments incorporating ESG 

factors suggests that such factors can be a valid financial consideration, 

both in the aggregate and as individual factors. The vast majority (88 

percent) of the scenarios in studies we reviewed that were published in 

peer reviewed academic journals between 2012 to 2017 reported finding 

a neutral or positive relationship between the use of ESG information in 

investment management and financial returns in comparison to otherwise 

 10 GAO-17-720. 

11 Environmental Protection Agency, Multi-Model Framework for Quantitative Sectoral 

Impacts Analysis: A Technical Report for the Fourth National Climate Assessment (May 

2017).

12 For more information on stranded assets from climate change, see: Richard Baron and 

David Fisher, Divestment and Stranded Assets in the Low-carbon Transition (Paris, 

France: Organisation for Economic Co-operation and Development, Oct. 28, 2015). 

13 For more information on how climate change may pose a risk to retirement plans, see: 

Mercer, Investing in a Time of Climate Change (2015). 

The Relationship between 

ESG Factors and 

Financial Performance
Page 8 GAO-18-398 Retirement Plans’ Use of ESG Factors

similar investments.14 When considered independently, environmental, 

social, and governance factors were each found to have either a neutral 

or positive relationship with financial performance in over 90 percent of 

the scenarios. In addition to our literature review, a 2015 meta-analysis, 

which reported aggregate evidence from more than 2,000 empirical 

studies, similarly found that 90 percent of the studies reported finding a 

neutral, positive or mixed (i.e., non-negative) relationship between 

incorporating ESG factors and financial performance.15 Further, a 2017

study commissioned by DOL also reported that while some investors may 

continue to perceive that incorporating ESG factors entails accepting 

lower investment performance, its review of academic literature suggests 

that incorporating ESG factors generally produced investment 

performances comparable to or better than non-ESG investments.16

Investors in the United States, in general (i.e., not limited to retirement 

plans), are increasingly incorporating ESG factors into their investment 

management, according to US SIF: The Forum for Sustainable and 

Responsible Investment (US SIF). For example, the use of ESG factors 

by U.S. investors continued to grow from 2014 to 2016, according to US 

 14 Nine of the 11 studies included in our literature review analyzed multiple investment 

scenarios to assess the impact of incorporating ESG factors on financial performance for 

otherwise similar investments. In total, these studies analyzed 1,288 different scenarios. 

Of these, 254 scenarios analyzed the relationship between an aggregate ESG score and 

financial performance with the number of scenarios in each study that ranged from 3 to 

87. The remaining scenarios assessed the relationship of individual factors or the 

materiality of the factors with financial performance.

15 We reviewed the studies included in the 2015 meta-analysis to ensure that none of the 

studies were duplicated in our review of the academic literature and found that due to the 

limited overlap in the timeframes of the two reviews, none of the same studies were 

included in meta-analysis and our review. For meta-analysis see Gunnar Friede, Timo 

Busch, and Alexander Bassen, “ESG and Financial Performance: Aggregated Evidence 

from More Than 2000 Empirical Studies,” Journal of Sustainable Finance & Investment, 

vol. 5 no. 4 (2015).

16 The DOL-commissioned study included research published between 2006 and 2016. 

See Ogechukwu Ezeokoli,.et al., Summit Consulting, LLC, Environmental, Social, and 

Governance (ESG) Investment Tools: A Review of the Current Field (Washington, D.C.: 

Dec. 2017).

Growth in the Use of ESG 

Factors by Investors
Page 9 GAO-18-398 Retirement Plans’ Use of ESG Factors

SIF surveys.17 Specifically, the amount of U.S.-based assets under 

management by institutional investors (including retirement plans) who 

considered ESG factors represented about $4.7 trillion in 2016—an 

increase of about 14 percent from the amount US SIF reported in 2014, 

when adjusted for inflation and expressed in 2016 dollars (see fig. 2). The 

number of investment funds, such as mutual funds and exchange traded 

funds, incorporating ESG factors in investments grew 12 percent over the 

same period. In total, the amount of assets under management by both 

institutional investors and money managers who considered ESG factors 

accounted for about one-fifth of all investments under professional 

management reported by US SIF in 2016 compared to about one-sixth in 

2014. Furthermore, the amount of assets under management by 

institutional investors in the United States that incorporate climate risks 

increased from about $600 billion to about $2.2 trillion from 2014 to 2016 

(expressed in 2016 dollars).

Figure 2: Amount of U.S. Based Assets of Institutional Investors in which 

Environmental, Social, and Governance (ESG) Factors, Including Climate Change, 

Are Incorporated, 2014 to 2016, in 2016 Dollars

Note: Percentages may not tie due to rounding.

The use of ESG factors also has grown considerably in other countries. 

According to the Global Sustainable Investment Review, by US SIF and 

other partner organizations, the amount of global assets invested using 

ESG factors increased from $18.3 trillion in 2014 to $22.9 trillion by 

 17 The US SIF data are based on a survey of asset managers and secondary research 

using fund prospectus documents, Securities and Exchange Commission filings, and other 

documentation. Through this research, US SIF identified 300 asset managers and 1,043 

community investing institutions, such as banks and credit unions, which reported 

incorporating ESG factors into their investment management for U.S. domiciled assets. 

See US SIF Foundation, Report on US Sustainable, Responsible and Impact Investing 

Trends (2016).
Page 10 GAO-18-398 Retirement Plans’ Use of ESG Factors

2016.18 Likewise, the number of PRI signatories, including retirement 

plans and other investors and asset managers, grew from 100 signatories 

in 2006 to over 1,900 by 2018, according to PRI. In becoming a signatory 

to the PRI, members commit to following six principles based on 

incorporating ESG factors into investment management. Of the roughly 

1,900 signatories, more than 1,500 are based outside of the United 

States, including more than 900 signatories based in countries in the 

European Union. According to the PRI, European Union countries have 

been directed to require workplace retirement plans to adopt an ESG 

framework to assess ESG risks, including climate change and stranded 

assets, by the end of 2018.19 Indeed, across regions, PRI reported that 

Europe represented the largest portion of assets managed by PRI 

signatories that were invested using ESG factors.

ESG factors may be used in the investment management of both defined 

benefit and defined contribution retirement plans. In a defined benefit 

plan, a participant is typically provided a monthly benefit upon retirement 

based on a formula that takes into account factors such as an employee’s 

salary, years of service, and age at retirement. Assets in a defined benefit 

plan are managed collectively by the plan on behalf of participants. In a 

defined contribution plan, such as a 401(k), participants accumulate 

retirement savings in an individual account based on employee and/or 

employer contributions, and the investment returns earned on the 

account. Rather than managing assets collectively, as in a defined benefit 

plan, participants in a defined contribution plan are provided a menu of 

investment options to select from by the plan. To increase participation, 

employers sponsoring a defined contribution plan may choose to 

automatically enroll eligible workers.20 As part of automatic enrollment, 

plan sponsors—absent a specific choice by the plan participant—choose 

an investment option in which to invest contributions on the plan 

participant’s behalf, known as a default investment option. In 2007, the 

 18 Global Sustainable Investment Alliance, 2016 Global Sustainable Investment Review

(2016).

19 This action was directed through the European Union’s revised Institutions for 

Occupational Retirement Provision Directive, according to PRI. As defined previously, 

stranded assets are those that, due to a change in the marketplace, experience a 

premature devaluation resulting in a loss of value for investors.

20 The Pension Protection Act of 2006 included provisions to encourage participation by 

allowing defined contribution plans to automatically enroll participants and place them in a 

default investment option if participants do not actively select another option.

Differences in Retirement 

Plan Type: Defined Benefit 

and Defined Contribution
Page 11 GAO-18-398 Retirement Plans’ Use of ESG Factors

Department of Labor (DOL) issued final regulations on the 

appropriateness of designating default investment options that, among 

other things, include a mix of asset classes consistent with capital 

preservation, long-term capital appreciation, or a blend of both. In 

particular, DOL specified criteria for qualified default investment 

alternatives (QDIA) that would provide legal protection for plan fiduciaries 

from liability due to investment losses that occur as a result of investing 

contributions on behalf of participants.21

As we reported in 2017, over the past 40 years, there has been a 

significant shift in the types of retirement plans offered by U.S. private 

sector employers, who have increasingly moved from offering defined 

benefit plans to offering defined contribution plans as their primary 

retirement plans.22 As shown in figure 3, defined contribution plans have 

become the dominant employer-sponsored plan type in the private sector, 

not only in number but in the extent to which these plans are primary 

retirement benefits for individual workers. In 1975, there were about 

103,300 defined benefit plans, compared with about 207,700 defined 

contribution plans, many of them supplemental plans. By 2015, the 

number of defined benefit plans had decreased to about 45,600, while the 

number of defined contribution plans had increased to more than 

648,200.23

 21 See 29 C.F.R. § 2550.404c-5.

22 GAO, The Nation’s Retirement System: A Comprehensive Re-Evaluation Is Needed to 

Better Promote Future Retirement Security, GAO-18-111SP (Washington, D.C.: Oct. 18, 

2017).

23 The number of plans is an imperfect indicator of the relative breadth of coverage of 

defined contribution plans versus defined benefit plans because some plans cover a very 

small number of participants, whereas other plans cover hundreds of thousands of 

participants. However, totaling the number of participants across all plans would also 

produce an inaccurate indicator of coverage because often the same individuals would be 

counted multiple times. Defined contribution plans hold a larger amount of assets than 

defined benefit plans—$5.3 trillion compared to $2.9 trillion as of 2015 according data 

from DOL.
Page 12 GAO-18-398 Retirement Plans’ Use of ESG Factors

Figure 3: Total Number of Private Sector Defined Benefit and Defined Contribution Retirement Plans in the United States, 

1975-2015

In the United States, private sector retirement plans’ investment decisions 

generally must comply with the provisions of the Employee Retirement 

Income Security Act of 1974 (ERISA). ERISA prescribes standards for 

fiduciaries of defined benefit and defined contribution plans based on the 

principle of a prudent person standard. Under ERISA, plan sponsors and 

other fiduciaries generally must (1) act solely in the interest of the plan 

participants and beneficiaries; and (2) invest with the care, skill, and 

diligence of a prudent person with knowledge of such matters; and (3) 

diversify plan investments to minimize the risk of large losses. Plan 

fiduciaries that breach any of these fiduciary duties can be held 

personally liable to repay any losses resulting from the breach, and 

restore any profits that have been made through use of plan assets. 

DOL’s Employee Benefits Security Administration (EBSA) is responsible 

for enforcing the fiduciary responsibility provisions of ERISA and issuing 

related regulations and guidance. As part of its mission, EBSA is also 

responsible for assisting and educating plan sponsors to help ensure the 

retirement security of workers and their families.

In the public sector, governments have established retirement plans for 

their employees at the federal, state, county, and municipal levels, as well 

as for particular categories of employees, such as teachers. These plans 

are subject to separate federal or state laws rather than ERISA and 

investment management is typically overseen by a board of trustees. 

While public sector plans are not subject to requirements applicable to 

private sector plans under ERISA, states generally have adopted 

standards similar to the ERISA prudent person standard.

Oversight of Retirement 

Plans in the United States
Page 13 GAO-18-398 Retirement Plans’ Use of ESG Factors

Few retirement plans in the United States incorporate environmental, 

social, and governance (ESG) factors into how they manage investments, 

according to available survey data and our interviews with asset 

managers. Asset managers we interviewed said retirement plans face 

several challenges to incorporating ESG factors into their investments 

including, among others, a lack of consistent and comparable data on 

relevant ESG factors and regulatory uncertainty. Those retirement plans 

incorporating ESG factors use a range of strategies including integration, 

whereby ESG factors are considered alongside other financial data as a 

core part of investment analysis. Asset managers and state and municipal 

plans using ESG strategies report enhanced risk management and other 

benefits.

Available survey data and our discussions with retirement plan asset 

managers indicate that few defined contribution plans incorporate ESG 

factors into how they manage their investments. Although there are no 

nationally representative data on how many retirement plans incorporate 

ESG factors, two large annual surveys report that few defined contribution 

retirement plans offer their participants ESG investment options—that is, 

make options available to participants in which ESG factors have been 

incorporated into investment management.24 The Plan Sponsor Council of 

America’s annual survey of about 600 defined contribution plans reports 

that in 2016 about 2 percent of defined contribution plans offered an ESG 

investment option as one of the options participants could select from.25

Additionally, a Vanguard Group report indicates that in 2016 about 8 

percent of the 1,900 defined contribution plans served by the firm made 

available to participants an option where ESG factors had been 

incorporated into investment management, but where ethical or moral 

 24 Other surveys that had smaller sample sizes and/or surveyed endowments, 

foundations, and retirement plans reported a higher utilization rate of ESG factors. For 

example, a study commissioned by DOL and issued in December 2017 mentioned a 2015 

survey from the Callan Institute, which included over 150 retirement plans, showed that 24 

percent of corporate defined contribution plans included ESG investments in their 

portfolios. For more information on the DOL-commissioned study, which also discusses 

available online information resources for investors interested in addressing ESG factors, 

see: Ezeokoli, et al., Environmental, Social, and Governance (ESG) Investment Tools.

