Want a Future Worth Saving For? Here’s How to Divest Your 401(k) From Fossil Fuels

If you’re lucky enough to have a retirement account, you’re trying to plan for a comfortable future. Unfortunately, your current portfolio may be turning that future into an unlivable hellscape of rising sea levels, extreme weather, and various climate change catastrophes.  

Of the Americans saving for retirement, more than half invest in a plan run by their employer, the most common of which is known as a 401(k). But only one tenth of one percent of America’s $9 trillion 401(k) dollars are put into socially responsible, environmentally sustainable investments. 

Whether you put your money into a default investment option, or even if you actively manage your retirement portfolio, chances are that money is funding climate catastrophe. 

That’s not just bad for the planet, it’s also probably bad for your bottom line. While environmental and social concerns have generally been treated as a niche issue in investing, some fossil fuel companies and dirty investment funds have actually begun underperforming the market. Meanwhile, clean energy investments have surged in value as technology grows cheaper and more widespread. While countries around the world get more serious about transitioning away from fossil fuels, investments in oil and coal may tank even further. 

“To avoid fossil fuels is good for your portfolio. Environmental considerations get put in the tree-hugging liberal box, but they are factors that reduce risk and increase return,” said R. Paul Herman, CEO of HIP Investor, an advisory firm that looks at impacts on society. 

For both altruistic and self-interested reasons, the time is ripe to dump your dirty portfolio. Here’s how to do it.

Many employers, large and small, use the online benefits management platforms of their 401(k) providers that let employees easily check the status of their retirement funds. Log on, navigate to the retirement benefits page, and look for the summary of your investments. Chances are you have a smattering of mutual funds with different maturity dates and compositions. 

“Most people don’t have a clue what they own,” said Andrew Behar, CEO of As You Sow, a corporate accountability group that pushes companies and institutional investors to adopt socially responsible practices through pressure from shareholders. “I did a talk at the World Bank, and I showed them their 401(k)s were invested in cluster munitions and landmines. But they didn’t know!”

Once you know what you own, go to fossilfreefunds.org, a website run by As You Sow. The site  lets you search any fund in your 401(k) plan by name, and gives each a letter grade based on stakes it has in carbon reserves, pipelines, oil and gas companies, and other parts of the fossil fuel industry. An “A” grade means a fund has zero exposure to fossil fuels, while an “F” grade means a fund has between nine and 100% exposure to fossil fuels. Fossil Free Funds’ data about what’s in each fund comes from Morningstar, a financial services and information company. Morningstar also has a sustainability metric for many funds 

A caveat here: many 401(k) plans invest in “target date” funds, which combine multiple mutual funds. Right now, grades for these funds aren’t available on the Fossil Free Funds website, though they will be in the next few months. In the meantime, you can look at your most recent prospectus (the document that explains what’s in the fund) to figure out the top investments, and then search for those funds’ ratings one by one.

Be careful not to just take a fund’s name at its word if you really want to make sure your portfolio is polluter-free. Many retirement funds engage in so-called “greenwashing,” using environmental branding to cover for the same old polluting investment decisions. For instance, there are eight “clean energy” branded funds that received an F grade from Fossil Free Funds. There’s no universal standard for what Wall Street can call green or sustainable. “We’ve tried to get the SEC to standardize language. There are no rules,” Behar said.

It’s doubtful your 401(k) portfolio is totally clean. In a 2016 analysis, As You Sow found that only one in 100 of the largest companies in the U.S. had a 401(k) plan that was completely free of oil, coal, or gas. 

“All of Amazon’s 401(k)s are invested in fossil fuels,” Behar said. “But for Amazon to add a few fossil fuel free funds should only take a couple of weeks. They should do it because they’ll get a victory lap. They’ll make their employees happy.”

Most corporate retirement account managers have yet to switch to green assets, according to Behar, because they’re fearful of getting into so-called “ESG” investments (environmental, social, and governance). Those are funds that take into consideration more than just the next quarterly earnings report, like impacts on nature and society. Since 401(k) plans have a legal fiduciary responsibility to seek the highest return, the plan administrators may believe that employees will sue if the plan appears to sacrifice profit for sustainability. 

There are only about 18 companies with truly green employee retirement plans, most of which are small or midsize, according Herman. 

But that inertia may be giving way. The amount of money invested in the U.S. with “sustainable” strategies intended to mitigate environmental and social damage soared from $12 trillion to $17 trillion between 2018 and 2020, according to the Forum for Sustainable and Responsible Investment, an ESG investing advocacy group. Now, one out of three dollars invested in America under professional management has a sustainable mandate. 

Take a look at your company’s other retirement plan funds, and search for their sustainability rating on the Fossil Free Funds website. If you find any that get a good grade, the next step is easy: go into your retirement fund’s management website and look for the tools to change both elections for future contributions, and balances for existing contributions. Reallocate your money from dirty funds to clean funds, making sure the total equals 100 percent.

There’s usually more to it than that though. More info about how to move your money into green investments here.

Investments outside of employer-sponsored 401(k)s are a lot easier to manage.  Evaluate the sustainability of the investments you have, and sell any that aren’t meeting green standards. Move that money to green investments instead.