The Divestment Movement Grows into Retirement Plans–and Why That May Make You a Better Fiduciary

Stand.earth just launched a divestment campaign for US retirement plans.

If you’re a people leader, this may cause a bit of angst.

Employee activism has been on people leader’s minds, and this may seem like just another crusade.

Now, I know that Stand.earth is a client of ours, but I ask you to give this idea a little more space.

Because now may be the right time for organizations to offer fossil fuel free options in their plan, and for some, at the default level.

The Divestment Movement Is in a Different Place

"The best reason to invest ethically is it's a key way to starve the fossil fuel industry and slow down global warming. The second best reason is it makes good financial sense too,” said Bill McKibben, writer and founder of Third Act.

The divestment movement started with ethical underpinnings, and this economic argument has deeply augmented the movement. This divestment movement is no longer small, it amounts to an estimated $40 trillion in partial or complete divestment as you can see in the divestment database.

“The divestment movement has mostly focused on personal investments and endowments until now,” said Amy Gray, director of climate finance at Stand.earth. “But with divested retirement investments now available, we saw the pathway to accelerate companies and nonprofits who actually care about solving climate change to put their money where their mouth is.”

How a Divested 401(k) Investment Option May Elevate Fiduciary Responsibility—not Detract.

“When Amy brought this option to me, I wanted to be cautious,” said Kayla Minotti, director of operations at Stand.earth. “I understand what the fiduciary responsibilities of an organization are to its employees: to offer investments in their best interests. And so it needed to be carefully considered.” This is a good position to act from: cautious if open.

According to the Department of Labor, there are three main tenets to running a fiduciary retirement plan:

1. Offer investments that mitigate the risk of loss
2. Prioritize plan participation
3. Prioritize employee contribution financial drag of oil on pensions

You’ll also get the use of “pecuniary” thrown around, which means its financial performance. So let’s look at the rearview on performance (as of Sept 3, 2024)

 SP 500 EnergySP 500 Index1 year returns-1.78%22.44%3 year returns23.12%6.83%5 year returns10.10%13.73%10 year returns-0.43%10.70%

In 3 of 4 time periods, fossil fuels/energy, is a drag on the overall market–it’s important to note that past performance doesn’t guarantee future returns. Granted, oil had an exceptional 2022 when Russia invaded Ukraine and decreased supply, while demand remained.

This point is hammered home with the recent reports from As You Sow on the financial drag of oil in retirement plans over 10 years in their 2024 Waterloo report as well as the Stand.earth and Waterloo 2023 report on pensions.

Individual employees at those organizations can have different results, because not all employees worked that exact time period.

On a larger scale, what it suggests is that plans have suffered performance drag over a long time period, and that may continue.

If you combine this historical data with the forward looking data from oil companies like BP projecting peak demand, then there is reason to believe that fund lineups on retirement plans may want to include target date options that avoid exposure to stagnation in the fossil fuel industry.

“When we dove into the data on sustainable target date options, in addition to passive options, that was really compelling for us from a fiduciary standpoint,” said Matt Westendorf, COO of Stand.earth. “A light clicked in my head: we had been forcing people  to invest in a way that may underperform over the course of their working timelines over the next 20, 30, 40 years in addition to going against their ethics. A double whammy. Now we have options that match the long term goals of our employees.”

Why Now May Be the Time for Some Companies to Divest in their Retirement Plan

Now that there are target date fossil fuel free options for retirement plans, this opens up the idea of who is this appropriate for.

From our fiduciary perspective at Carbon Collective Investing, we believe in having target date options in the climate, ESG, and passive investment philosophies.

Why?

Because any may perform the best over a specific time period.

In terms of which employers are a good fit for climate investment options as the default, we look at the age of the employees, because we tend to find that if a company has more employees who are under 45, and thus have 20+ years to retirement, we may be more likely to see a fast transition to climate solutions in the that time period that may result in outperformance of the climate option.

In terms of types of employers, we see this employee profile with:

• Nonprofits
• Tech companies, specifically climate tech
• Private businesses with a sustainable mission

We see this option being adopted more broadly eventually too. Good fits beyond this initial group may be CPG brands and retailers as they often have young employee bases and sustainability missions to help boost brand trust.

That doesn’t mean that a more traditional company should sit on their hands.

Quite the contrary, that employer would still want more quality options for their employees, and we do have clients that use the passive option as the default but add options for their employees for whom this aligns.

Choosing a default option then becomes matching to your employee base. But American employers may all want to have that deeply American value of the freedom to choose.

What Can You Do About It

“We know this is a different kind of initiative,” says Amy Gray. “This initiative is about actually getting the people who want to change to change. Our team understands that it may be a slower process than we all hope, but now that it’s not just an ethical position, but potentially a smart financial decision, we want to help educate people who want to take charge.”

For people that want to go for it now, what I’ve seen work is:

• Thank your HR leader (as a group, they are often underresourced) and ask them to consider the climate risk of their retirement plan. I love talking with these people leaders.
• If they say no or don’t respond, you have to get a group of employees together to collectively request investment options that take into account climate risk.
• Being direct, the math is that you’ll likely need a large enough employee group where the amount of work to say no to you is greater than the work to adopt climate smart options
• If you do get the HR team to add options, make sure to thank them. This is just being a decent human, but in our current world, it’s so valued.

If you need to ask any questions directly about your plan, you can find me writing about climate and investments on LinkedIn or reach out through the website.

Breene Murphy is the president of Carbon Collective Investing, a climate investment advisor for employer 401(k)/403(b)s, individuals, and institutional investors. Breene is a Grist 2024 Top 50 Climate Leader, and Carbon Collective Investing is an implementation partner of Project Drawdown and a CEO for Electrification with Rewiring America. You can read more from him on LinkedIn or connect through his website: carboncollective.co