25 The Plan Sponsor Council of America is a non-profit trade association supporting 

employer-sponsored retirement plans. Its members include large and small companies 

and non-profit organizations, which collectively have more than six million retirement plan 

participants.

Few U.S. Retirement 

Plans Incorporate 

ESG Factors into 

Investment 

Management and 

Those Doing So Use 

a Range of Strategies

Few U.S. Retirement 

Plans Are Reported to 

Incorporate ESG Factors 

into Their Investment 

Management
Page 14 GAO-18-398 Retirement Plans’ Use of ESG Factors

goals may have also been prioritized alongside financial performance—

that is, a “socially responsible investment option.”26 The Vanguard Group 

report also found that among defined contribution plans that offered a 

socially responsible fund option, few participants chose to invest in one in 

2016. Specifically, out of the total number of participants covered by 

Vanguard’s data, 18 percent were offered at least one of these options 

and 3 percent chose to invest in one. Vanguard’s report did not include 

information to explain why few participants chose to invest in a socially 

responsible option, including whether the ESG option was offered as a 

plan’s default option—which, for plans with automatic enrollment, is the 

investment option a participant would be defaulted into unless they 

affirmatively select another option. 27

Defined benefit plans were not included in these surveys, but the asset 

managers we interviewed who provided information on the topic (5 of 7 

asset managers) said that few defined benefit plans in the private sector 

were incorporating ESG factors into their investment management 

although some public sector defined benefit plans were.28 While few 

retirement plans in the United States incorporate ESG factors, each of the 

 26 Vanguard did not use the term ESG in its reporting. According to Vanguard, an 

investment option was identified as “socially responsible” by the fund provider—either 

Vanguard or an external fund provider used by plans for which Vanguard acts as recordkeeper. As an example of a fund included in this category, Vanguard cited the Vanguard 

FTSE Social Index Fund, which tracks the FTSE4Good US Select Index. According to 

documentation from FTSE, this index is designed to measure the performance of 

companies demonstrating strong ESG practices. For more information on Vanguard’s 

report, see The Vanguard Group, How America Saves 2017: A Report on Vanguard 2016 

Defined Contribution Plan Data (June 2017). The Vanguard Group (Vanguard) is a leading 

U.S.-based investment advisor and provider of mutual funds for retirement plans. 

27 As described later in this report, none of the asset managers we interviewed reported 

having defined contribution plan clients using ESG factors in their default investment 

option. To the extent that ESG factors are not included in the plan’s default investment 

option, participants would have to actively select the ESG fund.

28 The 2015 survey from the Callan Institute cited in the 2017 study commissioned by 

DOL reported that 7 percent of corporate (i.e., private sector) defined benefit plans had 

incorporated ESG factors into their investment management. A more recent 2017 survey 

from the Callan Institute reported an increase in the incorporation of ESG factors by 

defined benefit plans compared to 2015. Specifically, the 2017 survey reported that 25 

percent of corporate defined benefit plans and 18 percent of corporate defined 

contribution plans incorporated ESG factors. In addition, the 2017 survey found that 35 

percent of public sector plans incorporated ESG factors. The Callan Institute’s survey 

results were based on a relatively small sample size that included endowments and 

foundations in addition to retirement plans. Of the 105 survey respondents in 2017, 

approximately one-third were corporate plans and one-third were public plans.
Page 15 GAO-18-398 Retirement Plans’ Use of ESG Factors

four large public plans for state and municipal employees we interviewed, 

which are primarily defined benefit plans, said they are incorporating ESG 

factors into their investment management to some degree.29

In contrast to the large state and municipal defined benefit plans we 

interviewed, the federal Thrift Savings Plan (TSP), which is a defined 

contribution plan for federal workers and is the largest public retirement 

plan in the United States, does not incorporate ESG factors into its 

investment management, according to officials we interviewed.30

Specifically, TSP does not incorporate ESG factors into the plan’s default 

option or the other options participants may choose to invest in. As we 

reported in 2007, these investment options are largely outlined in TSP’s 

authorizing statute.31 However, the officials told us that an ESG 

investment option may soon be available to participants. Specifically, the 

officials said they are planning to implement a “mutual fund window” for 

TSP beginning in 2020 that will provide plan participants with a wide 

 29 In addition to representatives for the four large state and municipal plans we 

interviewed, a representative from a relatively small, largely defined benefit public sector 

retirement plan told us that the plan incorporates some ESG factors in its investment 

decisions. However, the representative told us the plan has not yet developed a formal 

ESG investment policy.

30 As prescribed by the Federal Employees’ Retirement System Act of 1986, TSP makes 

available five core funds to plan participants that include a mix of stocks and bonds. Two 

funds are invested exclusively in bonds—one fund is invested exclusively in short-term 

U.S. Treasury securities, while the other is invested in a bond index representing the U.S. 

government, mortgage-backed, corporate, and foreign government sectors of the bond 

market. Three funds are exclusively invested in stocks—one is invested in a stock index 

fund made up of a mix of stocks of 500 large to medium-sized U.S. companies, one is 

invested in a stock index fund made up of stocks of small to medium-sized U.S. 

companies, and one is invested in a stock index fund made up of stocks of primarily large 

companies in more than 20 developed nations. Since 2005, TSP participants have had the 

option to choose one of five life cycle funds, which are target-date funds invested in a mix 

of the five individual TSP funds, the exact mix determined by a targeted retirement date of 

the fund participant—the mix of stocks and bonds is adjusted (fewer stocks, more bonds) 

as the target retirement date draws closer. In a 2012 report, GAO identified challenges 

TSP faces in adopting a socially responsible investment option which seeks long-term 

competitive financial returns while realizing positive social impact by investing in 

accordance with one’s values (i.e., an approach that does not primarily focus on the use of 

ESG factors where they are considered to be material to financial performance). See 

GAO, Thrift Savings Plan: Adding a Socially Responsible Index Fund Presents 

Challenges, GAO-12-664 (Washington, D.C.: June 26, 2012).

31 GAO, Federal Retirement Thrift Investment Board: Many Responsibilities and 

Investment Policies Set by Congress, GAO-07-611 (Washington, D.C.: June 21, 2007).
Page 16 GAO-18-398 Retirement Plans’ Use of ESG Factors

range of investment options outside of TSP’s current core funds.32 The 

TSP officials told us there is no specific requirement that any of the 

investment options to be included in the window must address ESG 

factors, but they expect that such options will be available to plan 

participants.

Incorporating ESG factors into investment management presents 

challenges involving data, evidence, costs, and complexity, according to 

the seven asset managers and four representatives of state and 

municipal retirement plans we interviewed.

Five of the seven asset managers we interviewed said they had concerns 

about the quality of data available on ESG factors. Of these, three said 

that available data on ESG factors are not always consistent or 

comparable. For example, an asset manager explained that ESG data 

are not consistently disclosed or reported, whether by publicly listed 

companies or by ratings agencies, making it difficult to fully assess the 

impact of ESG factors across the range of assets in their portfolios.33

Like the asset managers, the state and municipal plan representatives we 

interviewed cited concerns about the quality and availability of data on 

ESG factors relevant to their investments. All mentioned that they had 

concerns about the availability and quality of disclosures made by 

companies regarding ESG factors. For example, one plan representative 

said that in the absence of specific reporting requirements, company 

disclosures on ESG factors may be incomplete or inaccurate because 

companies have the discretion to determine what information they 

provide.34 One state plan representative said that another challenge to 

 32 Congress passed the Federal Retirement Reform Act of 2009, which among other 

things, authorized TSP to offer a service that would enable participants to invest in mutual 

funds outside TSP if the Board determined that such a mutual fund window was in the 

best interests of participants.

33 In addition to concerns about the availability of consistent and comparable data on ESG 

factors for individual companies, Securities and Exchange Commission officials reported 

that the same challenge applies to disclosures provided by ESG funds about a fund’s 

approach for selecting investments. Officials mentioned that such information is often 

general in nature and does not allow investors to make comparisons across funds. 

34 GAO issued a report on the role of the Securities and Exchange Commission in 

overseeing climate change-related disclosures by publicly listed companies. See: GAO, 

SEC Has Taken Steps to Clarify Disclosure Requirements, GAO-18-188 (Washington, 

D.C.: Feb. 20, 2018).

Plans Face Data and 

Other Challenges in Using 

ESG Factors

Inconsistent and Incomparable 

Data
Page 17 GAO-18-398 Retirement Plans’ Use of ESG Factors

incorporating these factors in its investments is a general lack of 

standardized data on relevant ESG factors that makes it difficult to draw 

meaningful comparisons between companies or other potential 

investments. Another challenge a state plan representative noted is 

determining which ESG factors are material concerns for a particular 

company or investment. Specifically, this representative said that some 

ESG risk factors, like greenhouse gas emissions or demand for water, 

can generally be quantified for a particular company or investment. 

However, this representative explained, it is often difficult to associate a 

cost to such factors when trying to determine whether they represent 

material investment risks.

Most of the asset managers and state and municipal plan representatives 

we interviewed said that steps could be taken to address some of the 

data challenges, such as standardized reporting and disclosures. For 

example, four asset managers supported ongoing industry efforts to 

standardize reporting of material ESG factors by companies, particularly 

the work of the Sustainable Accounting Standards Board (SASB). SASB 

has developed standards for companies to disclose material information 

on ESG factors, including a “materiality map” that identifies what it has 

determined are likely material ESG issues on an industry-by-industry 

basis.35 All of the representatives of the four large state and municipal 

plans we interviewed supported SASB’s efforts as well. In addition, most 

of the state and municipal plan representatives we interviewed mentioned 

their support for the efforts of the Taskforce on Climate-related Financial 

Disclosures. This taskforce was established in 2015 by the Financial 

Stability Board to develop recommendations for standardizing voluntary 

climate-related financial disclosures that would be useful to actors in the 

financial sector, such as investors, lenders, and insurance companies.36

Although the majority of investment scenarios we analyzed showed that 

incorporating ESG factors has a positive or neutral relationship to 

financial performance, the perception that incorporating such factors 

could have a negative impact persists. Four of the seven asset managers 

we interviewed said some of their clients had concerns about the 

 35 SASB’s “materiality map” is available at https://www.sasb.org/materiality/sasbmateriality-map/.

36 The Taskforce on Climate-related Financial Disclosures issued a final report in June 

2017 with its recommendations that companies should disclose how they address climate 

risks in the context of their corporate governance, business strategy, risk management, 

and approach to measures and performance targets.

Concerns with Evidence on 

Investment Performance
Page 18 GAO-18-398 Retirement Plans’ Use of ESG Factors

sufficiency of evidence on the performance of investments in which ESG 

factors had been considered. Four asset managers also said some of 

their clients perceived that it was unclear whether incorporating ESG 

factors would have a positive effect on investment performance or would 

justify its costs. For example, one asset manager said some clients 

believed it was not clear that implementing ESG strategies would achieve 

sufficient returns when compared to established benchmarks, according 

to a survey of the firm’s clients (which include retirement plans and other 

institutional investors). However, two of the asset managers said it was a 

misperception that incorporating ESG factors into investments means 

sacrificing financial performance, which is consistent with our review of 

academic research on the subject described previously in this report.

Two asset managers expressed their own concerns rather than those of 

their clients. One of these asset managers said that using ESG strategies 

may have an adverse effect on investment performance, particularly 

negative screening strategies—that is, excluding from investment 

companies that perform poorly on certain ESG factors. The other asset 

manager said the empirical evidence on the relationship between ESG 

investment strategies and investment performance is ambiguous, which 

helps explain why some retirement plans elect not to incorporate ESG 

factors into their investment management.

Another challenge cited by asset managers is that incorporating ESG 

factors in investment management may increase costs to retirement plans 

and their participants. Specifically, four of the asset managers said taking 

the steps necessary to incorporate ESG factors into investment 

management may require additional resources and thereby increase 

costs to plans. Furthermore, one asset manager said that the costs of 

developing and implementing an ESG strategy may be cost prohibitive for 

some retirement plans—that is, not every plan can afford to develop the 

in-house expertise or hire the consultants needed to develop an ESG

approach. Similarly, one state plan representative said the cost of 

incorporating ESG factors is a challenge for smaller retirement plans, 

which may manage fewer assets and have fewer staff to devote to the 

issue.

Finally, four asset managers said that incorporating ESG factors 

increased the complexity of plans for participants, which they said is a 

concern across the retirement plan industry. Specifically, one asset 

manager explained that the industry is working to reduce what is 

sometimes seen as an overwhelming number of investment choices for 

participants in defined contribution plans. The asset manager added that, 

Possibility of Increased Costs 

and Complexity
Page 19 GAO-18-398 Retirement Plans’ Use of ESG Factors

for these plans, incorporating ESG factors often means providing an 

additional fund option. Adding fund options that incorporate ESG factors

may therefore add a new level of complexity at a time when the industry’s 

general effort has been to simplify plan offerings.

Some asset managers cited uncertainty stemming from DOL’s changing 

guidance over time as a challenge. Specifically, three of the asset 

managers we interviewed said retirement plans found it challenging to 

rely on DOL’s guidance regarding the use of ESG factors, given their view 

that the guidance had changed significantly with different administrations. 

