Sustainable investing: One more thing to feel guilty about not doing? A luxury for rich people who want to justify the piles of money they’re making in the stock market while the rest of us fret about our jobs? Or a relatively painless action you can take with your retirement savings and then sleep better at night?
Technically, it’s all three. But let’s not overcomplicate things. The good news is that if you have a retirement account, it’s easier than ever to invest it in a way that reflects your values. I think of it as kind of like voting with your money, which is to say, it’s more effective than screaming into the void.
I know: Wading through the bowels of your 401(k) plan is the last thing you feel like doing these days. But in the grand scheme of joyless pandemic should-dos, moving your retirement investments into companies you feel vaguely good about — and divesting from the ones you definitely don’t — is not that unpleasant, especially if you’ve just spent an evening trying to scrub seven months’ worth of mysterious goo out of your refrigerator drawers. From start to finish, transferring my retirement savings into ESG funds — named for the “environmental, social, and corporate governance” standards that they’re held to — took me less than an hour, including the eight minutes I spent on hold when I got confused and called the investor services line at Vanguard (they were very polite and talked me through the steps). I wouldn’t go so far as to call the process straightforward, but it was simpler than I expected.
(A word on retirement savings: Does it seem insane to focus on what your finances will look like in about 40 years when we’re in the middle of — gesturing around — all this? Of course. My advice: Don’t overthink it. Research shows that people make bad financial decisions when they get overwhelmed. If you’re already saving for retirement, keep doing it. If you’re not, make a plan for how to start.)
Here’s a step-by-step guide to better align your retirement savings with your moral compass.
What exactly are ESG funds?
More and more money-management firms are creating options for investors who want to steer clear of fossil fuels, guns, tobacco, or companies with questionable workplace safety records or political contributions. This approach is known as ESG investing, sustainable investing, or socially responsible investing (SRI).
ESG funds are basically clumps of stocks and bonds that meet specific criteria put forth by a couple of different regulatory organizations. ESG ratings and disclosures aren’t new, but they’ve become increasingly common in the past few years as more investors have demanded transparency about business practices.
In fact, sustainable investing has become such a trendy topic that many firms are now competing to display their commitment to it. At the annual World Economic Forum in Davos last January, a coalition of major financial institutions made a big show of their plans to purge their portfolios of carbon-heavy investments. Sure, plenty of people rolled their eyes and accused the money managers of “greenwashing” their offerings to appease customers. But no one can argue that more ESG funds equal more options for the rest of us.
Do ESG funds make less money than more traditional ones?
Not really. Some critics might say that promoting ESG standards gets in the way of maximizing profits, but there’s actually data that shows the opposite. One study found that roughly six out of ten sustainable funds delivered higher returns than their conventional equivalents over the past decade. Theoretically, ESG funds should perform much better in the long term because they back companies that aren’t making risky choices in how they treat the environment, their employees, their supply chain, and so forth. It’s win-win.
Another common criticism of ESG funds is that they’re less diverse, which flouts the golden rule that you want to have your money in many different baskets. That way, if one industry craps the bed (like oil did earlier this year), you’re cushioned by the many other types of stocks and bonds that a well-diversified fund will contain. There’s an argument that ESG funds hurt diversification because they cut out certain markets, and it’s true that some are designed to be concentrated in certain industries. But at this point, there are plenty of well-diversified ESG funds that are invested in hundreds or even thousands of different companies across many sectors, so if you pick one of those you should be fine.
What about these higher fees I keep hearing about?
In the past, ESG funds got a bad rap for charging higher operating fees that would eat into investment returns. But those days are over, explains Manisha Thakor, the founder and CEO of the financial advisory firm MoneyZen. “It used to be that ESG funds were smaller and couldn’t afford to run without charging a higher fee,” she says. Alternatively, some of the less reputable funds overcharged because they assumed that investors who prioritized social values wouldn’t mind paying more.
Luckily, that’s not the case anymore. “With so much more money flowing into this type of investing, there are now many socially responsible funds with fees that are just as low as traditional ones,” says Thakor. (As a general rule of thumb, look for funds with operating fees — which are also expressed as your “expense ratio” — that are under one percent.)
How do I find ESG funds?
