Dear Dot: How Can I Invest in Earth-Friendly Funds?

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Dear Dot,

Does Dot know anything about responsible investing for 401(k) plans? I was looking at mine last night and realized I have an aggressive portfolio and know nothing about the companies.

—Ali

Dear Ali,

While Dot tends to glaze over at any talk of investments, I do value your questions because it’s one that many of us — including me — should consider. After all, over a third of the American workforce has a 401(k)-style retirement account. And so I will do my best to steer you and your (potential) fortune toward environmentally responsible and fiscally sound waters. 

Let’s dive in: While financial managers are getting better at investing in socially responsible funds, investment accounts are still heavily polluted with stocks in companies that have poor environmental track records. 

As far as environmentally wise retirement funds go, 401(k)s are a bit tricky, because these plans are controlled by employers, many of whom are hesitant to invest in Environmental, Social, and Governance (ESG) funds. It’s not that they’re bad people, but rather that they take their fiduciary responsibilities seriously, and there’s a widespread belief that ESG funds are riskier than ordinary funds (whose more reliable earnings may come at a cost to the world).  

In 2018, the Department of Labor advised that financial planners should forgo ESG funds for opportunities with a proven return record, but it has since switched course and endorsed climate and social considerations for fiduciaries. And with good reason: A number of studies, including a 2021 report by BlackRock, have found that portfolios divested from fossil fuels have fared as well or better than traditional portfolios. 

That being said, financial planners overseeing 401(k)s are supposed to answer to the interests of the plan holders — that’s you, Ali — so theoretically you could have some sway over what your planner invests in. 

In a very informative article in the New York Times a couple of years ago, Ron Lieber offered some advice for making your voice heard in 401(k) decisions. He suggested that you first try talking with your investment manager about socially conscious investing. If you don’t already know who the investment manager is, you can typically get the name from HR. 

“Now, rally your like-minded friends (the more the better) and get ready to make your case,” Lieber says. That way the investment manager will know that there’s a significant constituency in the company that values ESG investments.

“Those plan’s deciders answer to you, in theory,” Lieber continues, “and their interests are aligned with yours, given that everyone wants to have a great plan with good choices.”. 

If your planner seems hesitant, show him the BlackRock study. If you make no headway with this approach, you might also be able to open your own, self-directed 401k brokerage account, which allows you to choose the funds that go into your retirement portfolio. Of course, if you’re like Dot and know little about investing (despite being married to a portfolio manager), this might not be the wisest course of action. You could also pay larger fees, depending on how you invest. 

Lastly, if petitioning your 401(k) planner isn’t working, and creating your own account feels too risky, why not try to change the system that’s put all of us in this pickle in the first place? Join the campaigns of a group like 350.org, which supports grassroots campaigns to end the financing of fossil fuels.

One way or another, you can be a part of the trend to invest in the future of our planet. 

Fiscally,

Dot

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