In light of these concerns, and other concerns about how the guidance 

should be interpreted and put into practice, two of the asset managers we 

interviewed said more education for plans would be helpful—such as 

examples that plans could follow on how to incorporate ESG factors into 

their investing.

Despite the challenges associated with incorporating ESG factors into 

investment management, some retirement plans are incorporating ESG 

factors using a range of strategies, according to the asset managers and 

representatives of the state and municipal plans we interviewed. Of the 

seven asset managers we interviewed, five reported having retirement 

plan clients that use strategies to incorporate ESG factors, and 

representatives of all five state and municipal plans said they were using 

such strategies.

While some of their retirement plan clients may be using ESG strategies, 

none of the asset managers we interviewed reported having defined 

contribution plan clients using them in their default investment option.37

Instead, the asset managers said some of their defined contribution plan 

clients offer ESG funds as options that participants may select (in addition 

to the default investment option or any other fund options that the plan 

has made available). Three of the asset managers added that although 

they are not doing so currently, some of their defined contribution clients 

have expressed interest in incorporating ESG factors into their default 

options.

 37 Default investment options are used by defined contribution plans for participants who 

are automatically enrolled and do not select another investment option. Of the four asset 

managers we interviewed that were able to answer, all said they had no defined 

contribution plan clients using ESG strategies in their default investment options.

Uncertainty from Changes in 

Guidance

Those Plans That 

Incorporate ESG Factors 

Use a Range of Strategies
Page 20 GAO-18-398 Retirement Plans’ Use of ESG Factors

As shown in table 2, strategies used by retirement plans may include 

considering ESG factors along with other financial data as a core part of 

investment analysis (i.e., integration). These strategies may also be more 

explicitly defined, such as limiting investments to those that score well on 

a certain set of ESG criteria, or excluding those that perform poorly on 

such criteria (i.e., screening). These strategies could be used by either 

defined benefit or defined contribution plans. In the case of defined 

contribution plans, the plan could include investment options that use 

ESG strategies in the menu of options offered to participants. In the case 

of defined benefit plans, because funds are invested collectively at the 

plan level, such strategies can be directly applied to plan assets.

Table 2: Strategies Used by U.S. Retirement Plans to Incorporate Environmental, Social, and Governance (ESG) Factors into 

Investment Management

Strategy Definition Example

Integration Information on ESG factors is 

considered along with other 

financial data as a core part of the 

investment analysis.

Investment manager considers information on employee health and 

safety, greenhouse gas emissions, and water and wastewater 

management, among other information when assessing the 

valuation, risk, and potential growth for companies in industries 

where this is material (e.g., oil and gas exploration and production, 

mining).

Screening Positive or negative screening to 

select investments based on 

established criteria. This strategy 

may be designed to maintain 

diversification across industries.

Positive screening:

Select companies with higher or improving ESG ratingsa relative to 

their peers.

Negative screening:

Exclude companies with low ESG ratings relative to their peers, 

while not excluding a whole industry.

Exclude certain industries or products, such as tobacco or 

controversial weapons.

Engagement Information on ESG factors is used 

for activities to monitor or influence 

the management of companies in 

which a plan owns stock, such as 

meeting with corporate boards and 

filing or voting on shareholder 

resolutions.

Investment manager meets with board of directors or other 

representatives to assess how a company is managing material 

ESG factors. Examples may include the following, among others:

• board composition and executive compensation;

• policies and practices to address environmental or social 

factors that have an impact on shareholder value; and

• long-term business plans, including plans on climate change 

preparedness and sustainability.

Source: GAO analysis of documentation from CFA Institute, Department of Labor, Principles for Responsible Investment, and other sources. | GAO-18-398

a Several investment research firms have developed ESG ratings or scores to assess a company’s 

exposure to risks and opportunities for ESG factors based on available information.
Page 21 GAO-18-398 Retirement Plans’ Use of ESG Factors

Five of the seven asset managers with private sector retirement plan 

clients we interviewed reported using an integration strategy to varying 

degrees, which is a common strategy according to some sources. For 

example, PRI and CFA Institute’s surveys found that integration was the 

most commonly reported strategy among the institutional investors and 

service providers they questioned. In practice, investors can take a 

variety of actions to integrate ESG factors (see text box).

Source: Principles for Responsible Investment, A Practical Guide to ESG Integration for Equity Investing (London, England, United 

Kingdom: September 2016) I GAO-18-398.

Negative screening to exclude certain industries or products on ESG 

factors was cited as a strategy by the five asset managers we interviewed 

with retirement plan clients using ESG strategies. Among the five asset 

managers with retirement plan clients using ESG strategies, four said 

they used shareholder engagement. For example, one asset manager 

told us it engages companies in which it owns stock on corporate 

governance issues because doing so is a good form of risk management. 

Another asset manager explained that addressing issues of corporate 

governance is important to help its clients avoid holding insufficient voting 

rights for the companies in which they are shareholders. Corporate 

governance was cited as a key ESG factor by five of the asset managers 

we interviewed.

Integration Is a Common 

Strategy among Those Private 

Sector Plans Incorporating 

ESG Factors

Integration of Environmental, Social, and Governance (ESG) 

Factors in Practice

According to the United Nations-supported Principles for Responsible 

Investment (PRI), investors can take a variety of actions to integrate 

ESG factors into their investment decisions. For example, investors 

can:

• Adjust how they forecast companies’ financial performance or how 

they value companies for the expected impact of certain ESG 

factors.

• Construct quantitative models that integrate ESG factors alongside 

factors such as value, size, momentum, growth, and volatility to 

guide their investment decisions.

• Use ESG factors and scores as a weight in portfolio construction to 

reduce risks.
Page 22 GAO-18-398 Retirement Plans’ Use of ESG Factors

Two additional strategies some of the asset managers identified were 

thematic investing and economically targeted investing. Two asset 

managers mentioned thematic investing, which focuses on one or 

multiple ESG factors—as opposed to ESG factors more broadly.38 In 

addition, both mentioned economically targeted investments, or 

sometimes called impact investments, that are made with the intention to 

generate a financial return alongside measurable social or environmental 

benefits.39 These ESG strategies, as well as the more common strategies 

mentioned earlier, can be used separately or in combination, according to 

two asset managers.

Despite reported challenges of using ESG factors, each of the five state 

and municipal plan representatives we interviewed, which all primarily 

offer defined benefit plans, incorporated ESG factors into their investment 

management using a range of strategies. Specifically, all of the 

representatives said they had integrated ESG factors into their investment 

management, including climate risks (which include risks from the 

physical impacts of a changing climate on the assets they hold as well as 

transitional risks stemming from the effects of changes in the economy 

meant to mitigate or adapt to a changing climate). However, the manner 

in which they did so varied. For example, a state retirement plan 

representative said the plan has initiated a 5-year plan to systematically 

integrate ESG factors into all of its investment management and has 

developed a set of related investment beliefs. One belief described by the 

plan representative is that the plan must consider risk factors such as 

climate change that emerge slowly over long time periods but could have 

a material impact on its investment returns. This plan has begun pilot 

programs to put some of these beliefs into practice for the varying classes 

of assets it holds (e.g., equities, fixed income, and direct real estate 

holdings). With respect to the potential physical risks of climate change, 

for example, the plan has a project under way to map the impacts of 

projected sea-level rises for its real estate holdings. However, 

representatives of the plan added, there is no readily available source of 

 38 For example, thematic funds may include mutual funds focused on investing in 

renewable energy companies or a fund focused on businesses in sustainable construction 

(i.e., “green building”). According to the U.S. Green Building Council, green building is 

generally defined as the planning, design, construction, and operations of buildings while 

prioritizing, among other things, concerns for energy use, water use, indoor environmental 

quality, and a building’s effects on its surroundings.

39 An impact investment fund may be focused on issues such as affordable housing and 

community development.

State and Municipal Defined 

Benefit Plans Use a Range of 

Strategies
Page 23 GAO-18-398 Retirement Plans’ Use of ESG Factors

data to assess these risks. Representatives for another state plan said 

they had integrated ESG factors, including climate risks, by developing a 

list of risk factors to be considered by all of its asset managers before 

making any investment decision. For example, according to the list of risk 

factors, an asset manager must assess how an investment’s business 

activities and exposure to certain environmental risk factors, including 

climate change, are expected to affect long-term profitability. The 

representatives explained that the plan’s asset managers have discretion 

to assess the relevance of the risk factors on a case-by-case basis and 

that the plan has not established specific criteria that the asset managers 

are required to apply. Representatives from this plan also told us they 

were taking steps to assess the portfolio’s risks under a range of future 

climate-change scenarios.

In addition to integration, all of the state and municipal plan 

representatives we spoke with said they relied on shareholder 

engagement as an important strategy for addressing their concerns about 

ESG factors such as climate risks. For example, to address the 

transitional risks associated with climate change, a state plan 

representative told us their plan had identified the companies that are 

responsible for the majority of greenhouse gas emissions in its portfolio, 

and is engaging those companies to encourage them to take the steps 

necessary to lower their emissions—thereby reducing its exposure to the 

potentially disruptive effects of a transition to a low-carbon economy 

(such as a tax on carbon emissions).

When asked what benefits, if any, incorporating ESG factors into 

investment management offered to retirement plans, all seven asset 

managers we interviewed offered examples of benefits, including 

enhanced risk management, improved long-term outcomes, and 

increased participation.

• Enhanced risk management. Six of the asset managers said that 

incorporating ESG factors enhanced retirement plans’ risk 

management. For example, an asset manager explained that 

assessing a company on how it addresses ESG risk factors can give 

investors a better idea of the quality of the company’s management, 

thereby enhancing how the investor manages risks. Another asset 

manager said its clients viewed incorporating ESG factors as a means 

to help manage the volatility of their portfolios.

Those Using ESG 

Strategies Report 

Enhanced Risk 

Management and Other 

Benefits
Page 24 GAO-18-398 Retirement Plans’ Use of ESG Factors

• Improved long-term performance. Four of the asset managers we 

interviewed said they expect incorporating ESG factors to improve the 

long-term performance of retirement plan portfolios. For example, one 

asset manager explained that ESG factors provide investors with 

additional information that goes beyond what is assessed in traditional 

financial analysis, and this provides a more complete picture of 

potential investments, and potentially enhances long-term investment 

outcomes. In addition, two other asset managers explained that they 

believe companies that have effective ESG practices are better 

managed in the long run and therefore are better performers 

financially.

• Increased participation. Four of the asset managers said that 

incorporating ESG factors helped retirement plans meet participant 

preferences for ESG-type investment options. The asset managers 

said that incorporating ESG factors can help plans meet participant 

preferences and increase participation rates. Specifically, an asset 

manager said that having ESG investment options within a retirement 

plan may make certain demographic segments, particularly younger 

investors, more enthusiastic about investing, thereby increasing their 

participation in the retirement plan.

Each of the representatives for the four large state and municipal plans 

we interviewed cited similar benefits of incorporating ESG into their 

investment management and said that addressing ESG factors is a form 

of effective risk management. For example, one plan representative told 

us that poor ESG practices can decrease the value of a company, 

thereby harming shareholders’ investments in the company. To protect its 

investments against such poor practices, this retirement plan has 

engaged companies in which it is a shareholder and has sought reforms 

on a range of issues, including aligning executive pay with long-term 

performance and promoting sustainability in supply chains. In addition, 

representatives of each state and local plan we interviewed said that 

incorporating ESG into investment management enhances the long-term 

returns of their investment portfolios. Two plan representatives said that 

research shows that companies that score well on ESG factors tend to 

have better financial performance in the long term.
Page 25 GAO-18-398 Retirement Plans’ Use of ESG Factors

The plans we reviewed in France, the Netherlands, and the United 

Kingdom reported using strategies, such as screening and integration, to 

systematically incorporate ESG factors across their portfolios. In 

implementing their ESG strategies, plan representatives described taking 

similar steps, such as including ESG factors in the plan’s stated 

investment policy, soliciting and monitoring information on the use of ESG 

factors from external asset managers, and communicating information to 

participants. Representatives from these plans also described targeted 

efforts to address climate risk in particular, including tracking the plan’s 

exposure to carbon emissions and setting targets for reducing the amount 

of emissions attributed to their portfolio.40 In addition, plan representatives 

and government officials said the disclosure requirements the plans are 

subject to encourage plans to address ESG risks and provide 

transparency.41

Representatives from the retirement plans we reviewed in France, the 

Netherlands, and the United Kingdom reported using strategies, such as 

screening and integration, to systematically incorporate ESG factors into 

their investment management. Two of these retirement plans—in France 

and the Netherlands—are for public sector employees and one plan—in 

the United Kingdom—is for private sector employees. While the details of 

each strategy varied, plan representatives reported that information on 

ESG factors was used systematically, with each plan establishing ESG 

criteria to manage investment risk and applying these criteria across the 

multiple asset classes included in the plan’s portfolio as described below.

