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Monday, September 9, 2024

How companies can align 401(k) plans with climate ambitions

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Retirement capital is a financial lifeline for the oil, gas and coal industries — roughly $1 trillion is invested in fossil fuel companies through Americans’ retirement plans.

That’s at odds with the interests of future retirees: Most employees want their employer to offer 401(k) investment options that align with the goal of the Paris Agreement to hold global temperature increases below 1.5 degrees Celsius. 

Companies that want to lead on this can do so, thanks in large part to President Joe Biden’s 2023 veto overturning a Trump-era resolution to restrict retirement funds from considering climate change and ESG factors in their administration. 

Still, they’ll need to proceed with caution: The 401(k) world is the strictest and most litigious in the U.S. investment space.

High bar for vetting credibility 

“Target date funds” such as Vanguard’s Target Retirement series, the largest in the United States, or equivalents from T. Rowe Price, BlackRock and Fidelity are structured to maximize returns by specified deadlines or timeframes. 

Funds of this type make up most options invested in 401(k) plans, as they meet the Department of Labor’s fiduciary expectation that 401(k) sponsors (a.k.a. employers) offer diversified options that reduce employees’ exposure to potentially large losses. 

But target date funds are among the biggest financial contributors to fossil fuel expansion. That’s largely because they include a high concentration of fossil fuel bonds, which oil and gas companies use to finance new project development.

Established managers including BlackRock and Fidelity offer target date funds in the U.S. marketed with terms such as “sustainable” or “ESG,” but for employees vetting fund choices for climate credibility, a good fund name may not suffice. 

BlackRock’s LifePath ESG Index 2065 Fund, for example, earns a D for fossil fuel financing and exposure. The fund’s AA MSCI ESG Fund Rating doesn’t provide much consolation for a 32-year-old GreenFin Weekly author contemplating retirement in the 2060s and interested in stable retirement savings and a stable climate to retire in. 

Options for taking action

With this in mind, there are ways companies can begin updating 401(k) offerings so they align with high-level climate mitigation or adaptation goals. Here are some steps for getting started.

Ask about plan options that avoid companies contributing most to climate change and at high risk of disruption from transition risks. If you’re a decision-maker in your company — a chief financial officer, a human resources person or benefits manager — that might mean directing your 401(k) provider to research options that eschew fossil fuel financing, such as the​​ Sphere 500 Climate Fund.

When mulling the legal ramifications, consider this: Department of Labor guidance in 2022 (challenged in 2023, but upheld) stated that “fiduciaries do not violate their duty of loyalty solely because they take participants’ preferences into account when constructing a menu of prudent investment options.” This is because “if accommodating participants’ preferences will lead to greater participation … then it could lead to greater retirement security.”

Assess employee interests. Are employees asking about fund options that avoid fossil fuels financing? Check with HR or benefits managers, key decision-makers in shaping 401(k) offerings. They may be fielding inquiries your company’s sustainability team hasn’t heard.

Fossil fuels exposure in retirement funds adds volatility to potential returns over time. More people — especially younger members of the workforce who won’t approach retirement age until the 2050 deadline for many net-zero commitments — are beginning to scrutinize those risks.

Consult an investment adviser with knowledge about climate-vetted fund options. A growing, though still small, number of advisers offer mission-driven portfolios to address fossil fuel investment risk and employee values alignment. 

“The most important thing you should ask in investing isn’t ‘who should I invest with’ or ‘what should I invest in,’ but ‘when do I need the money,’” said Zach Stein, co-founder of climate-focused investment manager Carbon Collective.

The $200 billion New York State Common Retirement Fund, Yale University’s $40 billion endowment and the Rockefeller Foundation — created out of oil wealth — recognize this long-term reality. They’ve divested from fossil fuel firms that are uncommitted to transitioning away from their core products. These funds, like future retirees, are long-term investors, and fossil fuels are a poor long-term investment. 

Roughly 75 percent of plan participants surveyed by the nearly $1 trillion investment manager Schroder’s said they would or might increase their overall 401(k) contributions if offered sustainable options.

That said, the retirement fund industry still has a lot of room to grow to meet the growing demand from employees.

[This article was reprinted from GreenFin Weekly, a free weekly newsletter. Subscribe here.]



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