Two topics that continue to pique investor interest are ESG investing and cryptocurrency. Although investment fads are nothing new, the fear of missing out on that next hot trend can feel very real.
Plan participants may have already started asking about the investment merits of ESG portfolios and cryptocurrency. Often, it can be difficult to assess whether in vogue investment trends have staying power and sustainable long-term growth potential.
Before you make any rushed investment decisions regarding your retirement plan investment lineup, consider the strategies, risk, and long-term impact of each. In this timely overview, we explore these two investment trends, review how they have grown in popularity over the years, and evaluate how they are positioned for future success.
- ESG Investing
ESG or “Environmental, Social and Corporate Governance” criteria entail a set of standards by which a company operates and a way for investors to screen potential investments. The term “ESG” was created in 2004 but the basis of this approach is not new and has evolved from the concept of socially responsible investing.
In this post-pandemic environment, there has been a shift in investor behavior whereby participants care not only about their investment returns but also the potential impact of that investment on the environment and other societal issues, such as, diversity and inclusion, among others. In fact, the Thrift Savings Plan (TSP), the nation’s largest defined contribution savings program, is making ESG funds available in a new mutual fund window starting in 2022.
Over the years, socially conscious investors have been driving the growing ESG demand, especially as Millennials and Gen Z join the workforce. Climate change is also impacting ESG investing with the U.S. rejoining the Paris Climate Agreement and the push to a net zero, low-carbon economy is spurring companies to become more ESG-oriented.
Most individuals by now have heard of Bitcoin and cryptocurrency “crypto” but many may not understand how it works or what it is. Bitcoin, the original and most well-known cryptocurrency, was founded in 2009 by a programmer(s) under the pseudonym Satoshi Nakamoto.
Crypto is digital currency that can be used to buy goods and services much like traditional currency, such as the U.S. dollar. According to the Bitcoin Foundation, Bitcoin is defined as a “peer-to-peer electronic cash system” that allows online payments to be sent directly from one party to another without going through a financial institution.
Bitcoin uses cryptography which is the science of making and breaking codes. The blockchain, the underlying technology that supports cryptocurrency, is a decentralized network spread across many computers that manages and records transactions. Blockchain technology fundamentally eliminates the digital currency’s need for a central controlling authority.
Cryptocurrency is decentralized currency, meaning it is issued by private systems and is not regulated by the government. Cryptocurrency exchanges are not backed by the Federal Deposit Insurance Corporation (FDIC) and unlike traditional government-backed currency, cryptocurrency’s supply is finite.
A Fad or Here to Stay
- ESG Investing – Here to Stay
In the case of ESG, this is a trend that has been gaining significant traction throughout the years. In fact, ESG funds are on track for a record year of inflows – over $21 billion in the first quarter of 2021. This amount represents a substantial relative increase from 2020, when annual inflows totaled over $51 billion. The pace of ESG interest is rising quickly as inflows in 2019 were $21.4 billion and just $5.4 billion in 2018. In light of the recent pandemic, many companies have established or refined their ESG guidelines pertaining to sustainability and social issues.
ESG investments still need to go through a prudent and well-documented process, much like traditional investments, for potential inclusion in retirement plans. Due to increased awareness, enhanced reporting capabilities and developing regulatory guidance, many plan sponsors are starting to incorporate ESG investments into their retirement plans. The longer-term data supports that ESG investing is here to stay and may continue to see a significant increase in interest and implementation in years to come.
- Cryptocurrency – Too Early to Tell
Over time, the crypto market has evolved and become more mature, but it still comes with a substantial amount of risk and general lack of understanding. As a result, there is significant pricing volatility mostly due to its limited supply and the lack of a central bank to control the supply. But limited supply is a double-edged sword with proponents saying this is what supports its valuation and appreciation opportunity. As an analogy, crypto has been compared to gold with some investors viewing it as “digital gold.”
Opinions vary on the outlook of cryptocurrency. Currently, crypto is virtually nonexistent in retirement plans due to its inherent volatility. It can also be a burden to plan sponsors who ultimately have the responsibility to monitor this investment and provide education to all plan participants. But as more institutional investors begin to invest in cryptocurrency, it may add legitimacy and overall stability to the crypto market. Only time will tell.
We will keep you posted on further developments as both these areas continue to evolve. Your ABG representative is available to help you answer any questions you may have on either one of these investment areas.