“We can’t include that fund because of our fiduciary responsibility.”
That bland statement seems to be what stands in the way of so many employees getting the types of funds they want in their retirement fund line up.
This has seemed silly to me. To have thousands of employees at Google or Microsoft or wherever asking for divested options in their 401(k), and then to have the plan sponsor condescendingly answer back that the company can’t because they are acting in the employees best interest?
C’mon. Even if you don’t understand the effects of climate change, it’s not too hard to see the amount of Teslas driving around. There is a massive technological transformation afoot.
What plan sponsors really mean is that they are afraid of being sued. This is not unreasonable. There is a cottage industry of ERISA lawyers suing retirement plans.
If you’re afraid of being sued, then what the lawyers think matters…a lot.
So in comes the brilliance of Jenna Nicholas and Yejide Olutosin of the Impact Experience, as they requested a legal opinion letter from the law firm the Wagner Group, which specializes in ERISA law.
Personally, this letter seems overly focused on only the investment aspects of running a fiduciary responsible 401k plan. Less about what happens when employees get options that align with their values. And that’s before education shows its importance, because, after all, how can you know what is in your best interest if you don’t understand what your options are?
But that aside, this group does a very careful review, and they break down options into 3 areas of funds that companies might consider for a retirement plan.
- Climate Integration Funds. Climate Integration Funds are investment funds that integrate financial material factors concerning climate-related risks and opportunities along with other financial material factors into their investment analyses with the goal of better managing risks and improving expected returns as further discussed below. A good example would be funds like Vanguard’s ESGV or Sphere’s SPFFX. Or if you’re thinking target date funds, Natixis’ ESG target date funds.
- Climate Focused Funds. “Climate Focused Funds are investment funds that focus on financial material factors concerning climate-related risks and opportunities, using them as a significant consideration in selecting portfolio investments.” This sounds like one of Carbon Collective’s ETF, or like BlackRock’s ICLN or First Trust’s QCLN.
- Climate Impact Funds. “Climate Focused Funds are investment funds that focus on financial material factors concerning climate-related risks and opportunities, using them as a significant consideration in selecting portfolio investments.” Not sure exactly what fits the bill here, but…
In evaluating the three, the Wagner Group says that the first two–Climate Integration and Climate Focused–can be considered for retirement plan fund lists as long as they are still focused on financial returns first.
This is a much easier argument nowadays. The International Energy Agency, who routinely used to underestimate the rapid growth of renewables, is now projecting peak oil demand before 2030. And with the exponential growth of solar, wind, electric vehicles, batteries and heat pumps, don’t you think that’s a smart place to invest?
The biggest question mark left out here is how to consider their inclusion. “Climate integration funds” as I understand it, may offer more diversification, but maybe less focus on the American Innovation of “Climate Focused” funds.
Even still, what role do they play in a retirement portfolio? I believe that’s the beauty of creating a fund list.
Ideally, an employee can have the choice of investment philosophy, but still get a portfolio based option. They’ll need diversification to mitigate the risk, as well as a balance of equities and fixed income.
And if they have choice in philosophy, then they’ll need the employee education to make an informed decision.
As more employee groups ask for this type of investing, I believe there is an opportunity for plan sponsors to seriously consider including sustainable or ESG options.
The wrinkle of new investment options creates an opportunity for retirement plan consultants and investment advisors to have a more prominent role in creating retirement plan fund lists that mitigates different types of risks and the education to help the plans come alive and create a pathway for long term financial security for millions of people.
That is, after all, what retirement plans are designed to do.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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