Socially Conscious Investing: Taking a Bigger Role in 401k’s

Socially Conscious Investing: Taking a Bigger Role in 401k’s

Peter Rothstein likes that his job has a social purpose. It expands clean energy to mitigate climate change. Best of all, he will soon be able to support that mission in his retirement plan. Socially conscious investing is gaining ground.

Identifying 401k offerings that support environmental, social and governance (ESG) factors

The Northeast Clean Energy Council, where Mr. Rothstein is president, will revise its 401k plan offerings to include mutual funds promoting those sustainability goals. The revamped plan will include a target date fund series that screens for environmental, social and governance factors, called ESG investing. The council, a nonprofit business alliance of 250 companies, will continue to offer traditional choices such as total-market index funds, but the ESG option will be the default investment choice for Mr. Rothstein’s staff of about a dozen employees.

“These new business models have the potential to be climate solutions and to grow the economy at the same time,” he said. “It makes sense for us to incorporate ESG investing for our retirement plan.”

The idea of investing with a social purpose is gaining ground

  • Sustainable and responsible investing in the US grew 38% from 2016 to the start of 2018, to $12 trillion in assets under management, according to the US Sustainable and Responsible Investment Foundation (SIF). SIF is a US-based membership association that advances sustainable, responsible and impact investing across all asset classes.
  • Morningstar reported that 2018 marked the third consecutive year of record flows into sustainable funds; the number of sustainable funds also jumped nearly 50%.

Most sustainable investments are held by institutional and high-net-worth investors

US SIF data showed that of the $12 trillion invested last year, 72% was held by pension funds, insurance companies and educational and philanthropic groups; 25% by high-net-worth clients or individual investors.

Many think 401k plans will play a larger role in ESG investing, driven partly by demand.

  • A Morningstar study published this year found that more than 70% of the US population has “at least a moderate interest” in sustainable investing.
  • The appetite is especially strong among younger workers: 67% of millennials would be more likely to contribute, or increase their plan contributions, if they knew their investments were contributing to social good.

Most ESG mutual funds rely on ratings systems that score securities for their exposure to indirect financial factors, including a company’s environmental impact, governance policies or how they treat employees or monitor their supply chains.

Critics argue that investors must sacrifice strong returns in return for their socially responsible choices. But a growing body of evidence finds that ESG-screened equities were better than average on measures of quality, financial health and volatility.

A look at San Francisco’s Veritable Vegetable

Veritable Vegetable, an organic produce distributor in San Francisco with about 130 workers, has included socially responsible mutual funds in its 401k plan since 1995. “Since the beginning, we’ve been committed to promoting environmental sustainability in everything we do,” Shira Tannor, the company’s chief administrative officer, said. “We have a different vision of what profitability means,” Ms. Tannor said. “We pay a good living wage to our workers, and sustainable prices to the farmers we work with, and we help people eat healthy food. We’re a for-profit business, but if we have nothing left over after that, we consider that a success.”

Evidence that ESG can match or beat traditional investment options is sparking interest

“We’re getting more questions from plan sponsors — they’re asking if they should be adding this to their investment menus,” says Mikaylee O’Connor, head of defined contribution solutions at RVK, a New York-based investment firm that advises workplace retirement plans. “What’s driving many of the conversations is more research that supports consideration of sustainable investing.”

Fiduciary responsibilities come first

Federal law mandates that sponsors place economic interests of participants ahead of other considerations when making decisions about retirement benefits. But guidance issued in recent years by the Labor Department on whether ESG products meet that obligation has shifted repeatedly.

Some senior managers view their 401k plans simply as a cost center, rather than as a way to promote company values or retain employees. Mr. Rothstein, however, remains bullish. His council’s shift to a socially responsible 401k plan was resonating with employees. “Everyone working in this industry, and more people in general, are recognizing that this matters,” he said.

Creating a Living Trust is an important part of financial planning

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