Is Your 401(k) Bad for the Planet? 7 Ways To Make Your Retirement Plan Environmentally Friendly
If you’re invested in a 401(k) retirement plan, congrats — you’re doing something good for your financial future. However, there’s a pretty big downside of many of these plans — they’re not great for the planet.
How can a 401(k) be bad for the planet? According to a report from the Business Climate Finance Initiative and the CFA Institute, many of these retirement plans are invested in fossil fuels, which play a huge role in the greenhouse gas emissions that are driving intense climate change.
“If you have a 401(k) retirement plan, chances are that…it is going heavily into oil, gas, and coal without you even knowing. Most companies invest that money in fossil fuels. Probably because there are not many options available,” said Rayner Teo, founder of TradingwithRayner. “But, with growing talk of making the world a better place, there are new options arising daily for sustainable investments.” Here are several of those options to make your retirement plan more environmentally friendly.
Exclusionary Screening
Adam Garcia, a financial consultant and CEO of The Stock Dork, recommends several approaches to making your retirement more sustainable. The first, called exclusionary screening, “involves excluding investments in certain industries or companies that engage in activities considered harmful or unethical,” he said. “For example, an investor may choose to avoid tobacco, weapons, or fossil fuel companies due to their negative impact on health, safety, or the environment. Exclusionary screening allows investors to align their portfolios with their values and avoid supporting industries that conflict with their sustainability goals.”
This does require doing some research and it may also mean revising your financial goals, as there are fewer of what are called ESG funds (environmental, social and governance) that do not invest in these harmful industries.
Positive Screening
The other side of this approach is to do positive screening, which is to actively select investments in companies that demonstrate strong ESG practices and contribute positively to sustainability.
Garcia said, “… look for companies with a strong track record in reducing greenhouse gas emissions, promoting diversity and inclusion, or practicing transparent and ethical business operations. Positive screening enables investors to support and encourage sustainable practices through their investment choices.”
Impact Investing
Another approach is impact investing, which focuses on generating measurable social or environmental benefits alongside financial returns. Garcia explained, “Investors specifically allocate funds to projects or companies that address pressing global challenges, such as renewable energy, affordable housing, or clean water initiatives.”
This approach helps funnel money to create positive change and allows investors to directly contribute to solving sustainability issues while seeking financial returns.
Shareholder Advocacy
Additionally, though this won’t change what you’re invested in overnight, Garcia explained that shareholders of a company can engage in advocacy that encourages companies to undertake better ESG practices, transparency and accountability.
“Investors leverage their ownership rights to influence corporate behavior through dialogue, resolutions, and voting at shareholder meetings. Shareholder advocacy allows investors to use their influence to drive positive change within companies,” he said.
Proxy Voting
On a similar note,Brandon Juodikis, certified financial planner and founder of BRJ Wealth Management, suggests that shareholders attempt to engage in “proxy voting,” which, if available, allows them to vote on various issues related to company policies and practices, including environmental matters.
“By exercising your voting rights, you can support positive change within the companies you invest in,” he said.
Engage With Employers
If your current 401(k) plan does not offer sustainable investment options, don’t just assume that’s a closed case. Juodikis said, “Consider engaging with your employer or HR department. Express your interest in having access to environmentally friendly investment choices and encourage them to consider including such options in the plan’s offerings. Your input can help drive change within your workplace retirement plan.”
Consider a Self-Directed IRA
If your employer’s 401(k) plan doesn’t align with your sustainability goals, you can explore opening a self-directed Individual Retirement Account (IRA), Juodikis said. “With a self-directed IRA, you have more control over your investment choices and can select funds or investments that are specifically focused on sustainable or socially responsible investing.”
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