Employees want sustainable 401(k) options (and will sock away more for retirement)

There are innumerable good reasons to make sure your company’s 401(k) plan has at least one sustainable fund as part of its menu, but let’s take two for starters: the Schroders 2022 US retirement survey found that three-quarters of defined contribution retirement plan participants said they would or might increase their plan contributions if it offered environmental, social, and governance (ESG) options, and 40% of respondents said that putting ESG options in defined contribution plans also improves how participants view their employers.

Though only 31% of 401(k) respondents reported having an ESG option on their menu, 90% of the respondents who do have access choose to invest in the ESG option – demonstrating just how popular sustainable options are among employees.

Increase in number of ESG funds

If your company is one of the 69% that does not yet offer a sustainable or ESG option, it may seem rather mind-boggling to know where to start when there are so many options to choose from. During the five years between 2014 and 2019, the number of funds branded as “sustainable” increased by over 140%, while the number of otherwise conventional funds that now say they consider ESG factors grew from 81 in 2018 to 564 in March 2020. The true impact a fund may have varies wildly depending on how the fund manager integrates ESG data, and trying to separate the truly sustainable funds from the ones that merely market themselves well is a lot for an HR manager to take on.

A reliable place to start your search is with the US SIF mutual fund database. As the leading voice for advancing sustainable investing in the US, the organization has many tools to help educate and empower investors seeking to align their investments with their values. US SIF’s online database displays every sustainable mutual fund or ETF offered by its member firms, and allows users to sort by cost, financial performance, screens, and more.

As You Sow, another US-based nonprofit, also provides tools to help vet sustainable investments. Their “Invest Your Values” website allows investors to search for funds that exclude or support a variety of issues such as fossil fuel-free funds, weapons-free funds, and gender equality funds. As You Sow also indicates whether a fund actively engages with companies to try to promote better corporate behavior, whether the fund’s manager is a member of US SIF, and whether the fund has an ESG or sustainability mandate baked into its prospectus – a formal document that is filed with the SEC and describes the fund’s investment guidelines and the risks involved.

When evaluating different sustainable funds, you should be looking for clarity in communication. The fund manager should have a very explicit way of conveying their values and framework in the investment selection process and you should be able to easily understand the focus of the investment process and the fund’s objective. It’s very important that a fund’s prospectus corroborates the fund manager’s claims to sustainability. When sustainability claims appear in a firm’s marketing materials but not in the fund’s prospectus, it is very likely that the fund manager is only aspiring to incorporate sustainability. Keep in mind that a prospectus containing phrases like “ESG consideration” is not as strong as a prospectus that spells out a sustainable investment process with specific ESG criteria.

Once you have identified a couple of funds that meet your expectations for sustainable goals, you can then look to see whether the fund provides transparent reporting that details its progress and contributions to sustainable outcomes. This kind of communication helps to delineate the funds that are truly impactful from those that are only marketing themselves that way. A fund’s manager may issue an annual or biannual impact report, for example, as a way to demonstrate accountability and transparency to shareowners. An impact report measures the fund’s progress toward stated sustainability goals and explores in detail how the fund’s managers are incorporating sustainability and ESG criteria into the investment process. Fund managers can choose to align their goals with self-generated or third-party benchmarks; our firm, Saturna Capital, uses an impact report to gauge a portfolio’s contribution to the United Nation’s 17 Sustainable Development Goals. This communicates the values, goals, and metrics used to evaluate criteria in a way that reflects a fund’s overall strategy which, again, should be specific and easy to understand.

Finally, once your chosen fund or funds make it on to your plan menu, be sure to announce the additions to your employees. ESG and sustainable funds have the potential to drive their investments toward the kind of future they want to see, meaning that employees are better set up to invest for their own healthy financial future, and for the betterment of society and the planet. That’s a profound opportunity for investors. And if Schroders’ survey is correct, an ESG or sustainable option means you may soon see an influx of new 401(k) plan participants and employees increasing their contribution figures.

Stephanie Ashton is Manager of Corporate Social Responsibility at Saturna Capital.