According to representatives from RAFP—a hybrid defined benefit plan 

that provides supplemental retirement benefits for public sector 

employees—the plan works with its external asset managers to use a 

“best-in-class” screening strategy for ESG factors.42 As described in 

RAFP’s 2016 annual report, the best-in-class strategy consists of 

 40 For additional information on each plan and their ESG strategy, see appendix II.

41 We did not conduct an independent legal analysis to verify the information provided 

about the laws, regulations, or policies of the countries selected for this objective. Instead, 

we relied on appropriate secondary sources, interviews, and other sources to support our 

work.

42 As described earlier, a hybrid defined benefit plan generally allows adjustments to both 

contributions and benefits depending on the plan’s funding level. Upon retirement, the 

plan typically provides monthly income to participants.

Plans in Other 

Countries Reported 

Using Strategies to 

Systematically 

Incorporate ESG 

Factors and Providing 

Public Disclosures

Selected Plans in Other 

Countries Used Various 

Strategies to 

Systematically Incorporate 

ESG Factors

France’s Régime de Retraite 

Additionnelle de la Fonction 

Publique (RAFP)
Page 26 GAO-18-398 Retirement Plans’ Use of ESG Factors

quantitative rules based on ESG scores to determine which assets are 

eligible for investment while not excluding any sector from investment. To 

implement this strategy, representatives from RAFP said that potential 

investments for an asset class, such as equities, are subject to a twostage screening process. As part of this process, the asset manager 

assesses a potential investment’s ESG rating for specific ESG factors, as 

well as their overall ESG score relative to similar investments. In the case 

of equities, the plan’s asset manager rates companies on key ESG 

factors specified in the plan’s investment policy, such as management of 

environmental risks, and those that have ESG scores in the bottom half of 

their sector (for at least one of the key ESG factors) are excluded. 

Second, companies are reviewed based on their overall ESG score and 

those in the lowest quartile for their sector are excluded. According to a 

plan representative, companies that are determined to have met both of 

these screens are considered to be eligible for investment and the plan’s 

external asset managers use additional factors to make investment 

decisions. Representatives from RAFP said that the application of the 

best-in-class strategy generally follows these rules, but it may vary by 

asset class.

The asset manager for ABP—a hybrid defined benefit plan for public 

school and other government employees—said the plan developed an 

“inclusion” strategy to incorporate ESG factors when selecting equities 

and bonds for investment.43 Under this strategy, ABP’s asset manager 

said that companies and issuers are analyzed based on ESG factors that 

were determined to be material. For example, according to ABP’s 2016 

annual investment report, ESG factors such as environmental pollution 

and workplace safety have been identified as material risks in the oil and 

gas sector whereas corporate ethics, such as involvement in bribery and 

corruption, money-laundering, and the credibility of a whistle-blower 

process are material risks in the financial sector.44 ABP’s asset manager 

said they use information on material ESG factors from ESG research 

firms as well as information gained through direct engagement with 

companies and internal research. ABP assesses how these material ESG 

factors are managed and categorizes the companies and issuers as 

either “leaders” or “laggards.” The plan invests only in equities or bonds of 

 43 Algemene Pensioen Groep (APG) is the asset management and administrative entity 

for Stichting Pensioenfonds ABP (ABP) and spoke on behalf of the plan for our interview. 

According to ABP’s 2016 investment report, ABP owns 92 percent of the shares in APG. 

44 Stichting Pensionenfonds ABP, Sustainable and Responsible Investment 2016 (June 

2017).

The Netherlands’ Stichting 

Pensioenfonds ABP (ABP)
Page 27 GAO-18-398 Retirement Plans’ Use of ESG Factors

companies and issuers classified as leaders and a subgroup of those 

classified as laggards, which it considers having the potential to improve. 

According to ABP’s 2016 investment report, the plan aims to have fully 

implemented their inclusion strategy for equities and bonds by 2020.45 In 

addition to equities and bonds, this report states that the inclusion 

strategy is also applied to alternative asset classes, such as real estate, 

infrastructure, and private equity.

Representatives from NEST—a defined contribution plan established by 

the national government to help private sector employers meet their 

obligation to automatically enroll eligible employees in a retirement plan—

said that the plan works with its external asset managers to use an 

integration strategy to incorporate ESG factors into investment decisions. 

Specifically, plan representatives said that ESG factors are fully 

integrated into the plan’s default investment option, which covers nearly 

all participants (99.8 percent) and includes multiple asset classes. A 

representative from NEST shared the view that incorporating ESG factors 

into the plan’s default option was important because it helps enhance 

risk-adjusted returns and it is a central part of the plan’s risk 

management. If ESG risks were not addressed in the plan’s default 

option, the representative said that such risks would not be effectively 

addressed because so few participants select an option outside of the 

default option. Representatives from NEST and their asset managers 

described examples of how NEST incorporates ESG factors within the 

default option. For example, for an equities fund that is part of the default 

option, representatives from NEST and one of their asset managers said 

that the fund is benchmarked to a broad stock market index and ESG 

factors are used to overweight (i.e., increase) the amount invested in 

some companies and underweight (i.e., reduce) the amount invested in 

others rather than screening out companies or sectors. NEST’s 

representatives also said that ESG factors are used in an emerging 

markets equity fund because risks related to ESG factors are particularly 

important in these markets. In addition, one of NEST’s asset managers 

said that the plan uses ESG factors to select and monitor investments in 

United Kingdom (UK) real estate. According to NEST’s 2017 annual 

report, the plan is in the process of incorporating ESG factors into other 

asset classes, such as commodities and infrastructure.46

 45 Stichting Pensionenfonds ABP (2017).

46 National Employment Savings Trust, Delivering Change 2017 Report: An Update on 

Our Responsible Investment Activities This Year (2017).

United Kingdom’s National 

Employment Savings Trust 

(NEST)
Page 28 GAO-18-398 Retirement Plans’ Use of ESG Factors

In conjunction with these investment strategies, each of the plans we 

reviewed in other countries reported using ESG factors in engagement 

activities, such as meeting with corporate boards and voting on 

shareholder resolutions. They also cited benefits and challenges 

associated with their efforts to incorporate ESG factors in investment 

management.

Representatives from each plan or their asset manager said they focus 

on engaging with companies identified as having ESG risks that are not 

sufficiently well-managed. Representatives from the plan we reviewed in 

France and the asset manager for the plan we reviewed in the 

Netherlands said that the plans consider this type of engagement to 

generally be a more effective strategy than divesting from such 

companies. In 2016, the Netherlands’ ABP reported engagement with 245 

companies on ESG factors, mostly related to governance. 

Representatives from the plans in France and the United Kingdom said 

their plans coordinate with external asset managers to engage with 

companies on ESG factors. To do this, representatives from both plans 

said they provide engagement guidelines, including on ESG factors, to 

their external asset managers and regularly monitor how asset managers 

are voting the plan’s shares in accordance with guidelines. 

Representatives from France’s RAFP said that coordinating engagement 

activities can be a challenge because the plan uses multiple external 

asset managers. They said that each year the plan reviews how their 

asset managers voted on the same shareholder resolutions for certain 

companies and could identify differences. Representatives from the UK’s 

NEST also described coordinating with an external manager to obtain 

information on planned votes for upcoming shareholder resolutions.

NEST considers how the asset manager intends to vote and, if the plan 

determines that ESG factors need to be addressed, the representatives 

engage with the asset manager, and in certain cases override the 

external manager’s planned vote.

Representatives of the three plans we reviewed in the other countries 

cited risk management and improved long term financial performance for 

the plan as reasons for incorporating ESG factors into their investment 

decisions. According to ABP’s asset manager, the plan includes 

information on ESG factors because doing so provides a more 

comprehensive view of the long-term risks and opportunities of an 

investment. In addition, representatives from NEST said that considering 

material ESG factors is necessary for understanding investment risk and 

the long-term sustainability of a company. A representative from RAFP 

Other Aspects of Selected 

Plans’ Use of ESG Factors

Engagement

Benefits and Challenges
Page 29 GAO-18-398 Retirement Plans’ Use of ESG Factors

also said that ESG factors help the plan maximize long-term, sustainable 

returns. Similarly, documentation from RAFP states that the use of ESG 

factors is intended to better assess medium- and long-term risks and 

identify companies that are well-positioned for long-term growth. In 

addition to these benefits, representatives from RAFP and ABP’s asset 

manager also said that addressing ESG factors helps to manage 

reputational risks for the plan with its participants. ABP’s asset manager 

said that participant engagement has shown that participants have a 

significant interest in managing ESG factors. Similarly, RAFP’s 

representative said that participants scrutinize the plan’s investment 

holdings in the event of a scandal related to ESG factors at a company 

the plan may invest in.

The plan representatives and asset managers we interviewed in the three 

countries also cited challenges in incorporating ESG factors similar to 

those cited by U.S. asset managers and plan representatives, such as 

ESG data quality. For example, one asset manager for NEST said that 

ESG data are inconsistently reported, which makes it difficult to interpret. 

Despite its limitations, this asset manager said ESG data are still useful 

and they use multiple ESG data sources for comparison in their 

investment analysis. Likewise, ABP’s asset manager said that data 

quality is the primary challenge to implementing an ESG strategy, but it is 

not insurmountable. The asset manager said that they assess available 

data to understand how it was collected and how it can be appropriately 

used. To improve data quality, ABP’s asset manager said that the plan 

supports efforts to standardize reporting on ESG factors, such as those 

by the Task Force on Climate-related Financial Disclosures and the 

Sustainable Accounting Standards Board. In addition to data quality, an 

RAFP representative said that a lack of knowledge on ESG issues and an 

over-emphasis on short-term returns is a challenge for using ESG factors, 

which are focused on long-term sustainable returns.

While the details of each plans’ ESG strategy varied, plan representatives 

described similar steps to implement their strategies. As shown in figure 

4, an initial step is for the plan to consider incorporating ESG factors into 

the plan’s investment policy. For example, representatives from NEST 

said that the plan engaged in a 2-year consultation period to develop its 

investment policy and strategy, which included considering the use of 

ESG factors. Following this consultation period, NEST published the 

plan’s Statement of Investment Principles, which states that the plan 

integrates ESG factors to address long term risks, such as climate 

change. Similar to NEST, representatives from ABP’s asset manager and 

Selected Plans Take 

Similar Steps to 

Incorporate ESG Factors
Page 30 GAO-18-398 Retirement Plans’ Use of ESG Factors

RAFP said that ESG factors were included in their plans’ investment 

policy statements. In addition, the plan representatives said they took 

steps to develop their ESG strategy and related criteria, such as the bestin-class strategy and investment rules used by RAFP.

Figure 4: Steps Taken by Selected Retirement Plans in France, the Netherlands, and 

the UK to Incorporate Environmental, Social, and Governance (ESG) Factors into 

Investment Decisions

Once a strategy is established, plan representatives described steps to 

implement it. For example, representatives from RAFP and NEST said 

they ask questions about an asset manager’s use of ESG factors and 

related processes in requests for proposals, which are used to hire asset 

managers. (See textbox.) Representatives from RAFP and NEST said 

they also monitor the use of ESG factors in their asset managers’

engagement activities, such as proxy voting, as described earlier.
Page 31 GAO-18-398 Retirement Plans’ Use of ESG Factors

Examples of Environmental, Social, and Governance (ESG)-related 

questions included in requests for proposals to hire asset 

managers

Questions:

• Detail the extent to which ESG risks and opportunities identified are 

factored into your investment process, and how this is done. 

Describe their relevance from a risk/return perspective to the 

proposed strategy.

• Provide two examples of when ESG issues have influenced your 

investment decisions.

• Detail to what extent ESG risks are monitored as part of your overall 

risk management function.

• Describe the data sources (either proprietary or external) used to 

help identify ESG risks in your portfolio. Your response should 

include how these are prioritized and addressed.

• Attach your ESG/Sustainability policy for (specified asset class) if 

available.

• Do you have a dedicated ESG research team? If yes, could you 

describe the team (size, skills/expertise, average experience)?

• Have you developed some key performance indicators to measure 

environmental (for instance, carbon footprint) and/or social (for 

instance, growth of the employment) impacts of your investments? If 

yes, describe the indicators used, the number of portfolios included 

and assets covered by this type of reporting.

Source: Documentation provided by the UK’s National Employment Savings Trust and France’s Régime de Retraite Additionnelle de la 

Fonction Publique. | GAO-18-398

After implementing their ESG strategy, an additional step for plans is to 

communicate it to participants. For example, according to ABP’s asset 

manager and plan documentation, the plan has taken multiple steps to 

communicate its ESG strategy to participants, including conducting a 

series of stakeholder meetings with plan representatives and participants, 

webinars on using ESG factors and investment returns, a participant 

survey, and annual reporting.

As an example of how ESG factors are used, representatives from each 

plan we reviewed in the other countries reported using a targeted strategy 

to address climate risk, including tracking the plan’s exposure to carbon 

Climate Risk Is Addressed 

Through Targeted 

Strategies
Page 32 GAO-18-398 Retirement Plans’ Use of ESG Factors

emissions and setting goals for reducing the amount of emissions 

attributed to their portfolio.

