Most 401(k) retirement plans aren’t automatically engaging in socially responsible investing, and many might not even offer sustainable investing choices at all. Furthermore, there are questions about the contents of environmental, social, and governance (ESG) investing and other such options.
You can talk to your 401(k) provider to learn more about the investments in your portfolio and to make changes if you want to align your 401(k) investments with your values.
- An increasing number of people want their investments to not only deliver financially but also push companies to act responsibly.
- The U.S. Department of Labor has warmed to the idea of incorporating environmental, social, and governance (ESG) analysis into fiduciary decision making.
- Nevertheless, finding out if your plan is actually socially conscious will require contacting your 401(k) provider. You may be able to make changes to your portfolio as well.
Socially Responsible 401(k) Investing
Many people save for retirement via a 401(k), and they have begun to question how their investments may be connected to nonfinancial concerns, meaning that there could potentially be a way of using those assets for social and environmental impact.
There haven’t been many options for people who want to be sure that their retirement money isn’t propping up unjust systems or fossil fuel companies. Historically disapproving of socially responsible investing, the U.S. Department of Labor (DOL) changed course. If passed, a rule that was proposed in 2021 would allow fiduciaries the go-ahead to use ESG criteria in decision making. Specifically, the rule would allow fiduciaries to consider ESG factors as relevant risks, and it follows up on a Biden administration executive order.
The administrative sea change removes one hurdle for ESG investing—namely, federal discouragement—but there are others. Most people don’t put a lot of thought into their retirement plans outside of financial returns. There’s also a high fiduciary standard under U.S. federal tax and labor law, detailed in the Employee Retirement Income Security Act (ERISA) of 1974, which gives plan fiduciaries pause. The fiduciary requirement under ERISA effectively requires that investments meet a standard of return on investment (ROI). Should they not meet that standard, the investor could be liable for legal action. The new rule changes would not alter that requirement.
Even with the DOL proposal, which has been viewed as a big win for the sustainable- and impact-investing crowd, most retirement plans do not use ESG investing right now.
Greenwashing or Just Green?
The channels are opening for ESG retirement investing, but whether the proliferation of ESG options is just corporate greenwashing is another question. Investigations into the contents of ESG investing have applied skepticism to how sustainable options that wear the ESG label actually are. For example, an inspection of MSCI Inc., the biggest ESG rating company, concluded that it used doublespeak in its marketing and methodology, leading to false perceptions about the sustainability of the companies it rated.
As of March 2023, the U.S. Securities and Exchange Commission (SEC) is still looking to standardize ESG disclosures and rein in the use of suspect ESG labeling. However, until that happens, it isn’t clear that something labeled ESG is, in reality, sustainable.
Knowing Your 401(k) Investments
So what’s it to you? If you want to know whether your plan is sustainable, you could start by consulting a nonprofit that investigates corporate impact.
One place you might look is the nonprofit organization As You Sow, a social responsibility advocate. It rates the social repercussions of retirement plans and mutual funds on several social issues, including gender equality, as well as a fund’s connection to weapons manufacturing and the prison-industrial complex.
From there, it’s a matter of selecting a sustainable option if one is available to you or lobbying your plan administrator for one if there isn’t. Contact your retirement plan provider and ask them to walk you through the investments in your 401(k) portfolio. If you feel that any of the companies or funds do not align with your morals and values, and you would like to switch to investing in more socially responsible companies or funds, ask if they can help you do that.
What is ESG investing?
Environmental, social, and governance (ESG) criteria inspect the corporate practices of a company. It’s likely the most well-known form of sustainable investment.
What us ERISA?
The 1974 Employee Retirement Income Security Act (ERISA) sets up rules for fiduciaries, including retirement plan managers.
What is conscious capitalism?
“Conscious capitalism” is a term minted by Whole Foods Market co-founder John Mackey and used by some corporate giants. It holds that thinking about the interests of all stakeholders allows companies to pursue profit in a way that’s sustainable yet doesn’t deaden financial returns.
The Bottom Line
Retirement savings represent a multitrillion-dollar market in the United States, and they have become part of the rush to provide a free-market answer to questions about sustainability. Conscious capitalism claims that expanding the notion of stakeholder will allow businesses to become more sustainable while returning good profits. The Biden administration pushed regulators to undo stumbling blocks to impact investing, and there’s an appetite for ESG investing.
Sustainable options aren’t ubiquitous, and there are hindrances to sustainable investing and concerns over the contents of the ESG alternatives. The upshot is that if you want to make sure that your investments are sustainable, you’ll have to contact your 401(k) provider and work with them to make it happen.