Many factors go into deciding which investments to put into one's 401(k) but environmental impact is one that has traditionally been important to only a minority of savers.
While the number skews higher for younger workers, a recent study from investment management firm T. Rowe Price found that less than a quarter found environmental, social and corporate governance (ESG) factors were just as or more important than their portfolio's stock performance.
DON'T MISS: The Average 401(k) Fell By an Obscene Amount in 2022
Equally, even those for whom the environmental factor is an important consideration may have a hard time finding stocks that align with those principles — a recent report from the Plan Sponsor Council of America found that less than 5% of employers offers 401(k) options specifically dedicated to ESG issues.
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Environmentally-Friendly 401(k) Options Are Rare
While the Biden administration overturned a Trump-era ruling that made it difficult for fiduciaries to take climate change and other ESG factors into account when choosing 401(k) plans, most are still wary to do so given fears around performance as well as challenges in identifying which companies are truly sustainability when almost all now try to position themselves as such.
"Despite a large body of evidence that shows ESG funds tend to perform as well or better than non-ESG funds, a persistent misperception remains that they don't," Georges Dyer, who co-founded the Crane Institute of Sustainability non-profit, told CNBC at the GreenFin conference in Boston.
Sometimes justified and sometimes unjustified fears of taking a risk with clients' retirement savings is the primary fear behind not offering an ESG-focused plan through the workforce. When ESG fund flows in the U.S. lost more than $6 billion and dropped to their lowest level in five years in the last quarter of 2022 amid a war in Europe and global uncertainty, critics of an ESG strategy got some major talking points.
But according to a report from financial services firm Morningstar, ESG funds still outperformed regular funds with $3 billion in profits when looking at 2022 as a whole and are expected to do even better in 2023. Another report from PwC found that ESG assets under management around the world will reach $33.9 trillion by 2026. Many younger workers are also specifically requesting such options from their employer.
There Are Misconceptions About ESG and 401(k)s
"When companies provide employees with 401(k) retirement accounts, they accept responsibility that the funds within their plans live up to their descriptions," CFA Paul Swanson wrote for TheStreet's Retirement Daily. "But the lack of a global standard means it can be hard to tell if an ESG fund has achieved or will ever achieve its goals."
While individual investors are increasingly factoring in climate change and other environmental considerations into their choices, risk-aversion has long been the strategy for employer-offered 401(k) plans.
Even with long-term numbers showing that ESG funds preform similarly to non-ESG funds in the long term, any signs of volatility are enough to spook fiduciaries into taking a more conservative approach.
"There has been significant growth in the availability of ESG funds over the past five years, but including them in 401(k) plans has been slower," Dyer said. "[...] “If they have gone through a process of selecting funds they are confident in including, they can be hesitant to trade those out for new funds."