RAFP’s representatives said that they consider climate change to be a 

key ESG factor and described using a targeted strategy to address 

climate risks. Specifically, plan representatives said that they have 

incorporated climate risks into their investment strategy through their 

best-in-class strategy and by tracking the plan’s exposure to carbon 

emissions. According to one plan representative, retirement plans such 

as RAFP are particularly focused on climate risk because of their long 

time horizon. As a first step, plan representatives said they assessed the 

carbon footprint of their equity portfolio and found it to be lower than the 

relevant benchmark. To further reduce their portfolio’s carbon footprint, 

RAFP representatives said they have invested in low-carbon index funds. 

According to the plan’s 2016 annual report, the carbon footprint for its 

equity portfolio was 17 percent lower than the benchmark. The plan also 

tracks the carbon footprint for investments in bonds and together with 

their equity portfolio, a total of 89 percent of the plan’s assets are included 

in their carbon footprint. The report states that the carbon footprint 

measures the plan’s exposure to transition risk from climate change (i.e., 

effects of changes in the economy meant to mitigate or adapt to a 

changing climate). The plan reports that it seeks to have a lower carbon 

footprint relative to its benchmark because it means that the companies 

they are invested in will, on average, be better placed to address 

challenges related to changes in energy sources (e.g., transitioning from 

fossil fuel-intensive sources to renewable energy sources). Plan 

representatives said that they balance their goal of reducing the portfolio’s 

carbon footprint with maintaining diversification across sectors. For 

example, they said the plan remains invested in the oil and gas sector 

and seeks to invest in the companies within that sector that it considers to 

be best positioned to address long-term risks from climate change.

Regarding physical risks from climate change, an RAFP representative 

said that their plan’s investment strategy is still in development. The 

representative said that French law requires retirement plans to address 

both transitional risks and physical risks from climate change, but that this 

requirement is relatively new and the science and data on physical risk 

are still being developed. The plan is in the process of reviewing its 

portfolio to assess the plan’s exposure to these risks, including its real 

estate holdings.

France’s RAFP
Page 33 GAO-18-398 Retirement Plans’ Use of ESG Factors

ABP’s asset manager said that considering risks and opportunities related 

to climate change is integral to the plan’s investment-decision making 

process. As described in the plan’s 2016 annual investment report, the 

plan has established carbon emission reduction targets to address 

investment risks the plan faces from measures governments will or could 

take as part of their climate policies, such as taxing carbon emissions. 

Specifically, the plan has established a target for reducing the carbon 

footprint of its investment portfolio by 25 percent by 2020 compared to 

2014 levels. The asset manager said that this effort is initially focused on 

equity holdings, but will eventually be extended to all asset classes held 

by the plan. To meet this commitment, ABP’s asset manager said that 

they use data from an external provider to identify carbon budgets for 

each sector and factor this into their investment decision-making. For 

companies the plan has invested in, this information is used in conducting 

engagement to encourage efforts to reduce a company’s carbon footprint. 

By the end of 2016, the plan reported that it had reduced carbon 

emissions by 16 percent compared to 2014. In addition to the emission 

reduction targets, the 2016 annual investment report notes that the plan 

increased investments in renewable energy and green bonds.

Representatives from NEST and the plan’s asset managers also 

described targeted strategies to address climate related risks and 

opportunities. In particular, representatives from NEST cited the plan’s 

“Climate Aware” fund which is included in the default investment option. 

According to the representatives, the purpose of this fund is to increase 

the default option’s exposure to companies that are positioned to do well 

in a low-carbon economy. Plan representatives said that this fund is 

designed to deliver investment returns that are similar to a broad stock 

market index, while adjusting the weight of investments in companies 

based on its rating for ESG factors related to climate risks. For example, 

some of these factors include assessing whether companies are on track 

to meet established emission reduction targets, the amount of a 

company’s fossil fuel reserves, and whether they use or produce energy 

from renewable sources. According to plan representatives, the fund will 

increase the amount invested in companies that rate favorably on such 

criteria while reducing the amount invested—rather than divesting 

completely—in companies that rate poorly. Representatives from the 

asset manager for this fund said that it considers the current carbon 

footprint of companies and their estimated trajectory for future emissions, 

as well as evidence that the company’s management is committed to 

emission reductions. Plan representatives said they will monitor the fund’s 

performance and consider adjusting the weighting and other criteria used 

within the fund depending on performance.

The Netherlands’ ABP

United Kingdom’s NEST
Page 34 GAO-18-398 Retirement Plans’ Use of ESG Factors

In addition to the Climate Aware fund, representatives from one of 

NEST’s asset managers said that climate risk is included in the ESG risk 

assessment for the plan’s real estate fund, which is part of the default 

investment option. According to the asset manager, in managing assets 

on behalf of NEST, they conduct an environmental risk assessment for 

potential investments that includes an assessment of physical risks of 

climate change, particularly flood mapping. Documentation from the asset 

manager also shows that the asset manager has established a goal of 

reducing energy and water consumption and carbon emissions by 20 

percent for UK property holdings compared to 2010 levels. Going forward, 

representatives from NEST also said that they are planning to incorporate 

more ESG data on climate risk, particularly data on rising sea levels, into 

their investment decisions.

According to retirement plan representatives and government officials, 

plans we reviewed in France, the Netherlands, and the United Kingdom 

are subject to disclosure rules and requirements on their use of ESG 

factors as described below.47 Plan representatives and agency officials 

noted that these disclosures may encourage plans to address ESG risks.

• France’s RAFP. RAFP representatives said that the plan provides 

disclosures, which they said are required by law, on its use of ESG 

factors, including climate risks. An official from the French Ministry for 

the Economy and Finance—the agency that oversees disclosures of 

retirement plans’ use of ESG factors—said that institutional investors, 

such as retirement plans, with more than €500 million in assets are 

required to disclose how ESG factors are considered in their 

investment decisions or explain why they are unable to do so. As part 

of this requirement, the official said that plans are required to disclose 

their exposure to climate risks. The government official said that, prior 

to current requirements that were established in 2015, asset 

managers often had been reporting on their use of ESG factors in a 

generic way that did not indicate serious consideration of such risks. 

In comparison to earlier disclosure requirements, the official said that 

current requirements ask for more detailed information, particularly for 

environmental factors such as climate risk.

• The Netherlands’ ABP. ABP’s asset manager said that the plan is 

required to disclose whether or not ESG factors are taken into 

 47 For more information on each plan’s disclosures of their investment policy and use of 

ESG factors, see appendix II.

Plan Representatives and 

Agency Officials in 

Selected Countries 

Reported That 

Governmental Policies 

May Encourage Plans to 

Address ESG Risks
Page 35 GAO-18-398 Retirement Plans’ Use of ESG Factors

account in its investment decisions. According to an official from the 

Dutch National Bank (DNB), DNB oversees retirement plans in the 

Netherlands and plans have been required since 2015 to disclose in 

their annual report how they incorporate ESG factors. The official said 

that, under the current rule, plans are not required to incorporate ESG 

factors, but the plan must explicitly disclose if it does not do so in its 

written investment policy. The official said that DNB conducted a 

survey in 2015 and found that the vast majority of retirement plans 

had at least some mention of a policy related to ESG factors in their 

annual report. The official also said that, starting in 2019, new rules 

are expected to go into effect that require retirement plans to 

incorporate ESG factors and describe their approach to such risks in 

their investment policy. As part of this new requirement, the official 

said that plans will be expected to conduct some stress testing of their 

portfolios for climate-related risks.
Page 36 GAO-18-398 Retirement Plans’ Use of ESG Factors

• The UK’s NEST. NEST representatives said that the plan’s use of 

ESG factors is disclosed in its investment policy—known as the 

Statement of Investment Principles. According to officials from The 

Pensions Regulator (TPR)—the agency which regulates retirement 

plans in the UK—and TPR’s Code of Practice, plans are required to 

develop a Statement of Investment Principles and to disclose it to 

members upon request.48 Additional TPR guidance states that plan 

trustees should take into account ESG factors if they are determined 

to be financially material and disclose the extent to which such factors 

are used in the selection, retention, and realization of investments in 

the plan’s investment policy.49 TPR officials said their agency has 

issued guidance for defined benefit and defined contribution plans, 

which has additional information about how plans may incorporate 

ESG factors that are determined to be financially material. Guidance 

for both types of plans provides examples of ESG factors that may be 

considered, such as climate change and unsound corporate 

governance. In particular, the guidance for defined benefit plans 

provides examples of language a plan may use to disclose how it 

considers climate risk (see text box).

Source: The Pensions Regulator, Investment Guidance for Defined Benefit Pension Schemes (March 2017) I GAO-18-398.

Plan representatives, government officials, and stakeholders we spoke 

with cited several goals of the disclosure requirements, including 

encouraging plans to address ESG risks and providing transparency. For 

example, an official from the French Ministry of the Economy and Finance 

said that the government introduced disclosure requirements in order to 

encourage plans to consider ESG factors because they consider ESG 

risks to be material and significant. The official said that requirements for 

plans and other investors to consider ESG risks and disclose how they do 

so has caused plans to be more systematic in assessing ESG factors 

across asset classes. Similarly ABP’s asset manager said that the 

disclosure requirement helps ensure ESG risks are managed by plans. 

Representatives from a stakeholder organization in the UK said that 

 48 The Pensions Regulator, Code of Practice No. 13: Governance and Administration of 

Occupational Trust-Based Schemes Providing Money Purchase Benefits (July 2016).

49 The Pensions Regulator, Guide to Investment Governance: To Be Read Alongside Our 

DC Code of Practice No. 13 (July 2016).

The United Kingdom’s Pensions Regulator’s Guidance on 

Climate Risk

The Pensions Regulator’s guidance for defined benefit retirement 

plans to develop and disclose its investment policy provides examples 

of how a plan may address climate risk. Specifically, the guidance 

states that plan trustees may establish the following investment 

principle:

“As long-term investors, we believe climate risk has the potential to 

significantly affect the value of our investments.” 

The guidance also provides the following examples of how plans may 

disclose this investment belief in the plan’s investment policy:

• “We expect fund managers to have integrated climate risk into 

their risk analysis and investment process.”

• “We will try to ensure that we manage all new and existing 

investment arrangements in a way that takes account of climate 

risk.”

• “In monitoring the performance of our fund managers, we will also 

regularly consider how they are performing with reference to 

climate risk issues.”
Page 37 GAO-18-398 Retirement Plans’ Use of ESG Factors

without disclosure requirements, it is easier for plans to disregard ESG 

risks. In addition to encouraging plans to address ESG risks, 

representatives from a French association of asset managers said that 

the disclosure requirements are intended to provide transparency about 

different strategies for addressing ESG risks, such as climate change, 

rather than to endorse a particular strategy. Similarly, the official from the 

French Ministry of the Economy and Finance said that strategies to 

address climate risks are still evolving and the disclosure requirements 

could foster information-sharing on methods to address such risks.

In the United States, DOL’s guidance explains that private sector 

retirement plans may incorporate material ESG factors in investment 

analysis and that ESG factors are appropriate issues for shareholder 

engagement; however, it does not address some of the issues plans face 

when considering use of ESG factors. In particular, DOL has not 

addressed the issue of whether a defined contribution plan may 

incorporate ESG factors in the plan’s default option and qualify for certain 

legal protections. DOL is also considering changes which, if adopted, 

could result in the collection and public disclosure of some information on 

the use of ESG factors by private sector retirement plans, which are 

subject to provisions of the Employee Retirement Income Security Act of 

1974 (ERISA).

DOL’s 2015 and 2016 interpretive bulletins—which provide guidance to 

U.S. private sector retirement plans—identify material ESG factors as 

proper components of a retirement plan’s investment analysis and 

appropriate issues for shareholder engagement activities.50 The bulletins 

state that incorporating ESG factors can be consistent with ERISA 

fiduciary responsibilities and emphasizes that fiduciaries are responsible 

 50 DOL’s 2015 interpretive bulletin relating to the fiduciary standard under ERISA in 

considering economically targeted investments sets forth supplemental views of DOL 

concerning the interpretation of sections 403 and 404 of Part 4 of Title 1 of ERISA as 

applied to employee benefit plan investments in economically targeted investments. 

According to its preamble, the guidance in the interpretive bulletin also applies to ESG 

investing.

DOL’s 2016 interpretive bulletin relating to the exercise of shareholder rights and written 

statements of investment policy, including proxy voting policies or guidelines sets forth 

DOL’s interpretation of sections 402, 403, and 404 of Part 4 of Title 1 of ERISA with 

respect to voting of proxies, statements of investment policy, and exercise of other legal 

rights of a shareholder. 

