Morningstar - Q4 2021 - 16

Dispatches
Congress is already working on this in a bill
commonly called Secure 2.0, and we think that's
a really good thing. Qualified longevity annuities
are often hard to gain access to because of the
way the regulations try to ensure they result in
taxable distributions. Congress has a solid,
bipartisan proposal to make this much less
onerous for people seeking deferred income while
avoiding creating a major new tax loophole.
3 Ensure there's a strong fiduciary standard when
advisors recommend rolling a 401(k) into an
annuity product, so that conflicts of interest don't
drive recommendations.
We think the Department of Labor, which has
authority over everything that ends up in
qualified retirement accounts, needs to harmonize
its regulations with the SEC, which has productspecific
authority over securities whether
they are in a retirement account or not. Variable
annuities are often covered by the SEC's
best-interest regulation, but other kinds of
annuities are not. This is confusing and results
in an uneven experience for investors. The
DOL could take steps to expand the definition of
fiduciary (as it tried in 2016), and the SEC
could mirror the DOL's emphasis on analyzing
rollover recommendations. The upshot would be
that retirement investors get consistent
advice. Further, workers might be more inclined
to leave their money in their retirement plans,
spurring employers to offer better drawdown
options, including guaranteed-income products.
Savers Need Help
There are good and not-so-good annuities.
Sophisticated investors and topnotch advisors
have the time and ability to sort them out,
but policy choices and fragmented regulation have
impeded the abilities of ordinary retirement
savers to explore guaranteed-income options for
themselves. While the federal government
cleans this mess up, it can also set policy to
emphasize high-quality annuities. Given how
useful good annuities can be for ordinary investors,
the government should set policy to make
these products more readily available. K
Aron Szapiro is head of retirement studies and public policy
at Morningstar.
Bringing Structure
to ESG
Morningstar develops
an investing framework
to clarify the field.
Jon Hale
SUSTAINABILITY MATTERS
Sustainable investing has grown significantly
in the past five years as more investors have
become increasingly concerned about the
many challenges facing the world today. They
want their investments to consider how climate
change and other environmental, social,
and corporate governance issues may affect their
returns, and they weigh the broader impact
of their investments on the world.
To many, though, sustainable investing can
be a confusing mix of terms and approaches.
That's mainly because of a lack of consensus over
terminology and, perhaps more significantly,
because sustainable investing does not
represent a single, distinct investment approach.
Rather, it consists of a range of approaches
that have been evolving over the past decade,
as asset managers and wealth managers
adapted them in unique ways to their existing
processes. These developments have
proceeded largely without regulatory guidance
in most of the world, although the European
Union has taken some recent steps to
clarify terms and the scope of the field. As a
result, investors have been left largely
on their own to figure out the many facets
of sustainable investing.
Morningstar's Sustainable Investing Framework
addresses the critical need for clarity. It
provides a straightforward way to understand
the motivations for seeking sustainable
investments and outlines the range of activities
associated with sustainable investing.
16
Morningstar Q4 2021
Let's begin with a definition:
Sustainable investing seeks to deliver
competitive financial results while also driving
positive environmental, social, and corporate
governance outcomes.
Traditionally, investing has focused primarily
on financial results, with little systematic
attention given to ESG issues. Also focused on
financial results, sustainable investing
applies ESG assessments to improve investment
analysis. Beyond that, sustainable investing
also considers the broader societal impacts
of investments.
What does driving positive ESG outcomes mean?
It can mean improving a company's performance
on material ESG issues, which in turn can
improve company financial performance and also
lead to positive outcomes more broadly for
people and planet.
It's important to keep in mind that sustainable
investing is investing, first and foremost.
It seeks competitive returns. There is absolutely
nothing concessionary about this intent
when investing in public stocks and bonds. But
it also recognizes that investment returns
are part of a bigger picture that includes concerns
about people and planet as well as profits.
Our Framework MAP-for Motivations,
Approaches, and Portfolios-covers three key
dimensions of sustainable investing,
organized in an easy-to-understand way that can
be quickly grasped by a range of investors.
Investor Motivations
What is motivating investor interest in
sustainable investing?
We know that many investors today have
sustainability concerns across a range
of ESG issues. A growing number of investors have
these concerns-and the concerns themselves
appear to be growing-especially around
climate change.
Perhaps the best way of thinking about it is
to consider what happens before the investment
https://www.morningstar.com/authors/1855/jon-hale https://www.morningstar.com/authors/2015/aron-szapiro
Morningstar - Q4 2021

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