How to Persuade Your Employer to Add ESG Investing to 401(k)
Only 3% of 401(k) plans have a sustainable fund option.
How to bring sustainable investment options to your 401(k) plan
For many people, the 401(k) is a sizable store of assets. Regular readers will know that assets equal impact. Let’s get these two aligned.
This article will show you:
How to start the conversation with your employer
Email scripts successfully used by other employees
3 examples of other employees who engaged HR to add ESG funds
BONUS legal jargon (so they know you mean business)
This post is designed to be one of the most impactful articles written here.
THE GOAL: Shift tens of millions of dollars into better-for-world investments with a few clicks of an HR leader’s buttons. Help us reach that goal by sending it to your friend who is interested in impact. Or share to LinkedIn, where HR leaders can see that you’re interested in more ESG options.
What is ESG? And why does it matter?
ESG stands for Environmental-Social-Governance, but has become shorthand for a strategy of investing in “more ethical, responsible, and sustainable” investments. Generally, this means public companies that are deemed more responsible or sustainable based on publicly available data like CSR reports, CO2 emissions, workplace safety, how their Board and executives are compensated, and commitments to be better social and environmental actors. It is often called “sustainable,” “socially responsible,” or “impact” investing.
ESG companies perform better according to several research studies showing these companies perform better than their competitors. The Vanguard FTSE Social Index Fund outperformed the Dow Jones and S&P 500 by 36% and 20% respectively over 5 years.
ESG funds come in all shapes and sizes. They invest in the highest ranking ESG companies (or the highest in a sector). Funds strategies differ. Some choose divestment and do not own oil companies, gun companies, companies at risk of child labor, and other bad-for-planet activities. Others may focus on specific companies like renewable energy companies or low carbon footprint companies.
ESG funds are available in your brokerage account — and after today — in your 401(k).
ESG investing is growing quickly and is a great way to vote with your dollars.
ESG isn’t perfect. There will always be a need to do better. The global financial and economic system is a slow-turning ocean liner—you have to start turning hundreds of miles before the destination. Yet, ESG is attracting a lot of capital and is encouraging companies to keep up with the pace.
What impact could this have?
Only 3% of 401(k) plans have an ESG options.1
Yet 69% of 401(k)ers would or might switch if an ESG option was offered.2
Retirement accounts will hold $11 TRILLION in assets by end of 2022.
If sustainable investments expand to 10%, that is an additional $1 TRILLION for better-for-planet investments.
How to Get ESG in Your 401(k)
These steps have been used successfully by friends and readers of The Do-Gooder's Guide to Investing.
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Step 1: Scan your 401(k) options
Login and look for fund options that say “ESG” or “climate” or “sustainable.”
Nothing? Aw snap. Time to go Thor and put the hammer down.
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Step 1.5: Understand the inner workings
For context: Your employer offers a 401(k) so you can invest money tax free. However, they outsource the management of the 401(k) options to a Plan Sponsor or Provider. Your HR leader will likely be the one asking the 401(k) Plan Sponsor or Provider to add ESG funds into the system.
In certain organizations, a Board Finance Committee needs to tell the Provider to make certain changes.
Unless Sauron is on the Committee, they should be receptive to employee demands.
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Step 2: Reach out to HR
Write an email or talk with your HR leader.
A quick note can be as simple as: “Our current 401(k) fund options do not include ESG or climate-focused options.”
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An email script that works + bonus legal jargon
This email script has been used by others to successful add ESG fund options to an entire company’s 401(k):
“My understanding is that The Provider has a fiduciary duty3 to provide options that maximize our financial returns. My understanding is that other 401(k) providers have determined that including ESG funds allow them to meet that obligation. Particularly in a situation where an employee will not invest in non-ESG funds, the options we have today don’t give me and other employees in my position the chance to maximize their return.”
Another script to help your HR leader do their job
As one reader wrote: “My employer didn’t really know how to answer my questions, but once I got to [the Provider] it was very quick and easy.”
Here is a script your HR leader or you can share with the 401(k) provider:
“We’ve heard urgent feedback from our employees that they would like their benefits to align with their values. As for our 401(k) options, we do not have any ESG, climate-focused, or sustainability-focused fund options. With over 600 ESG funds and ETFs, we’re certain you can provide several options to help our employees invest with their values. We have also heard from other Providers who have maintained a fiduciary role while adding ESG funds. If you’re not able to provide ESG options, can you let us know of other Providers who can?”
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Step 3: Engage other colleagues
Let them know you are engaging HR and ask if they can write a letter or talk with HR, too.
Show up to the party with your crew.
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Step 4: Suggest other Providers
If the 401(k) provider won’t budge they are not doing their job.
With over 600 ESG index funds and ETFs, the options are plentiful. There are other Providers who do offer sustainable and responsible 401(k) options.
Betterment has Socially Responsible, Climate Impact, and a Social Impact option for 401(k)s.
Social(k) offers Fossil Free Funds, Gender Equality Funds, Gun Free Funds, Deforestation Free Funds, and more.
Vanguard has several low-cost, high quality ESG funds, and is the standard when it comes to investment funds, so Providers will know and trust them.
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Step 5: Stick with it
Asha reached out to her HR / Benefits team in February 2019 after reading The Do-Gooder's Guide to Investing. She pinged them again in April, and again in August. In November, Vanguard’s Social Index Fund (VFTNX) was added.
Asha created a big win for herself and her colleagues.
Over the last 5 years, VFTNX has outperformed the other major indices (Dow Jones Industrial Average and S&P 500) by 31% and 20% respectively.
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Step 6: Share your story
Write us.
Let us know what worked and what didn’t. If you’ve had a success, share it on LinkedIn so others get inspired to make change at their companies, too.
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Success stories
Here is the letter from one reader’s HR Manager thanking him for speaking up.
Ellie, a nurse in Seattle, wrote:
“It was absolutely worth the time and energy. It is by far the most impactful change I've made in my efforts to align my finances with my values. My retirement account is the largest investment account I have, and it will continue to grow over the next forty years. The potential to support causes I believe in is huge, and all while making money for retirement! It's fantastic! I love knowing that my hard-earned money is contributing to causes I believe in, and I equally love that none of my hard-earned money is contributing to causes I don't believe in. If money must run the world, at least I can choose where I throw my financial weight.
How to be a smarter, more impactful investor.
When you own a company, you are a shareholder. You get a vote. And a voice.
Shareholders are a powerful force for creating positive, lasting change in corporate behavior.
As You Sow
Get to know As You Sow, a non-profit raising the shareholder voice to increase corporate responsibility & push for a just and sustainable planet.
FossilFreeFunds.com
This website lets you search your funds by name or ticker. Grab a name from your 401(k) and drop it in here to see how exposed to fossil fuels it is.
A search for ticker symbol: ETHO — the Etho Climate Leadership ETF — co-founded by our brilliant friend Katie Hoffman, lets you know:
It earns an A grade
Has a sustainability mandate
Doesn’t own any coal, oil, or massive carbon reserves owners stocks.
You can search Fossil Free Funds by other issues, like Gender Equality, too.
Outside of 401(k)s you can do a lot more with your money. We cover the best gender equity & climate ETFs in other articles.
Take action. You’ll be proud that you added ESG funds to your 401(k). And the world will thank you for it.
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Interesting Links
Plan Sponsor Council of America, 2019
Schroders
Acting on behalf of another’s best interests. In this case, financial fiduciaries are somewhat required to help you maximize returns AND reduce risk.