DOL Has Provided 

Limited Information 

on How Retirement 

Plans May 

Incorporate ESG 

Factors

DOL’s Guidance Explains 

That Retirement Plans 

May Incorporate ESG 

Factors in Investment 

Management
Page 38 GAO-18-398 Retirement Plans’ Use of ESG Factors

for considering factors that potentially influence risk and return, which can 

include material ESG factors.51 The bulletins state DOL’s stance that 

fiduciaries may not accept lower expected returns in pursuit of collateral 

benefits, which are benefits outside of investment returns. The preamble 

to the 2015 bulletin further explains that ESG factors can have a direct 

relationship to the economic value of a plan and in such a case the ESG 

factors are not collateral but are considered as part of the primary 

analysis of an investment, and the use of material ESG factors should not 

inherently be subject to special scrutiny. The 2016 bulletin goes on to 

clarify that ESG factors can be appropriate topics for proxy voting policies 

and engagement with corporations. Both the preamble to the 2015 

bulletin and the 2016 bulletin refer to the use of ESG factors by retirement 

plans generally and do not distinguish between how such factors may be 

used by defined benefit and defined contribution plans.52

The 2015 and 2016 bulletins updated and replaced two interpretive 

bulletins issued in 2008 that encompassed the use of ESG factors, but 

did not address the potential for a direct relationship to the economic 

value of a plan’s investments. Similar to the 2015 and 2016 bulletins, the 

2008 bulletins stated that fiduciaries may not subordinate the economic 

interest of plan participants in pursuit of collateral economic or social 

benefits, which are understood as inclusive of ESG.53 However, they did 

not discuss the potential for ESG factors to affect the risk or return of an 

investment. Unlike the updated bulletins, the first interpretive bulletin from 

2008 also stated that using such strategies should be rare, and that to 

demonstrate compliance with ERISA, fiduciaries would need a 

documented economic analysis to provide evidence that using ESG 

factors was not expected to harm returns.

 51 ERISA requires fiduciaries to act prudently and solely in the interest of plan participants 

and beneficiaries. See 29 U.S.C. § 1104(a). 

52 After our audit work was completed and while our report was being reviewed by DOL, it 

issued new guidance on the use of ESG factors in Field Assistance Bulletin No. 2018-01. 

For a discussion of the field assistance bulletin and our response to DOL’s comments, see 

the Agency Comments and Our Evaluation section of this report.

53 Likewise, DOL issued an Advisory Opinion in 1998 regarding the inclusion of a 

“socially-responsible fund” in a defined contribution plan. In the opinion, DOL stated that 

fiduciary standards do not preclude the consideration and selection of an investment 

option with collateral benefits if the fiduciary has determined that offering such collateral 

benefits is expected to provide an investment return commensurate to alternative 

investments having similar risks. See DOL Advisory Opinion 1998-04A, May 28, 1998.
Page 39 GAO-18-398 Retirement Plans’ Use of ESG Factors

When issuing the updated bulletins in 2015 and 2016, DOL stated that 

the 2008 versions may have unduly discouraged the use of ESG factors 

and resulted in a chilling effect on the uptake of strategies to incorporate 

ESG factors. This concern was also raised by several industry 

stakeholders we interviewed. The preamble to the 2016 bulletin also 

identified concerns that the 2008 bulletins were not aligned with important 

domestic and international trends in investment management. Among 

these trends DOL specifically cited the growing number of institutional 

investors engaging companies on ESG issues and the growing 

recognition that these issues may have an impact on the long-term value 

of an investment. Still, DOL officials stated that since issuing the 2015 

and 2016 bulletins they have not received questions from fiduciaries. 

Several of the asset managers we interviewed said that the bulletins were 

helpful as they clarified that ESG factors can be an appropriate 

consideration for retirement plans. However, given that there have been 

several changes to the bulletins, some asset managers said that there is 

uncertainty about the potential for further changes that could impact their 

ability to consider ESG factors.

While DOL has issued broad guidance that explains that plans may

consider using ESG factors in their investment management, the agency 

has not specifically addressed whether protection from potential litigation 

for defined contribution plans extends to default investment options that 

incorporate ESG factors. Fiduciaries for defined contribution plans face 

uncertainty because DOL’s ESG guidance generally recognizes that ESG 

factors may be appropriate considerations without distinction by plan or 

fund type; yet it is unclear whether using such factors would be 

permissible in Qualified Default Investment Alternatives (QDIA), which are 

widely used by defined contribution plans to automatically place 

participants in a default investment option if participants do not actively 

select another option. In addition, DOL has not provided information to 

assist fiduciaries for defined benefit or defined contribution plans in 

investment management involving ESG factors which may help address 

uncertainty and the need for education on ESG issues cited by some 

asset managers we interviewed.

DOL’s QDIA regulations identify types of investment options in which 

defined contribution plan sponsors can automatically enroll participants in 

a defined contribution plan and receive “safe harbor” protection from 

potential litigation. Specifically, in 2007, DOL issued final regulations 

outlining conditions under which a plan fiduciary would generally not be 

liable for any investment losses that occur as a result of investing 

DOL’s Guidance Does Not 

Address Uncertainties 

Plans Face in 

Incorporating ESG Factors

Qualified Default Investment 

Alternatives (QDIA) and 

Additional Information
Page 40 GAO-18-398 Retirement Plans’ Use of ESG Factors

contributions on behalf of participants and beneficiaries.54 Examples of 

these types of investment options include target date funds, balanced 

funds, and managed accounts.55 Industry data from Vanguard shows that 

many defined contribution plans use a QDIA. Specifically, Vanguard 

reports that 80 percent of plans designated a QDIA at the end of 2016 

and over 90 percent of designated QDIAs were target date funds.56

Although many defined contribution plans designate a QDIA, DOL’s QDIA 

regulations and ESG interpretive bulletins do not specifically address the 

potential use of ESG factors in a QDIA and agency officials said it is 

unclear whether using such factors would comply with regulations. As 

previously described, most asset managers we interviewed identified 

ESG factors as a valid risk mitigation strategy and some asset managers 

said they have had discussions with clients who have expressed interest 

in incorporating ESG factors within a default option. More broadly, all of 

the asset managers and state and municipal plan representatives we 

interviewed said that incorporating ESG factors in investment 

management offered benefits to plan participants. However, DOL officials 

told us that they have not considered whether the use of ESG factors in a 

default option’s investment strategy impacts its ability to comply with 

existing QDIA regulations. They added that fiduciaries may be hesitant to 

adopt such a product as a default option absent specific guidance due to 

potential litigation risk. As we reported in 2015, plan sponsors and 

stakeholders have previously stated concerns that any change to a QDIA 

could expose sponsors to additional fiduciary liability.57 Moreover, 

 54 This fiduciary relief is also referred to as “safe harbor” protection. See Default 

Investment Alternatives Under Participant Directed Individual Account Plans, 72 Fed. Reg. 

60,452 (Oct. 24, 2007) (codified at 29 C.F.R. § 2550.404c-5). 

55 We found that at least one target date fund offered by an asset manager that 

incorporates ESG factors. A target date fund or life cycle fund is an investment product or 

model portfolio that is designed to become more conservative as the participant’s age 

increases, a balanced fund is an investment product or model portfolio that is designed 

with a mix of equity and fixed income exposures appropriate for the participants of the 

plan as a whole, and a managed account is an investment management service that uses 

investment alternatives available in the plan and is designed to become more 

conservative as the participant’s age increases. 

56 See Vanguard, How America Saves 2017: Vanguard 2016 Defined Contribution Plan 

Data (Valley Forge, Pa.: June 2017). This report is based on non-generalizable data from 

the 1,900 defined contribution plans for which Vanguard serves as record keeper. 

57 For example, as described in this report, one plan sponsor stated that fear of potential 

litigation kept it from changing a QDIA even though participants would be better served by 

the change. GAO, 401(k) Plans: Clearer Regulations Could Help Plan Sponsors Choose 

Investments for Participants, GAO-15-578 (Washington, D.C.: Aug. 25, 2015).
Page 41 GAO-18-398 Retirement Plans’ Use of ESG Factors

because the 2015 and 2016 guidance refers to plan investments 

generally, it may not be clear to fiduciaries that DOL could view the use of 

ESG factors in a QDIA differently than in other investment options.

The mission of DOL’s Employee Benefits Security Administration includes 

educating fiduciaries to ensure they are equipped to fulfill their duty to act 

prudently and in the best interest of participants, which includes 

understanding the potential risks and returns of an investment. As 

described in Standards for Internal Control in the Federal Government, 

the agency should externally communicate the necessary quality 

information to achieve the entity’s objectives.58 Without clarification, 

fiduciaries for defined contribution plans face uncertainty as to whether 

they are permitted to incorporate ESG factors in their QDIA. As a result, 

the fear of potential litigation may dissuade them from considering 

information that DOL has acknowledged may directly impact the plan’s 

financial performance. Further, if DOL determines that the use of ESG 

factors is not consistent with the QDIA regulations, such a conclusion 

would be an important clarification to assure that fiduciaries do not 

inadvertently violate them.

In addition to the lack of clarity regarding QDIAs, DOL has not provided 

additional information to help fiduciaries for defined benefit or defined 

contribution plans in investment management involving ESG factors more 

broadly, including how to identify and evaluate options not limited to a 

QDIA. As described previously, the use of ESG factors is an emerging 

practice and retirement plans face challenges related to data quality and 

complexity, among other issues. In other cases where plans may face 

complexity, such as when a fiduciary selects a target date fund or 

monitors pension consultants, DOL has provided general information,

 58 GAO, Standards for Internal Control in the Federal Government, GAO-14-704G 

(Washington, D.C.: Sept. 10, 2014). 
Page 42 GAO-18-398 Retirement Plans’ Use of ESG Factors

including items to consider and questions to ask.59 These types of 

materials, for example, could help fiduciaries identify practical steps to 

take when considering potential investment strategies. DOL officials told 

us that they have received no questions about the 2015 and 2016 

guidance; however, each asset manager and plan we interviewed cited 

challenges incorporating ESG factors, such as the complexity and varying 

quality of information. As previously stated, the mission of DOL’s 

Employee Benefits Security Administration includes educating fiduciaries 

to ensure they are equipped to fulfill their duty to act prudently and in the 

best interest of participants. In the absence of additional information, 

fiduciaries may have difficulty determining appropriate issues to consider 

in investment management involving ESG factors. Fiduciaries that decide 

to pursue using ESG factors may face difficulty identifying and evaluating 

available options. Lastly, without additional information plans may be 

reluctant to pursue ESG strategies because they do not understand risks 

that could be considered material and they may not be able to effectively 

select and monitor an ESG strategy.

DOL officials stated that while there is currently no mechanism for the 

agency to collect information on ERISA retirement plans’ use of ESG 

factors, changes to the Form 5500 are being considered that could 

capture this type of information.60 The proposed changes to the Form 

5500 cover a range of topics, and the section specific to ESG includes a 

 59 DOL’s Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries provides 

fiduciaries with a list of items to remember when choosing a target date fund. For 

example, the items include “[e]stablish a process for comparing and selecting target date 

funds” and “[r]eview the fund’s fees and investment expenses.” In addition, the document 

also provides fiduciaries with a list of other related resources to consult. See DOL, EBSA, 

Target Date Retirement Funds – Tips for ERISA Plan Fiduciaries (Washington, D.C.: 

February 2013).

DOL’s Selecting and Monitoring Pension Consultants – Tips for Plan Fiduciaries provides 

fiduciaries with a set of questions to ask pension consultants when evaluating the 

objectivity of the pension consultants’ recommendations and an explanation of why the 

question is relevant. DOL and the U.S. Securities and Exchange Commission developed 

the question to encourage the disclosure and review of more and better information about 

potential conflicts of interest. See DOL, EBSA, Selecting and Monitoring Pension 

Consultants – Tips for Plan Fiduciaries (Washington, D.C.: May 2005). 

60 See Proposed Revision of Annual Information/Reports, 81 Fed. Reg. 47,534, 47,564 

(July 21, 2016). The Form 5500, among other things, is the primary means by which the 

federal government collects information on retirement plan assets. Plan sponsors are 

generally required to submit it as part of annual reporting requirements under ERISA and 

the Internal Revenue Code.

DOL Is Considering Steps 

to Collect Data on ESG 

Use among Retirement 

Plans
Page 43 GAO-18-398 Retirement Plans’ Use of ESG Factors

request for public comments on the potential costs and benefits of DOL 

collecting information on retirement plans’ use of ESG factors. DOL also 

requests comments regarding the best way to collect standardized, 

comparable, and reliable information on the use of ESG factors by 

retirement plans.

The comment period for these proposed changes closed in December 

2016. Of the 200 total comments received, DOL identified 6 that 

addressed both benefits and challenges of potentially collecting 

information about retirement plans’ use of ESG factors. We reviewed the 

6 comments and noted that potential benefits listed include increased 

transparency surrounding retirement plans’ use of ESG factors and an 

increased potential for retirement plans to review and report a wider 

range of risk factors. Potential challenges listed included inconsistency in 

the terminology and definitions related to ESG factors, a lack of clarity 

regarding the appropriate criteria to evaluate ESG factors, and the

absence of a single reporting standard for ESG factors. As of March 

2018, DOL officials said that the agency is considering next steps on 

potential changes to the Form 5500 and did not provide a timeframe for 

further action.

ESG factors have emerged as a way for investors to assess potential 

risks and opportunities that otherwise may not be taken into account. 

Although this practice is not widespread, investors are increasingly using 

ESG factors, and the body of published research we reviewed suggests 

that such factors can be used in investment management without 

sacrificing financial performance, and potentially improving it. For 

example, retirement plans we reviewed in France, the Netherlands, and 

the United Kingdom use ESG factors to address a range of investment 

risks, in particular climate change and poor corporate governance. In the 

United States, however, available data suggest that few retirement plans 

are doing so outside of some of the largest public sector plans. Using 

ESG factors in the United States poses regulatory uncertainty, data 

difficulties, and other challenges.