They usually aren’t hard to spot, because the companies that offer them are shouting from the rooftops about them. (Good publicity!) They often have the letters “ESG” in the description or ticker symbol (the group of letters that represent a stock or fund). Some companies like Calvert offer ESG funds exclusively; more often, a company will offer a couple under its general umbrella of different investment options.
My company’s 401(k) plan only includes a couple of funds, and it looks like an ESG isn’t one of them. What do I do?
Unfortunately, this is very common, and may become even more so if Trump wins next month. “Despite growing investor interest in sustainable funds, very few 401(k) plans have sustainable funds in their lineups,” says Jon Hale, who leads sustainability research at Morningstar, a financial-services firm. One major reason for this is political: The Trump administration considers ESG funds to be politically motivated and has proposed a rule that would limit their use in 401(k) plans. “The administration especially doesn’t like the fact that many (but not all) sustainable funds are fossil fuel–free,” explains Hale.
Another reason that many corporate 401(k) plans don’t offer ESG funds is that they’re trying to keep things simple. “Research has found that the more options employees get in their retirement funds, the less likely they are to choose anything because it’s overwhelming,” says Thakor. “Over the last ten years, most plans have shifted from having a bajillion options to having just a few.”
One thing you can do about this is talk to your human-resources department and request that sustainable fund options be added to your 401(k) plan. “Better yet, organize your colleagues to make a broader ask,” says Hale. “Many firms recognize that including sustainable fund options may be attractive to employees, especially younger ones, so confirming that can achieve results.”
Alternatively, your company might offer something called a brokerage window, which is an option in some 401(k) plans that basically allows you to do your own thing. It’s also called a “self-directed option” or a “self-directed brokerage option,” and it gives you the freedom to use a separate brokerage platform (like Merrill Lynch, E*Trade, SoFi, and many others) that would offer ESG funds, among many others. However, brokerage windows have also gone out of fashion lately, so that may be another dead end.
If your company plan doesn’t include ESG options, you can look up the ESG ratings for the funds they do offer. (Some funds have high ESG ratings even if they aren’t advertised as such.) Morningstar has a widely trusted sustainability rating system that you can access with a free two-week trial and plug in funds from your 401(k) plan to see how they fare.
I have an old 401(k) plan from a previous job that I’ve been meaning to roll over into an IRA. Can I invest that sustainably?
Yes. Like many people, I’ve had multiple jobs that left me with a couple of stray 401(k) plans that were floating around until I got my act together and bundled them all into one rollover IRA. This is worth doing, not only because it’s much easier to keep track of all your retirement accounts if they’re in one place, but also because it gives you a lot more freedom in how you want to invest them.
Also, if you’re a freelancer like me and don’t have a 401(k), you can create a SEP (simplified employee pension plan), which is a type of IRA for self-employed people.
IRA plans come with a slew of investment options that can be overwhelming. If you get decision fatigue (or just confused, like I did), it’s worth getting on the phone with the firm that manages your retirement investments and asking for their help transferring your money to a couple of well-diversified ESG funds. Reputable money managers have a fiduciary duty to their clients, which means they must act in their investors’ best financial interests. So if you want your 401(k) invested in environmentally friendly companies, they can’t plunk it all in, say, a tree store and call it a day; they have a duty to invest your money in a balanced group of stocks and bonds that will help your portfolio grow.
Will my investments really change anything, though?
There’s historical precedent for divestment movements making real impact. In the ’70s and ’80s, university students and faculty protested apartheid by demanding that their schools stop investing their endowments in companies that had business interests in South Africa. (Of note: One organizer of the South Africa divestment movement at Occidental College was a teenage Barack Obama.) The effort gained critical mass and ultimately pushed Congress to pass the Comprehensive Anti-Apartheid Act of 1986, which banned new U.S. investment in South Africa. There are conflicting opinions about how much this pressured South Africa to start negotiations that eventually dismantled the apartheid system, but everyone agrees it played a role. Also notable: Then-President Ronald Reagan vetoed the legislation, but anti-apartheid sentiment was so strong that he was overridden by Congress. The takeaway: Investment decisions can shape major change, at the very highest levels, no matter who’s in charge.