Is your employer doing enough to protect your financial future from climate change? Many U.S. employees saving for retirement are unknowingly invested in companies fueling the climate crisis, exposing their savings to climate-related financial risk and in misalignment with their values. Employees are increasingly calling for climate-safe fund options to avoid these risks.
Employer-sponsored 401(k) and other retirement plans have a legal responsibility to always act in their employees’ best interest by mitigating financial risk and maximizing returns. As shareholder advocates, As You Sow has engaged over a dozen companies including recently Google, asking for disclosures on how they’re protecting employee savings from climate risk. Unfortunately, some companies are still offering outdated and misguided excuses about “fiduciary duty” to explain why they aren’t taking steps to protect employees. The reality is that offering climate-safe sustainable funds is the best way to satisfy fiduciary duty and protect plan participants and administrators.
Department of Labor: Fossil free 401(k)s are OK
The Department of Labor (DoL), the regulator for employer-offered retirement plans, mandates that financial returns are paramount: Plan administrators “may not sacrifice investment return to promote goals unrelated to the interest of plan participants.”
Does this mean climate change can’t be considered? Not at all. The fact is that climate change is a material factor that affects the returns of investments. To deny that climate change is related to the interest of plan participants is to ignore the large and growing body of evidence showing that climate-safe investing is the smart approach financially.
To leave no room for doubt, the DOL issued a clarification stating clearly that plan fiduciaries can indeed consider climate change (as well as other environmental, social, and governance factors) when making investment decisions.
Adding climate-safe sustainable options can reduce financial risk
When you get into the numbers, it’s clear why climate change should be considered as a factor in investing. Recent estimates suggest that climate-related damages are already costing the global economy an estimated $16 million per hour. Fossil fuels are responsible for the vast majority of greenhouse gas emissions, fueling the climate crisis, but they’re also an increasingly risky sector to invest in. Oil and gas has been the lowest performing sector of the U.S. economy over the past decade.
The financial losses could be staggering. Our recent report with researchers from the University of Waterloo found more than 2 million employees from 12 tech-sector companies could have earned an estimated $5.1 billion in additional returns had their retirement plan holdings been made fossil-free 10 years ago. Because nearly all retirement investors are invested in fossil fuel companies through the mutual funds in their retirement plans, most have no idea they are exposed to climate-related financial risks.
Plan fiduciaries and beneficiaries don’t have to choose between returns and managing climate risk. In recent years, 1,500 institutions, representing more than $40 trillion in assets, have committed to reducing exposure to investments in high-carbon industries, many of them specifically citing long-term financial risk and the expectation that this decision will have a positive financial and risk-reducing impact on financial performance in the long run.
Google’s search for better returns leads to sustainable funds
One of a fiduciary’s key responsibilities is to manage the list of plan options, to make sure they are maximizing returns for participants. Recently, Google’s 401(k) added a new sustainable fund – one that consciously considers climate change in portfolio management and proxy voting. We recently spoke with Alex Wright-Gladstein, founder and CEO of Sphere, a fossil-free fund manager, about what spurred Google’s move.
“Alphabet offers a climate-safe fund option whereas many plans offer none, and the process the company’s benefits team followed for adding the climate-friendly fund sets a great example.”
To find a new fund option for its retirement plan, Google’s benefits team focused on their fiduciary duty to maximize benefits and minimize risk.
“They wanted to replace an existing fund that was underperforming, a common practice among 401(k) plan managers, and in doing their due diligence to maintain their fiduciary duty, they found that a fossil-free fund was the best replacement.” says Wright-Gladstein. “This assessment was made strictly on financial grounds, including because the fossil-free fund had been performing well compared to its non-fossil-free peers. The Google benefits team has demonstrated that it knows you don’t have to trade off returns to offer climate-safe investments.”
Google now offers the Parnassus Core Equity Fund as a sustainable option in its core fund lineup. Sam Gooch, a program manager at Waymo, a Google subsidiary, had this to say about the plan’s shift:
“The Parnassus fund that Google recently added to its lineup shows that a divested 401(k) fund can still meet the requirements for fiduciary duty. While this is a big step in the right direction, the fund has relatively high fees and is not a target date index fund, so it is probably not suitable for most investors’ needs.”
There’s still room for Google to do more. Approximately 66% of Google plan assets are held in the company’s default option, the Vanguard Target Retirement Fund series, which deliberately ignore climate change as an investment factor. Our recent study found that Google employees missed out on $1 billion due to its 401(k) plan investments in fossil fuels. While Google has taken positive steps, Sam Gooch and his fellow employees are still pushing the company to make progress towards a climate-safe retirement plan by adding a climate-safe target date option:
“Over 1,200 employees requested that a fossil fuel-free target date index fund be added to the lineup in early 2024 but have yet to hear back from the Google benefits team.”
Taking action
In a rapidly warming world, plan fiduciaries should be working to mitigate their participants’ exposure to climate-related financial risk by offer climate-safe sustainable options in the core plan lineup.
Want to get started? Visit our action toolkit for plan administrators to learn how you can protect your plan participants from climate risk while supporting a safe, just, and sustainable future for all.
Alex Wright-Gladstein is the CEO and founder of Sphere, which manages the Sphere 500 Fossil-Free Index which tracks the Top 500 US companies by market capitalization and excludes fossil fuel companies to avoid stranded asset risk.