DOL has issued interpretive bulletins that allow private sector retirement 

plans in the United States to consider ESG factors that are material to 

financial performance, but it does not provide additional information to 

clarify how fiduciaries for defined benefit and defined contribution plans 

may go about doing so. In particular, defined contribution plans—the 

predominant plan type in the United States—typically use a QDIA as a 

default investment option. Although DOL’s guidance on ESG factors is 

Conclusions
Page 44 GAO-18-398 Retirement Plans’ Use of ESG Factors

broadly framed, comments from agency officials suggest that the 

application of ESG factors may be considered differently in a QDIA than 

in other fund types. The regulations pertaining to QDIAs predates DOL’s 

2015 and 2016 guidance on ESG factors and agency officials said plans 

face uncertainty in this area. Providing clarity on whether ESG factors 

could be used in a QDIA could help fiduciaries for defined contribution 

plans in managing risks for their primary investment option.

More broadly, additional information from DOL would also help fiduciaries 

for both defined benefit and defined contribution plans better understand 

steps they can take to effectively consider whether and how to use ESG 

factors not limited to QDIAs to address investment risks, including how to 

navigate the challenges of doing so. Without these actions, it may 

continue to be difficult for fiduciaries of private sector plans in the United 

States to take into account the full range of risks they consider material in 

managing plan assets.

We are making the following two recommendations to DOL:

• The Assistant Secretary of Labor for EBSA should clarify whether an 

ERISA plan may incorporate material ESG factors into the investment 

management for a qualified default investment alternative (QDIA). 

(Recommendation 1)

• The Assistant Secretary of Labor for EBSA should provide further 

information to assist fiduciaries in investment management involving 

ESG factors, including how to evaluate available options, such as 

questions to ask or items to consider. (Recommendation 2)

We provided a draft of the report to the Department of Labor (DOL), the

Federal Retirement Thrift Investment Board, the Pension Benefit 

Guaranty Corporation, the U.S. Department of State, the Department of 

the Treasury, and the Securities and Exchange Commission for their 

review and comment. In its comments, reproduced in appendix III, DOL 

neither agreed nor disagreed with the recommendations in this report. 

DOL and the Securities and Exchange Commission also provided 

technical comments, which we incorporated as appropriate. The Federal 

Retirement Thrift Investment Board, the Pension Benefit Guaranty 

Corporation, the U.S. Department of State, and the Department of the 

Treasury did not provide comments on this report.

Recommendations for 

Executive Action

Agency Comments 

and Our Evaluation
Page 45 GAO-18-398 Retirement Plans’ Use of ESG Factors

DOL, in its written comments, stated that our report provided valuable 

research that will be carefully considered as the agency continues to 

review its efforts to assist plan sponsors, service providers, and others in 

complying with ERISA. Our report recommends that DOL take steps to 

(1) clarify whether plan fiduciaries may consider material ESG factors in 

designating an investment option as a Qualified Default Investment 

Alternative (QDIA) and (2) provide further information to assist fiduciaries 

in investment management involving ESG factors. On April 23, 2018, 

while DOL was reviewing our report, DOL issued Field Assistance Bulletin 

2018-01 regarding retirement plans’ use of ESG factors. Both the new 

field assistance bulletin and DOL’s written comments on our report 

emphasize that plan fiduciaries are required to act prudently and in the 

best interest of participants when making investments decisions. The new 

field assistance bulletin generally reiterates that in considering the use of 

ESG factors, plan fiduciaries are not permitted to sacrifice investment 

returns or take on additional investment risk as a means of promoting 

collateral social policy goals—a position that is consistent with DOL’s 

earlier guidance. The new field assistance bulletin states that fiduciaries 

must not too readily treat ESG factors as economically relevant, and 

includes information about the use of ESG factors in engagement 

activities, such as proxy voting. In discussing this new guidance, DOL 

officials told us that, consistent with ERISA and the evaluation of 

investment options generally, fiduciaries are required to conduct due 

diligence in evaluating ESG investment options in order to understand 

how they operate and to assess whether such options are in the best 

interest of plan participants. Indeed, we agree that such diligence is 

important when evaluating any investment option. Moreover, DOL’s 

earlier guidance, as well as asset managers and representatives from 

public sector plans we interviewed, indicate that the use of ESG factors 

can help plans assess risks relevant to the plan’s financial performance 

that may otherwise not be assessed. 

With respect to our first recommendation, our report recommends that 

DOL clarify whether fiduciaries may incorporate material ESG factors into 

the investment management of a QDIA. Unlike earlier guidance on the 

use of ESG factors, the new field assistance bulletin specifically mentions 

the use of ESG factors in a QDIA and reiterates the conditions under 

which an investment option may generally be considered a QDIA. 

However, the new field assistance bulletin’s discussion of QDIAs focuses 

on the use of ESG factors for collateral benefits rather than on cases 

where ESG factors are considered in investment decisions because they 

have been determined by fiduciaries to be material to financial 

performance. For example, the new field assistance bulletin states that 
Page 46 GAO-18-398 Retirement Plans’ Use of ESG Factors

the QDIA regulations do not suggest that fiduciaries should select a QDIA

based on collateral public policy goals. Research we reviewed along with 

detailed interviews we conducted with asset managers, retirement plan 

representatives, and industry stakeholders indicated that ESG factors can 

be used to address material risks, which might otherwise be ignored, and 

that there is interest in considering such factors within a QDIA. The use of 

ESG factors in this manner can be distinct from pursuing collateral public 

policy goals. Additional clarification from DOL that explicitly addresses 

plans’ use of financially material ESG factors in investment options 

designated as a QDIA could enhance the agency’s effectiveness in 

assisting plan fiduciaries with understanding and fulfilling their obligations 

under ERISA.

In addition, with respect to our second recommendation, we believe that 

while DOL’s new field assistance bulletin provides information on the 

limitations of using ESG factors for pursuing collateral benefits, additional 

clarifying information from DOL could help sponsors conduct due 

diligence in considering whether ESG factors are material to an 

investment’s financial performance and, if so, how to address those 

material risks. DOL’s written comments recognize that additional 

clarification could be appropriate, depending on responses to the new 

field assistance bulletin from the public. We appreciate DOL’s 

consideration of the need for additional information, particularly as some 

have noted the new field assistance bulletin could create a chilling effect 

that leads fiduciaries to avoid considering ESG factors that could address 

material risks in their investments, to the detriment of plan participants’ 

best interests.

We are sending copies of this report to the Secretary of Labor, the 

Executive Director of the Federal Retirement Thrift Investment Board, the 

Director of the Pension Benefit Guaranty Corporation, the Secretary of 

State, the Secretary of the Treasury, and the Chair of the Securities and 

Exchange Commission. In addition, the report will be available at no 

charge on the GAO website at http://www.gao.gov.
Page 47 GAO-18-398 Retirement Plans’ Use of ESG Factors

If you or your staff have any questions about this report, please contact 

me at (202) 512-7215 or jeszeckc@gao.gov. Contact points for our 

Offices of Congressional Relations and Public Affairs may be found on 

the last page of this report. GAO staff who made key contributions to this 

report are listed in appendix IV.

Sincerely yours,

Charles A. Jeszeck

Director, Education, Workforce, and Income Security Issues
Appendix I: Objectives, Scope, and 

Methodology

Page 48 GAO-18-398 Retirement Plans’ Use of ESG Factors

Our objectives for this review were to examine (1) the use of 

environmental, social, and governance (ESG) factors by retirement plans 

in the United States, (2) the use of ESG factors by selected retirement 

plans in other countries, and (3) the Department of Labor’s (DOL) 

guidance on the use of ESG factors by private sector retirement plans in 

the United States.

To provide context about research on the relationship of ESG factors to 

financial performance, we conducted a literature review of studies that 

analyzed the financial performance of ESG strategies. To identify studies 

for this literature review, we conducted searches of various databases, 

such as EconLit, Proquest’s Business Premium Collection, and Scopus. 

The search terms consisted of combinations of relevant terms including 

variations of ESG or sustainability and financial performance or return on 

investment. The search returned 205 studies. We limited our sample to 

studies that were published in peer reviewed academic journals or 

publications, analyzed the financial performance of ESG strategies in the 

United States, and were published from 2012 through 2017. The 

application of these criteria resulted in 11 studies for this literature review. 

Of these 11 studies, 9 conducted empirical analyses of investment 

scenarios with a collective total of 1,288 scenarios analyzed. These 

investment scenarios used different types of information to analyze the 

relationship between financial performance and variations of aggregate 

ESG scores or individual ESG factors. Specifically, 254 used an 

aggregate ESG score, 286 used specifically environmental information, 

329 used specifically social information, 415 used specifically governance 

information, and 4 specifically used material ESG information. We then 

documented the authors’ findings for each study and summarized the 

investment scenarios to provide evidence of the relationship between 

ESG and financial performance as documented in relevant literature.

To examine retirement plans’ use of ESG factors in the United States, we 

conducted structured interviews with asset managers who have 

retirement plan clients to gather information on the types of ESG 

strategies used by retirement plans, the goals of such strategies, and 

their experience with implementation. We also interviewed ESG service 

providers, such as firms that provide research and ratings on ESG 

factors, and other knowledgeable stakeholders. The 7 asset managers 

who agreed to participate in our structured interviews were identified from 

a ranking of the 10 largest asset managers in 2016 published by 

Pensions & Investments based on assets under management for U.S. 

Appendix I: Objectives, Scope, and 

Methodology
Appendix I: Objectives, Scope, and 

Methodology

Page 49 GAO-18-398 Retirement Plans’ Use of ESG Factors

institutional tax-exempt clients, which includes retirement savings plans, 

endowments, and foundations.1 In addition, we interviewed 6 public 

sector retirement plans and reviewed plan documentation on their use of 

ESG factors in investment management. These included the 5 largest 

U.S. public sector retirement plans based on assets as ranked by 

Pensions & Investments for 2016. Specifically, the 5 largest public sector 

plans we interviewed were the federal Thrift Savings Plan, 3 plans for 

state employees and 1 plan for municipal employees. We also 

interviewed a smaller state plan at the recommendation of the National 

Association of State Retirement Administrators.

To examine the prevalence of the use of ESG factors by retirement plans 

in the United States, we reviewed available survey data from plan service 

providers and stakeholder groups and included questions in the 

structured interviews with asset managers about their retirement plan 

clients’ utilization of ESG investment options. Nationally representative 

data on retirement plans’ use of ESG factors is not available. The DOL 

collects nationally representative information on the assets of retirement 

plans through the Form 5500, but this form does not capture information 

on the use of ESG factors in a plan’s investments. In the absence of 

nationally representative data, we identified two reports based on surveys 

with a relatively large sample size, but which only included defined 

contribution plans. Specifically, the Plan Sponsor Council of America’s 

annual survey included about 600 defined contribution plans and 

Vanguard’s How America Saves 2017 report included about 1,900 

defined contribution plans.2 We also reviewed other reports based on 

survey data that included both defined contribution and defined benefit 

plans, but which had much smaller sample sizes and/or included other 

types of investors, such as endowments and foundations. Because these 

smaller surveys focused on ESG and participation was optional, the

sample may not be representative of the population.

To examine how retirement plans in other countries incorporate ESG 

factors, we Interviewed representatives from selected plans in France, the 

Netherlands, and the United Kingdom, as well as government officials, 

service providers, and other stakeholders, and reviewed documentation. 

 1 This was the most recent available data at the time of our review.

2 See The Plan Sponsor Council of America, 60th Annual Survey of Profit-Sharing and 

401(k) Plans (February 2018) and The Vanguard Group, How America Saves 2017: A 

Report on Vanguard 2016 Defined Contribution Plan Data (June 2017).
Appendix I: Objectives, Scope, and 

Methodology

Page 50 GAO-18-398 Retirement Plans’ Use of ESG Factors

To select these plans, we conducted an initial review of retirement plans 

in Organisation for Economic Co-operation and Development (OECD) 

countries highlighted for their use of ESG factors in available literature 

and consulted with experts at the OECD and the Council of Institutional 

Investors, among others. The selected plans included two hybrid defined 

benefit plans—Régime de Retraite Additionnelle de la Fonction Publique 

(RAFP) in France and Stichting Pensioenfonds ABP (ABP) in the 

Netherlands—and one defined contribution plan—the National 

Employment Savings Trust (NEST) in the United Kingdom. Each of the 

three plans use a different ESG strategy. We did not conduct an 

independent legal analysis to verify the information provided about the 

laws, regulations, or policies of the countries selected for this study. 

Instead, we relied on appropriate secondary sources, interviews, and 

other sources to support our work. We submitted key report excerpts to 

plan representatives in each country for their review and verification, and 

we incorporated their technical corrections as necessary. For more 

information on RAFP, ABP, and NEST, see appendix II.

