How to Invest Retirement Savings in ESG–Even if Your 401(k) Doesn’t Offer It The Wall Street JournalHow to Invest Retirement Savings in ESG–Even if Your 401(k) Doesn’t Offer It The Wall Street JournalHow to Invest Retirement Savings in ESG–Even if Your 401(k) Doesn’t Offer It The Wall Street Journal
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The ESG flavor of an employer plan’s fund may not be reflected in the name of its fund. Look at the plan’s online literature, and review your portfolio holdings. Photo by Mikael J. Sjoberg/Bloomberg News September 15, 2021, 12:01 ET Investors who want to align their portfolios with the values they hold dear often face a problem. Many Americans are unable to save enough money for retirement. This is because 401(k) plans and other employer-sponsored retirement savings plans do not include funds that are focused on ESG issues. There are many ways to incorporate ESG into your retirement-savings strategy. Either in conjunction with an employer plan, or within it. It takes some work to do this. You might need to look at the fund options in a plan to determine if they have ESG leanings or research ESG investments you can hold in another account. The debate continues about whether ESG stocks or mutual funds will increase overall returns. Nicole Lee, head of ESG research at Woodstock’s Miller/Howard Investments says that companies that pivot to become more sustainable increase their chances of being relevant and profitable long into the future. ESG-sensitive funds, particularly equity funds, have outperformed other funds in their respective categories in a Morningstar analysis. For the five years ending in 2020, 77% of sustainable funds ranked among the top half of their Morningstar categories while 49% ranked within the top quartile. Only 10% were in the bottom quarter. Here are some tips for employees who want to incorporate an ESG focus into their nest eggs. Regardless of the name, determine if any of your retirement plan investment options have an ESG flair. While few 401(k),s have funds that are clearly marked as having an ESG focus but many do have at least one fund that takes ESG in to account when it builds its portfolio, Samantha Lamas, behavioral researcher at Morningstar, says. She adds that nearly three-quarters of plans have at least one investment option that has received a Morningstar high ESG rating. Begin by reviewing the online literature and portfolio holdings of any fund that is part of your employer’s plan. Does the fund description refer to ESG? Do funds own tobacco, defense, or energy companies that many ESG funds do not exclude? However, does the portfolio include the same stocks as large ESG-focused funds like Parnassus Core equity (PRBLX), or the iShares ESGAware MSCI USA ETF ESGU 0.06% (ESGU)? Morningstar rates funds’ ESG-worthiness by giving them one to five “globes,” with five being the highest. MSCI Inc., a research company, also offers online rankings for individual stocks or funds. It assigns funds to one of three categories: “leader”, “average” or ‘laggard” based on the analysis of the companies they invest and issues such as carbon emissions and the independence and inclusion of boards. 2. You should check to see if your plan has a self-directed brokerage window. While employer-sponsored retirement plans offer limited investment options, more plans now allow participants to add a self-directed brokerage window. This allows you to purchase and hold funds or individual stock that your plan does not offer, such as those with an ESG focus. You can also keep your retirement investments in one tax-deferred bank account. However, transaction fees may apply. A brokerage window does not have the ability to help investors sort through the many options when choosing what to own. Investors can use ETF.com and Morningstar.com to find the best ESG funds. Sal Bruno, chief investment officer at IndexIQ of New York Life Investments, said that this is a great way to find individual stocks or top ESG funds. Mr. Bruno points out that ESG funds are more sophisticated than earlier socially responsible strategies. They take a more targeted approach to stock selection. He says that they don’t exclude entire industries like energy. They may also own an energy company that develops renewable resources. 3. For more options, you might consider lobbying the plan sponsor. Participant in an employer-sponsored plan may be able convince the plan sponsor to increase ESG exposure. This involves researching the plan’s current offerings and arguing why ESG investing would be better if there were other options. Ms. Lee of Miller/Howard states that those who advocate for changes to a 401k investment portfolio have a greater chance of success if they can get together like-minded employees to lobby. She says, “It’s about pushing those in charge of your retirement plan to expand those options and explaining why it’s important to them.” 4. You might consider adding ESG holdings to your employer plan. It might be worth creating a Roth IRA or a traditional IRA to invest directly in ESG funds. Todd Rosenbluth, head of fund and ETF research at data-provider CFRA, recommends looking for funds that have low fees. He recommends that you start with a broad ESG fund rather than one that is focused on one theme such as clean water and renewable energy. He suggests that ESG portfolios with a wider range of themes will be more in line with major market indexes like the S&P 500, and may also carry a lower risk. Mr. Pollock is a Pennsylvania writer. You can reach him at firstname.lastname@example.org More on esg investing Should ESG Funds be in Retirement Plans? The Fund Company that Won the Race for Socially Responsible Investors. The Surprising Ridiculous Risks of Investing In ESG Funds. How Bond Investors Can Also Jump On the ESG Train Copyright (C),2021 Dow Jones & Company, Inc. All Rights Reserved. 87990cbe856818d5eddac44c7b1cdeb8