Does your 401(k) contribute to fossil fuels?
How your retirement savings can drive positive change.
By Asiyah Choudry
September 27, 2023
Did you know that your retirement portfolio can have a greater positive impact on climate change than other lifestyle changes like going vegan or flying less? With $6.3 trillion in assets as of September 2022, 401(k)s present a tremendous pool of capital with the potential to create positive change. However, as long as they remain invested in fossil fuels, retirement assets will continue to contribute to climate change.
Read on to find out why you should free your 401(k) from fossil fuels today and learn how to take action now.
The link between your retirement investments and fossil fuels
We are experiencing climate change in real time — July 2023 was the hottest month ever recorded in human history. Fossil fuels are the largest contributor to climate change, accounting for 75% of global emissions. As the concentration of greenhouse gasses in the atmosphere increases, the global average temperature will continue to rise, with devastating consequences for life on Earth.
Past limitations surrounding the permissibility of incorporating environmental, social, and governance factors into retirement plans have restricted the availability of sustainable retirement options. Retirement savings represent a tremendous pool of assets working against the planet and amplifying the climate crisis.
You may think climate action is incongruent with maximizing financial returns. But sustainable retirement funds aren’t just a climate issue – climate risks resulting from global climate change can negatively affect the value of your investments. This means that avoiding fossil fuels in your retirement portfolio may be financially prudent. A study by the University of Waterloo found that six large pension funds would be worth $21 billion more if they were fossil fuel free.
The need for climate capital
Just as divestment from fossil fuels can have a huge positive impact, so can investment in climate solutions. Transitioning to a net zero economy demands a high influx of investment into climate mitigation and adaptation measures, but global climate finance flows are falling short. Climate finance flows would need to increase by seven times up to $4.3 trillion per year by 2030 to mitigate climate change. The energy transition alone requires $35 trillion by 2030.
Fortunately, there are a growing number of financial products that allow investors to direct their capital toward climate solutions. However, these options do not typically extend to retirement products. If a portion of the $6.3 trillion in retirement assets were deployed to finance climate solutions, we could move closer to achieving climate finance requirements.
How to assess your 401(k)
If you don’t know what’s in your retirement portfolio, you can contact your employer’s HR representative or 401(k) plan manager to identify your investments.
Once you know what you’re invested in, you can review each fund’s prospectus to search for references to energy or fossil fuel companies. Banks are also notorious fossil fuel financers. The prospectus will also provide insight into the fund’s investment objective, strategy, and holdings. You could also compare the fund’s holdings against the Greenhouse 100 Polluters Index to see if you invest in any of the top corporate polluters.
A screening tool such as GreenPortfolio makes it easier to identify whether your investment portfolio, including your 401(k), is financing fossil fuels. We gather data from dozens of sources to score your investments and banks. Our proprietary scoring algorithm examines over 400 climate dimensions such as science-based emissions targets, coal mining, and environmental fines. Get started today on the GreenPortfolio Climate Hub and see the climate impact of your full investment portfolio.
Divesting your 401(k) – and the rest of your portfolio
While sustainable funds represent a minority of defined contribution plans, there is a clear demand for sustainable retirement solutions. According to Schroder’s 2022 US Retirement Survey, 87% of plan participants want their retirement plans to align with their values, and 74% claimed they would increase their contribution rate if they had an ESG option.
If your employer offers a fossil-free retirement plan, consider making the switch. If not, voice your preference for a sustainable retirement solution. Sphere, Carbon Collective, and Arnie have designed fossil-free retirement solutions that mitigate the carbon footprint of your retirement portfolio, enabling you to invest your retirement funds into climate solutions.
Towards greener retirement
Through involvement in fossil fuels, pension funds are contributing to climate change. Divesting retirement assets from fossil fuels into climate solutions can help address the climate finance needs necessary to limit global warming.
If you want to reduce the environmental impact of your investment portfolio, get started today on the GreenPortfolio Climate Hub!
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