To examine DOL’s guidance for retirement plans’ use of ESG factors in 

their investment management, we reviewed the relevant DOL guidance 

and other documents published by DOL. This included the interpretive 

bulletins that document DOL’s interpretation of the relationship between 

fiduciary responsibilities and potential use of ESG factors. We interviewed 

DOL officials to discuss the relevant guidance and the status of any 

potential changes. In addition, we included questions about the 

interpretive bulletins in the structured interviews with asset managers to 

gather information on their perspective of DOL’s guidance. We also 

reviewed DOL’s qualified default investment alternatives regulations.

We conducted this performance audit from January 2017 to May 2018 in 

accordance with generally accepted government auditing standards. 

Those standards require that we plan and perform the audit to obtain 

sufficient, appropriate evidence to provide a reasonable basis for our 

findings and conclusions based on our audit objectives. We believe that 

the evidence obtained provides a reasonable basis for our findings and 

conclusions based on our audit objectives.
Appendix II: Key Features of ESG Strategies 

for Selected Retirement Plans in France, the 

Netherlands, and the United Kingdom

Page 51 GAO-18-398 Retirement Plans’ Use of ESG Factors

To compile the information in this appendix, we Interviewed representatives from 

selected plans in France, the Netherlands, and the United Kingdom, as well as 

government officials, service providers, and other stakeholders, and reviewed 

documentation. We did not conduct an independent legal analysis to verify the 

information provided about the laws, regulations, or policies of the countries selected 

for this study. Instead, we relied on appropriate secondary sources, interviews, and 

other sources to support our work. We submitted key report excerpts to plan 

representatives in each country for their review and verification, and we incorporated 

their technical corrections as necessary.

Appendix II: Key Features of ESG Strategies 

for Selected Retirement Plans in France, the 

Netherlands, and the United Kingdom
Page 52 GAO-18-398 Retirement Plans’ Use of ESG Factors

Appendix II

France’s Régime de Retraite Additionnelle de 

la Fonction Publique

Environmental, Social, and Governance (ESG)

Integration through a “Best in Class” Strategy

Examples of ESG in practice

Global equities:RAFP relies on external managers to implement its

“best in class” approach for incorporating ESG factors into its investment 

decisions for global equities, which accounted for 32 percent of its assets 

under management in 2017. RAFP’s external managers have discretion 

in selecting which sources of ESG ratings data they use in implementing 

RAFP’s “best in class” screening process. RAFP uses its own source for 

ESG ratings data, provided by a consultant, to help inform its supervision 

of its asset managers. As part of its ESG approach, RAFP has put a 

particular emphasis on climate change. For example, RAFP invested

€100 million by the end of 2017 in global equity funds aimed at 

combatting climate change by investing in companies that offer products 

or services that could help cut carbon emissions. 

Fixed income: RAFP also uses its “best in class” approach for fixed 

income assets, which account for about 57 percent of its assets under 

management—made up of sovereign, corporate, and convertible bonds. 

RAFP manages sovereign bonds itself while relying on external 

managers for the others. Along with the public companies for which it 

holds equities, RAFP also estimates the carbon emissions of bond 

issuers as it calculates the carbon footprint of its portfolio—which the plan 

uses as a measure of its climate risk. 

Private Equity and Real estate: For its private equity and real estate 

assets, RAFP is working with a consultant to design a methodology for 

measuring and analyzing its exposure to climate change risks. RAFP 

expects to include the initial results of this work in its 2018 annual report.

Disclosure of ESG strategy

RAFP discloses information on its ESG strategy to regulators, 

participants, and stakeholders using multiple publicly available sources. 

RAFP’s statement of its five charter values, which is publicly available,

describes the key ESG factors that underly its “best in class” investment 

strategy. RAFP has specified a framework and criteria for implementing 

its “best in class” principle.

RAFP also describes its “best in class” strategy in annual investment 

reports provided to participants.

At a glance

France’s Régime de Retraite 

Additionnelle de la Fonction 

Publique (RAFP) is a retirement 

plan that supplements the basic 

pensions of French public sector 

employees. RAFP was established 

in 2005. 

Plan type

Hybrid defined benefit plan—a 

plan that generally allows 

adjustments to both contributions 

and benefits depending on the 

plan’s funding level and provides 

monthly income in retirement. 

Plan size

RAFP had over 45,000

employers, 4.5 million members, 

and €29.1 billion (approx. $35.7

billion) in assets under 

management in 2017. 

ESG strategy

Integration and screening: 

RAFP has systematically 

integrated ESG factors in its 

investment decisions for all asset 

classes using a “best in class” 

screening approach and tracking 

carbon emissions tied to its 

portfolio.

RAFP invests in assets it rates 

“best in class” on ESG factors 

specified in the plan’s investment 

policy, including management of 

environmental risk and good 

governance, transparency, and 

social factors.

Source: GAO analysis of plan documentation 

and interviews with government officials and 

plan representatives; U.S. State Department 

(base map); Art Explosion (flag).
Page 53 GAO-18-398 Retirement Plans’ Use of ESG Factors

Appendix II

The Netherlands’ Stichting Pensioenfonds 

ABP

Environmental, Social, and Governance (ESG) 

Integration and Inclusion Strategy

Examples of ESG in practice

Equities: ABP aims to invest only in equities of companies that are 

determined to be leaders in managing ESG factors by 2020. In addition, 

ABP is taking steps to reduce their carbon footprint—that is, the total 

amount of carbon emissions produced by companies held in their equity 

portfolio—by 25 percent by 2020 compared to 2014. To do so, ABP has 

set specific carbon budgets for the investment teams managing each 

individual equity portfolio and incrementally reduced the carbon budget 

over time in line with the 2020 goal.

Real estate:To assess ESG factors for current and prospective real 

estate investments, ABP uses the Global Real Estate Sustainability 

Benchmark (GRESB) survey—an annual comparative study which 

includes information on environmental and other ESG factors, such as 

workplace safety and involvement in bribery and corruption. For example, 

ABP uses GRESB data to track the energy and water consumption and 

carbon emissions of its real estate investments. ABP has also set specific 

targets for increasing sustainable investments, which primarily consist of 

real estate investments that rate in the highest category on the GRESB 

survey. As of 2016, €23.4 billion out of a total €41 billion in sustainable 

investments were held in such real estate investments. 

Private equity: ABP coordinated with UN Principles for Responsible 

Investment to develop a questionnaire to assess potential investments in 

private equity funds. ABP uses the questionnaire to gather information on 

the fund’s responsible investment policy, as well as implementation, 

reporting, and monitoring practices. ABP contributed material to the 

questionnaire to request information on climate change risks and other 

ESG factors to provide better oversight of how these factors are 

managed. ABP also worked with an association of private equity fund 

managers in Europe to develop a due-diligence questionnaire to be used 

by private equity fund managers to assess ESG factors when seeking to 

acquire a new portfolio company. 

Disclosure of ESG strategy

ABP discloses information on their ESG strategy to regulators, 

participants, and stakeholders using multiple sources, including annual 

reports, meetings between the Board of Trustees and participants, 

webinars, position papers, and meetings with asset managers and other 

stakeholders. ABP also surveys plan participants about the plan’s ESG 

strategy.

ABP’s annual report includes a description of their Strategic Investment 

Plan and sustainable and responsible investment policy. ABP also issues 

an annual responsible investment report, which provides an overview of 

their ESG strategy and progress towards goals established for 2020, as 

well as specific examples of how ESG factors are used in practice. 

At a glance

The Dutch Pension Fund ABP (or 

Stichting Pensioenfonds ABP) is a 

retirement plan for public and 

education sector employees in the 

Netherlands.

Plan type

Hybrid defined benefit plan—a 

plan that generally allows 

adjustments to both contributions 

and benefits depending on the 

plan’s funding level and provides 

monthly income in retirement.

Plan size

ABP had about 2.9 million 

participants and €411 billion

(approx. $505 billion) in assets 

under management as of 2018. 

ESG strategy

Integration and “inclusion”:

ABP integrates specific targets for 

sustainable and responsible 

investing with their return targets 

across all asset classes using 

an inclusion-based strategy. ABP 

identifies material ESG factors, 

assesses how they are managed, 

and categorizes companies and 

issuers as either “leaders” or 

“laggards.” The plan invests only 

in equities or bonds classified as 

leaders and a subgroup of those 

classified as laggards which it 

considers as having the potential 

to improve. The plan engages 

with companies which have been 

determined to insufficiently 

manage ESG factors. In 2016, 

ABP reported engagement with 

245 companies on ESG factors, 

mostly related to governance.

Source: GAO analysis of plan documentation 

and interviews with government officials and 

the plan’s asset manager; U.S. State 

Department (base map); Art Explosion (flag).
Page 54 GAO-18-398 Retirement Plans’ Use of ESG Factors

Appendix II

The United Kingdom’s National Employment 

Savings Trust

Environmental, Social, and Governance (ESG) 

Integration Strategy

Examples of ESG in practice

Global equities:NEST worked with their asset manager to develop a 

fund which addresses climate change risks and opportunities. The 

Climate Aware Fund is benchmarked to a broad stock market index and 

weighted in favor of companies that rate more highly on certain ESG 

factors related to climate change. For example, companies are rated 

based on their greenhouse gas emissions and progress towards meeting 

targets set under the 2 degree Celsius scenario in the Paris Agreement. 

The fund does not exclude any companies from investment, but, rather, 

underweights the amount invested and seeks to engage with those that 

rate poorly against these ESG criteria.

Emerging markets equities: NEST’s emerging markets fund uses an 

ESG screening process. According to NEST representatives, ESG risks 

can be particularly important in emerging markets, especially for issues 

such as governance, corruption, and the environment. NEST’s asset 

manager identifies key ESG risks in the fund and screens out the 

companies with the lowest ratings.

Fixed income: NEST evaluates ESG risks for high yield bond issuers. 

When hiring asset managers, NEST solicited and evaluated information 

on how prospective managers incorporate ESG risk and opportunities 

into their decision-making and investment selection process. This 

included information on specific ESG factors NEST determined to be 

highly material, such as operations and governance structure, bribery and 

corruption, and climate change. NEST also examined how well the asset 

managers report to clients on these practices. 

Real estate: For their real estate assets in the United Kingdom (UK), 

NEST’s asset manager conducts an ESG risk assessment prior to 

acquiring a property and subsequently sets environmental performance 

targets for each property. As part of this process, the asset manager 

identifies specific properties in their portfolio with relatively high energy 

consumption compared to an established benchmark and develops a 

strategy to improve performance and monitor progress. The asset 

manager established an overall goal of a 20 percent reduction in energy, 

carbon, and water by 2020 compared to a baseline (2010 or the first year 

a property is owned).

Disclosure of ESG strategy

NEST discloses information on their ESG strategy to regulators, 

participants, and stakeholders using multiple publicly available sources. 

NEST’s statement of investment principles describes the use of ESG 

factors in the plan’s investment strategy. The UK Pension’s Regulator 

points to NEST’s document as a resource for other plans.

NEST also describes its ESG strategy in quarterly and annual investment 

reports provided to participants.

At a glance

The National Employment Savings 

Trust (NEST) is a retirement plan 

established by the government and 

managed as an independent entity 

to help employers meet their 

obligation to automatically enroll 

eligible workers in a retirement 

plan. An employer may select 

NEST or offer their own plan. 

NEST began enrolling participants 

in 2012. 

Plan type

Defined contribution. 

Plan size

NEST had over 600,000 

employers, 6 million members, 

and £2.3 billion (approx. $3.2 

billion) in assets under 

management at the end of 2017. 

ESG strategy

Integration: 

NEST integrates ESG factors in 

the plan’s default investment 

option for nearly all asset classes. 

The default investment option 

covers 99.8 percent of 

participants. 

NEST works with their external 

asset managers to engage with 

corporations on ESG factors—for 

example meeting with corporate 

boards and voting on shareholder 

resolutions on issues such as 

executive compensation, gender 

diversity, and disclosure of climate 

change policies. 

Source: GAO analysis of plan documentation 

and interviews with government officials and 

plan representatives; U.S. State Department 

(base map); Art Explosion (flag).
Appendix III: Comments from the Department

of Labor

Page 55 GAO-18-398 Retirement Plans’ Use of ESG Factors

Appendix III: Comments from the 

Department of Labor
Appendix III: Comments from the Department 

of Labor

Page 56 GAO-18-398 Retirement Plans’ Use of ESG Factors
Appendix IV: GAO Contact and Staff

Acknowledgments

Page 57 GAO-18-398 Retirement Plans’ Use of ESG Factors

Charles A. Jeszeck, (202) 512-7215 or jeszeckc@gao.gov

In addition to the contact named above, Michael Collins (Assistant 

Director), Sharon Hermes (Analyst in Charge), Adrianne Cline, Laura 

Hoffrey, Christina Murphy, Steven Ray, and Seyda Wentworth made key 

contributions to this report.

Also contributing to this report were Joanna Berry, Deborah Bland, Leia

Dickerson, Aimee Elivert, J. Alfredo Gómez, John Lack, Sheila McCoy, 

Rachel Stoiko, Joseph Dean Thompson, Kathleen van Gelder, Walter 

Vance, and Adam Wendel.

Appendix IV: GAO Contact and Staff 

Acknowledgments

GAO Contact

Staff 

Acknowledgments

(101470)
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