Global Courant
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BOSTON – As concerned as you are about climate change, it can be difficult, if not impossible, to invest with the environment in mind in your workplace retirement plan.
Less than 5% of 401(k) plans provide funds dedicated to environmental, social and governance issues, according to the latest Plan Sponsor Council of America member survey.
“There has been significant growth in the availability of ESG funds over the past five years, but their inclusion in 401(k) plans has been slower,” he said. George Dyer, co-founder and executive director of the Crane Institute of Sustainability. CNBC interviewed Dyer after appearing on a panel on the GreenFin conference this week in Boston.
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As a result, the money Americans have in their 401(k) plans is likely enabling fossil fuel extraction and deforestation, experts say. Both are climate issues blaming scientists for the warming planet.
“In terms of accelerating climate change, one important effect of continuing to invest in high-carbon industries (or greenhouse gas emissions) is a signal to markets and governments that it is OK to continue business as usual,” he said. Andrew BearrCEO of As You Sow, a non-profit organization that promotes corporate environmental and social responsibility.
Companies are slow to offer ESG options in 401(k)s
Concerned about confusing employees, sponsors of 401(k) plans are often wary of adding more fund options to their lineup, Dyer said.
“Once they’ve gone through a process of selecting funds that they’re confident they’ll take, they may be hesitant to trade them in for new funds,” he said.
Increasingly, employees are automatically enrolled in their 401(k) plan without any loss of investment. Their money is often put into so-called target-date funds, which have become more popular due to the fact that they automatically adjust the mix of investments over time to reduce risk as the employee approaches retirement.
More than 45% of the fund options offered in retirement plans are target date funds, according to research by the CFA Institute.
Still, this convenience can make it harder for the planet. The CFA Institute found that target-date funds have a 16% higher weighted carbon intensity compared to all the retirement plans it examined.
Meanwhile, some employers may fear that their employees won’t get enough profit from ESG funds, Dyer said.
“Despite a large body of evidence showing that ESG funds outperform or outperform non-ESG funds, there remains a persistent misconception that this is not the case,” said Dyer. Indeed, an analysis found by Morgan Stanley in 2019 that there was no significant difference in total return between ESG-focused funds and traditional mutual funds.
Political battles have also hindered adoption
ESG funds have not been spared either the political battle over climate change. That’s another factor slowing their adoption on 401(k) menus, experts say.
A Trump-era rule discouraged retirement plan sponsors from offering ESG funds, experts say. Under President Joe Biden, the US Department of Labor has since changed that policy. Biden also used his first presidential veto to save the rule on investment choices related to ESG.
“The DOL rule is very clear that ESG factors can be material to investment performance and can therefore be considered in the investment process,” said Dyer.
While that rule remains in effect, it is currently being challenged in federal court in Texas, he said Bradford Campbell, a former DOL official who also spoke at GreenFin. House Republicans also recently introduced legislation that could limit the use of EGS funds, or what they call “woke” investments.
“Interest in ESG-related investing is growing,” said Campbell. “But uncertainty about the future of the regulation due to the pending litigation and the possibility of policy changes (at) the next presidential election certainly affect the pace at which plans adopt such investments.”
How to research your ESG 401(k) options
If you belong to the small pool of employees who do have access to an ESG fund in your retirement plan, your research may end there.
“Unfortunately, we usually see that if a 401(k) offers sustainable investments, it only offers one,” Behar said.
If you find multiple ESG options on your menu, you can look up which funds are climate-safe and also offer competitive returns, Behar said. Tools to do this are As You Sow’s Fossil-free funds And MSCI’s ESG database.
For most other employees unable to divest from companies that may be exacerbating climate change, Behar recommends talking to your company’s management and asking for sustainable funds to be made available.
“It’s possible that a simple question could start the process,” he said.
Employers have a fiduciary duty to administer retirement plans in the best interests of plan participants.
Andrew Bearr
CEO of As You Sow
If this goes nowhere, employees might consider organizing with their colleagues, Behar said. “It’s easier to ignore a single voice than a chorus.”
There is one on his website action toolkit to help employees advocate for a sustainable investment option in their retirement plan.
“Employers have a fiduciary duty to administer retirement plans in the best interests of plan participants,” Behar said. “If they don’t assess climate risks as part of that process, they may fail.”
