When it comes to investing, about half of Americans have a retirement account, and not much else.
Those retirement accounts might be individual investment accounts (IRAs), employer-sponsored plans like 401(k)s, or pensions. But let’s be real—outside of government jobs, pensions are mostly a thing of the past.
That means that most people’s retirement depends on how well their investments perform, and the pressure to invest wisely is high. But these days, it’s not just returns that worry investors.
Around 60percent of Americans believed global climate change was a threat to the well-being of the U.S. in 2020, up from 44percent in 2010, according to the Pew Research Center. Nearly half of the respondents to a Wells Fargo/Gallup poll in 2020 were interested in sustainable investing—but only 13percent reported actually owning a sustainable investment.
An interest in green investing is there, but Americans are lacking the follow through.
Limited options within 401(k) plans could be part of the reason. Only 2.8percent of 401(k)s had a sustainable investment option in 2018. While sustainable mutual funds or exchange-traded funds (ETFs) are widely available, employer-sponsored plans have been slow to get on board with green investing.
Still, increased fossil fuel consumption, rising global temperatures, and the ominous climate consequences we’re already experiencing, have Americans scared for the future. If you’re determined to invest your 401(k) in green initiatives that won’t screw over your kids, here’s what you need to know.
What are Sustainable Funds?
Sustainable funds, also known as “green funds,” “socially responsible funds,” and “ESG funds,” are developed with considerations to environmental, social, and governance factors.
An ESG fund is a mutual fund or ETF that invests in multiple companies with business practices that prioritize things like clean energy, sustainability, community development, or diversity. It might also exclude companies that fail to prioritize factors like greenhouse gas emissions, or companies that deal in weapons or fossil fuels.
Investors can purchase ESG funds almost anywhere that sells mutual funds or ETFs, and they can be held in nearly any type of investment account.
Why Aren’t More Sustainable Funds in 401(k) Plans?
It comes down to professional obligation and perceived risk, according to Aimee Forsythe, senior vice president and senior portfolio manager at Cambridge Trust, a private bank based in Boston. And money is always the bottom line.
“The reason we don’t see as many sustainability options in 401(k) plans is because of the responsibility that plan sponsors have to their participants. They have a fiduciary duty to always act in the best interests of those participants, so when they’re choosing investments, historically, that means that they’re really just looking at financial factors,” said Forsythe.
The concern among financial managers has been that looking at other factors, like sustainability, could impact a fund’s performance.
With limited ESG options, what’s an aspiring green investor to do?
Check Your 401(k) Plan for ESG Funds
While most employer-sponsored plans do not include ESG funds, a small minority do. Check your 401(k)’s investment options to see if anything fits the bill. Usually, you’ll have access to the details through an online employee portal associated with the company your 401(k) is invested with, like Fidelity or Vanguard.
When you’re examining the different investments that make up your 401(k), look for key terms like “sustainable,” “ESG,” or “socially responsible.” But be sure to check the fund’s description, too—you can only learn so much from a title. If your employer doesn’t provide any info beyond a list of funds, head to the specific fund provider’s website to learn more.
To check fossil fuel exposure specifically, fossilfreefunds.org can help. The free and user-friendly tool assigns funds a grade based on their fossil fuel holdings. Just like in school, A is the best and F is the worst.
Check for a Brokerage Option
While relatively rare, some employer-sponsored 401(k) plans offer a self-directed brokerage account option. That means that you can decide yourself how you want to invest your retirement money, and this type of account is ideal for hands-on investors with specific values.
On the flip side, they aren’t a good fit for inexperienced investors without the knowledge or motivation to carefully research and select their own investments. With free reign and no guidance, people may choose investments that don’t align with their risk tolerance.
But if you’re the DIY type, check to see if your plan offers a brokerage account option. If so, research the sustainable funds you’d like to buy and proceed on your own. Morningstar, a financial services firm known for its comprehensive investment research, maintains a list of funds that focus on ESG factors—that’s a great starting point. From there, you can check out Morningstar’s assessment of a given fund, or head to the fund provider’s website to dive deep.
Ask for Change
If no suitable green investment options are available within your 401(k) plan, there’s no reason you can’t ask for them. Employees have more of a say than they think, because employers have a say in what 401(k) funds are available.
“Often employers have a mechanism,” says Todd Soltow, co-founder of Frontier Wealth Management. “It can be an investment committee made up of colleagues or something as simple as feedback to your human resources department. The key is to use the mechanisms, whatever they may be, to raise awareness that there is a demand for these funds from within the employee base.”
There is also power in numbers, so encourage your like-minded colleagues to speak up, too.
Work With What You Have
If ESG funds aren’t available in your 401(k) and there’s no sign of change on the horizon, you still have options.
Funds that incorporate some ESG factors are the next best thing. For example, a fund that mostly invests in companies that prioritize clean energy, and a few that don’t, is a greener pick than a fund with most of its holdings in fossil fuel companies.
You can find out which funds have environmentally sustainable qualities (but aren’t officially an ESG fund) by consulting the website of the company your 401(k) is invested with (like Vanguard or Fidelity). On these sites, you’ll learn about a particular fund’s objectives, philosophies, and holdings, and whether or not they align with green investing.
There are also several high-quality online tools investors can use to assess the sustainability of a given investment fund. Morningstar gets the nod from many industry experts, including Forsythe. Their ESG Screener delivers a suite of sustainability metrics when you search a fund. MSCI’s ESG Fund Ratings is another set of free, user-friendly tools for assessing a fund’s sustainability. Ratings range from AAA (the best) to CCC (the worst).
Sustainable Investing Outside Your 401(k)
Outside a 401(k) plan, your green investing options are much more flexible. Whether it’s a Traditional IRA, Roth IRA, or taxable account, you’re not restricted to a list of funds chosen by your employer—any fund is fair game.
You can work with a knowledgeable advisor to choose ESG funds that align with your values, or use online tools to help evaluate and select sustainable funds.