Sustainable investing and 401(k)s: What are my options?

One of the demands placed on human resources professionals who manage employer-sponsored retirement plans is keeping in stride with employee expectations and desires. These two elements are anything but static, changing as generational and consumer tastes evolve. Moreover, an HR director must have their finger on the pulse so that future employee interests are met with a degree of expertise that reflects the gravity of the work being done.

A major trend in the 401(k) administration sphere that warrants monitoring is the arrival and surge of sustainable investment options. As defined by the Investment Company Institute, these funds are generally identified as:

• Environmental, social, and governance (ESG) exclusionary investing, which screens out companies or sectors that do not align with investors’ sustainability goals
• ESG inclusionary investing, which proactively seeks out companies that perform demonstrably better on environmental, social, and governance issues, and
• Impact investing, which focuses on generating positive, measurable, and reportable social and environmental projects and results, alongside financial returns.

Options within these categories seek to drive capital into avenues that support sustainable practices across ESG issues. As we are confronted with the grave consequences of climate change and the need to address social issues both at home and abroad, the alignment of such values has become top of mind for many investors.

As a result, HR directors overseeing 401(k) options should be prepared to offer employees ways to invest their money in funds that seek to address the causes they find meaningful. Below are three categories of sustainable investing funds that can be considered as part of this goal.

1.    Aligned with sustainable development goals

Developed by the United Nations and adopted by all UN Member States in 2015, the 17 sustainable development goals (SDGs) provide a “shared blueprint for peace and prosperity for people and the planet, now and into the future.” The SDGs outline ways to eradicate poverty and hunger, promote gender equality and quality education, accelerate climate action and much more. Each goal is tied to tangible benchmarks and ambitious horizons. Furthermore, these goals are backed by a reputable global force in the UN, making them useful tools for socially and/or environmentally conscious investors.

In funds that are aligned with the SDGs, investments can target specific goals to better measure how capital is deployed in a sustainable fashion. However, not all holdings that harness the SDGs are created equal. It’s important to understand that some funds may mention alignment with an SDG without offering data to back up the claim. Therefore, it is critical that HR managers ensure that fund companies provide concrete data in support of their SDG alignment. Failure to do so can expose investors to the pitfalls of greenwashing: the dubious all-talk and no-action strategy used by companies to appear more sustainable than they really are.

Take this example of how a company can be reliably (and truthfully) measured against an SDG. Corporation A is a public enterprise information management company that tethered itself to SDG 10, which aims to reduce inequality. This company transformed its governance policies in the name of transparency, policy and quantitative goals. This included publicly disclosing pay gaps, tightening gender pay parity from +/- 10% to +/- 5%, and aiming for 30% of their US leadership to consist of BIPOC individuals by 2025. This commitment to transparency and goal setting reassures HR managers that this firm is indeed aligned with SDG 10.

Such evidence reported by an SDG-aligned fund provides HR with a powerful tool to show sustainably minded employees how their money is being put to work.

2.    Fossil fuel free

Our world is hooked on fossil fuels but coal, crude oil and natural gas have enormous consequences for our planet (e.g., through contributions to polluted food supplies or warming our climate) – both during the extracting and burning processes. Thus, our near dependence on them within the energy supply simply isn’t tenable in the long run.

Fossil fuel-free funds (FFFFs) are defined differently by different fund managers, but overall, they involve investments in companies that (to some extent) have less reliance on fossil fuels.

In truth, our current degree of reliance on oil and gas makes it nearly impossible to fully exclude all companies that are in some way exposed to fossil fuels. However, funds with clear strategies surrounding this issue do exist.

As with the SDGs, HR managers who are interested in FFFFs should understand how these funds determine their status. By way of illustration, while one sample of three prominent FFFF ETFs omits companies that have “proved and probable” fossil fuel reserves for “energy purposes,” the included funds still have between 4.3% and 7.4% total fossil fuel exposure. One resource that may be helpful is Morningstar’s Portfolio Fossil Fuel Involvement metric, which defines fossil fuel involvement as occurring when a company collects at least 5% of its revenue from fossil fuel generation or production, or at least half of its revenue from fossil fuel products and services.

When including these types of funds in their 401(k) plans, HR managers should outline for employees how the proposed options participate in the fossil fuel sector. Several of the funds Saturna Capital manages, for example, exclude companies involved in fossil fuel extraction. Fossil Free Funds is a handy database that helps investors discover FFFFs based on custom search criteria. Funds are listed and ranked on metrics such as carbon footprint (in tons of CO₂ / $1M invested), percentage of fossil fuels, or with a straightforward fossil fuel letter grade.

3.    Faith-Based Options

As we’ve seen, funds can be sustainable when attached to goals set by reputable organizations or when backed by data on how companies turn a profit in relation to fossil fuel consumption. Another structured approach aligns with faith-based criteria.

In an era that is seeing consistent progress toward recognizing the importance of all employees’ backgrounds and beliefs, providing a faith-based option in their 401(k) can be a welcome benefit. Employees who feel a strong connection with their faith may want to align their investments with their religious tenets. For some, this could be a required component of their saving and investing strategy; for others, it could be part of an emotional journey they may not have even considered.

Christian funds have been available for some time, often driven by endowments associated with religious organizations. Jewish or Kosher investments are lesser known but accessible – and often aligned with impact investing. Islamic investing (called Halal or Shariah-compliant) is becoming more prominent with the growth of the Muslim population in the US. Indeed, the Muslim community is expected to be the second-largest religious group in the country by 2040.

There is significant overlap between faith-based investing and socially responsible investing, as the main driver of both is the exclusion of objectionable sectors like gambling, tobacco or alcohol. Muslim investors must also avoid usury and speculation. Funds that consider all these elements are rare, but options do exist.

As an HR manager, you have the power to provide employees with socially responsible and sustainable investment options that will enable them to direct their savings into funds that align with their values. Having better, more personalized options can increase enthusiasm, participation, and satisfaction with your company plan.