Social(K) BLOG
December 14, 2023

Retirement Plans and Fossil Fuels

99% of People Have No Option To Avoid Fossil Fuels in Their Retirement Plans

  • Written by Rob Thomas

A 2020 study by Plan Sponsor of America found that just 3% of 401(k) plans have an ESG option. ESG stands for Environmental, Social, and Governance investing, and is a term that is used to encompass most types of values-aligned investing. That means 97% of 401(k) plans have no option for employees to consider environmental or social factors when investing their life savings. 

A 2023 analysis by Energy Monitor, however, found that 83% of sustainable funds contain fossil fuels. How can that be? 

Given that climate breakdown is a preeminent environmental concern, how can it be that the lead contributors to climate breakdown are included in so many sustainable funds?

The answer ranges from different definitions of sustainability, to outright greenwashing. While the SEC is cracking down on greenwashing with a new focus on environmental claims in funds, the truth remains that 97% of people who invest via employer-sponsored retirement plans have no option to invest in an ESG fund, and among the three percent that do, 83% of those funds are likely invested in fossil fuel companies. As a result: fewer than 1% of people have an option to avoid fossil fuels in their retirement plans, if they want to have a diversified investment portfolio and expect market-rate returns.

What types of fossil fuel companies are sustainable funds invested in? More than two-thirds of the sustainable funds included in the Energy Monitor analysis were invested in oil and gas companies, and a quarter were invested in energy utilities that own coal-fired power plants. Avoiding these diversified funds in a retirement plan may require investing in sector-specific funds such as real estate or bond funds. A real estate fund investment on its own means exposing your life savings to the unpredictable swings of the real estate market, and a bond fund investment means accepting lower returns than a stock market investment would expect.

Employers who want to offer environmental funds in their retirement plans that are both fossil free and diversified can explore the database fossilfreefunds.org, which provides transparency into how heavily invested funds are in fossil fuel companies.

For more information about ESG read these articles

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Social(k) offers hundreds of investments using Environmental, Social, and Governance, (i.e. ESG screened investments) backed by a plethora of Financial research. Structured into traditional Mutual Funds, Social(k) helps you sleep at night knowing that you’re pursuing the brightest possible future for your retirement and our planet.

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