How to push for a 401(k) that drives climate action

Over the past year, there has been a spate of stories chronicling highly paid corporate workers who have shifted career paths to tackle climate change. But employees don’t have to work at a cleantech or climatetech company to play an important role in driving down emissions. 

Start by following the money, particularly where the $6.3 trillion in 401(k) assets are invested. ​“Corporations can undermine their sustainability goals by how they invest the cash they have on hand and the retirement benefits they provide to their employees,” said Jamie Beck Alexander, director of Drawdown Labs, a program of the nonprofit Project Drawdown that is focused on accelerating corporate emissions reductions. 

Changing the narrative around sustainable investing

It’s a long-held belief that sustainable investing means accepting lower returns. But today, a far more persuasive argument can be made that fossil fuel investments are actually a drag on long-term investments. 

At the very least, an analysis by the London School of Economics found that the S&P 500 stock market index would have performed about the same between 1989 and 2017 without fossil fuel stocks. A more recent report concluded that the Colorado Public Employees’ Retirement Association pension fund would have had an additional $2.7 billion in value as of November 2022 if it had divested from fossil fuels a decade ago. 

These findings can be attributed to a number of factors. Fossil fuel stocks can be very volatile. Oil and gas production is capital-intensive, and the financial viability of existing and new projects depends on the future price of oil and gas. 

Geopolitical turmoil also plays a role — for example, the war in Ukraine has pushed prices up and resulted in recent record profits for oil and gas companies. But most significantly, the long-term trajectory of fossil firms has grown murky as renewable energy sources become cost-competitive globally and transportation and buildings increasingly shift from fossil fuels to electrification. 

Another way to evaluate the growing pull of sustainable investing compared to the status quo is to consider how much money needs to be deployed to solve the climate crisis. In 2019, climate solutions attracted about $600 billion globally, according to Project Drawdown and the Climate Policy Initiative. To keep warming at or below 1.5 degrees Celsius, that annual investment needs to grow to $5.2 trillion by 2030.

“The next internet is the climate economy,” said Zach Stein, co-founder of Carbon Collective, which helps employers assemble sustainable 401(k) plans. ​“You want to invest and align with the industries that are replacing the dying ones.” For investors, there are plenty of options. Carbon Collective has compiled a list of nearly 200 companies that earn over half of their revenue building climate solutions. 

Divest, reinvest, pressure the rest

Fossil fuel divestment and reinvestment in climate solutions are two of the three principles driving Carbon Collective’s investment strategy. The third pillar is to make use of the leverage of individual investors — who own almost 80 percent of the stock market’s value — to pressure companies to decarbonize by pushing climate-friendly shareholder resolutions. 

Employees can be essential in shifting how 401(k) funds are invested by advocating for sustainable options. In the past, employees who advocated for divestment from climate-harming funds may have encountered pushback based on the argument that failing to offer these funds would violate the employer’s fiduciary responsibility to maximize investment returns. Employers take fiduciary responsibility seriously because not meeting that requirement exposes them to potential lawsuits. 

But at the end of 2022, the U.S. Department of Labor issued a final rule allowing fiduciaries responsible for company retirement investments to consider climate change and environmental, social and governance (ESG) factors. Even before the rule was issued, BlackRock, the world’s largest asset manager, released a report pointing out that investors who had divested from fossil fuels had seen either neutral or positive results. ​“Employers sponsoring 401(k)s don’t want to get sued for violating their fiduciary responsibility,” Stein said. ​“They need to understand that ignoring climate risk violates that responsibility.” 

Unlocking more sustainable 401(k) options

Here’s how employees can shift company retirement plans to become sustainable: 

Know who to talk to. Your employer has a fiduciary responsibility to provide prudent, financially sound options for you to invest in your 401(k). That generally means they only provide portfolios that track the overall stock market, but they don’t take major financial stressors like climate change into account. As an employee, you have a right to approach your head of HR/​People to ask for more options. 

Be clear about what you want and offer help. Stein suggests auditing the existing lineup of funds in your 401(k) plan to see how much climate risk exposure there is (fossilfreefunds.org is a good place to start). 

“Then write an open letter to your plan sponsor saying, ​‘We don’t think you meet your fiduciary responsibility by having these investment options, and we want to engage in finding a new adviser or work with the existing one to find green options,’” Stein said. At companies with 100 or fewer employees, a rapid shift to sustainable investing is possible when a significant percentage of the workforce advocates for change. At larger companies, you may have to target a consultant tasked with selecting 401(k) funds. In both cases, be clear that employees are willing to help find sustainable investment options — and that they won’t accept no for an answer. 

Make sustainable options the default choice. Target date funds are popular 401(k) options because they automatically adjust the proportion of stocks and bonds to become more conservative as an employee nears retirement. Many of today’s sustainability-oriented target date funds are expensive or not climate-friendly, although Stein believes that will change. When it does, these ​“set-and-forget” green 401(k) options will need to be the default choice. ​“By making it the default option,” said Stein, ​“employees would then need to opt into a portfolio with fossil fuels.” The first step is just getting such funds into a 401(k) plan. Step two is getting them set as the default. 

“The truth is that there aren’t many sustainable target date options,” Stein said of the current market options from financial firms such as Natixis, Betterment and Morningstar. ​“However, people are waking up to the idea that divesting from fossil fuels and reinvesting in climate solutions might not be just ethical investing, but smart investing.”