Individual Retirement Accounts (IRAs) are tax-advantaged investment accounts to help you save for retirement, made primarily for people who don’t have access to workplace retirement accounts like a 401(k). Setting up an IRA for the first time is one major milestone toward securing your financial future. But that future is shaped by the choices you make today.
Redirecting investments away from high carbon industries and into the clean energy transition is an important step in avoiding a dramatically less hospitable future climate and developing more affordable energy sources. IRA plans in the U.S. hold more than $18 trillion in assets under management, so how they’re managed can have a big impact.
Investing your IRA in a sustainable future
Moving your money out of fossil fuels isn’t just good for the planet, it can be good for your financial future. While fossil fuels periodically experience high profits, over the past two decades, fossil fuels have underperformed the U.S. stock market, quietly dragging down the mutual funds most people’s retirement plans are built on.
One key difference between an IRA and an employer-offered plan like a 401(k): IRAs are more likely to offer a broader menu of funds, meaning there’s much greater access to many climate-friendly investment products.
There are also fewer legal barriers. Under the current administration, partisan regulators have taken some steps to restrict sustainable investing in 401(k)s, but IRAs aren’t covered by those rule changes. There are many IRA platforms that continue to offer a wide range of sustainable funds.
If you’re concerned about climate change and you have an IRA or are thinking about opening one, there are a few steps you can take to make sure you avoid climate portfolio risk and are investing in a safe and sustainable future.
Step 1 – Opening an IRA
Here’s the key step: make sure the firm you choose to manage your IRA offers access to sustainable or ESG investment options BEFORE you open your account (“ESG” stands for Environmental, Social, and Governance, a framework for addressing investment risk).
If you have a financial advisor helping you, let them know you’re interested in sustainable investing and ask about available sustainable options (here’s a list of socially responsible advisors from Green America to get you started). If you’re setting up an IRA yourself, some robo-advisors specifically screen for sustainable portfolios.
Once you’ve selected a provider, opening and funding the account is straightforward: you’ll provide some basic personal information, then make an initial contribution by cash, check, or transfer. In most cases, you should also have the option to roll over an existing 401(k) into a personal IRA.
If you ask and find out your provider doesn’t offer sustainable investing, you’re in a tougher spot. You can ask them to add funds or look into finding a new firm.
Step 2 – Researching your investments
Once your account is set up, it’s time to start researching investments. It’s not always easy to know which funds carry hidden climate portfolio risk. Even funds with “sustainable” or “green” in the name can carry meaningful climate risk once you look at what’s actually inside them. The downside of having more choice in an IRA is that the burden falls on the individual to figure out which funds are for real and which ones are just greenwashing.
We’re here to help. Fossil Free Funds lets you search any fund by name, ticker, or asset manager and see exactly what you’d be investing in. Funds are graded on their fossil fuel exposure so instead of relying on a fund’s name or marketing, you can see the actual companies inside it before you commit your savings. It also grades funds on other issues like deforestation and weapons manufacturing, so you can invest in whatever matters most to you and your portfolio.
Step 3 – Monitoring your investments
It’s important to regularly review your IRA. If you have a financial advisor, they’ll help you with this process.
Periodically, check back on Fossil Free Funds as part of your regular portfolio review. New sustainable fund options frequently come to market; revisiting your funds’ sustainability ratings helps make sure your portfolio stays aligned with your investment goals.
Spread the word
Share what you find with friends and family and encourage them to look at their own retirement accounts. They may have the same concerns about climate change and environmental impact as you. Raising awareness can multiply the positive impact of sustainable investing and help speed the growth of the sustainable financial industry.
Last thought: More climate finance actions
Investing in a sustainable IRA can be a great way to build a retirement portfolio that protects both your future and the planet’s. But there are other ways your money can have impact.
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Since the Paris Agreement, the six largest U.S. banks have committed $1.8 trillion in lending and underwriting to the fossil fuel industry. Here’s how to see what your bank is doing with your money, and how to find sustainable banking alternatives. Your insurance premiums may be funding the same industry, so it’s worth checking there too.
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Owning individual stocks gives you real power as a shareholder, including the right to vote on investor proposals that address issues like climate change, racial justice, and ocean plastics. My Money My Vote is a free service that automates your voting on each company ballot (called a proxy) according to ESG-aligned guidelines provided by As You Sow.
Disclaimer: As You Sow is not an investment adviser. We do not provide financial planning, legal, or tax advice. We are a non-profit providing educational material about the environmental and social sustainability of various investments.
