What's in your 401(k)? Polluters driving climate change

First, the bad news: Most 401(k) and other employer-sponsored retirement plans, as well as individual retirement accounts (IRAs), have at least some money invested in companies that contribute to fossil fuel extraction, deforestation or both. So the money sitting in your retirement kitty right now is very likely bound up with the climate crisis in some way. 

"There's 100 million people in the United States with $10 trillion in assets that have no idea that they're investing in their own destruction," estimates Andrew Behar, chief executive officer of the shareholder advocacy group As You Sow. "It's been completely hidden." 

Read more: Why ESG retirement plans could get employees to save more for the future

The combined carbon footprint of these accounts is enormous, too. A 401(k) plan with $1 billion in assets is responsible for roughly 64,000 metric tons of carbon dioxide equivalent, according to a September 2022 report by the Business for Climate Finance Initiative and the CFA Institute. That's the equivalent of the annual emissions coming from nearly 14,000 cars. And because these emissions are linked to employee investments, they don't usually show up in a company's climate pollution ledger of their direct activities. 

In some cases, the carbon impact of the retirement accounts "is bigger than the footprint of the companies themselves," says Andres Vinelli, CFA's chief economist, who contributed to the report. "That's kind of shocking in my mind." 

It doesn't have to be that way. Even amid a Republican-led backlash to environmental, social and governance (ESG) investing, a small but growing number of people are taking charge of their investments to de-pollute them. Some of them are motivated to invest in a climate-friendly future, says Elizabeth Levy, head of ESG strategy at Trillium Asset Management, while others are worried about poor returns on fossil fuels if governments take more aggressive climate action. "I think particularly with retirement accounts with long-term investment horizons, it's reasonable to think fossil fuels will not be great investments," Levy says. 

Read more: Go green or go home: Employees want their 401(k)s to reflect ESG goals

Big-name companies, pension funds, and universities worldwide started divesting from fossil fuels about a decade ago. As of early September 2022, around 1,500 institutions had publicly committed to divesting from some form of fossil fuels, representing just over $40 trillion in assets, according to tracking by the advocacy group DivestInvest. Earlier this year, the New York state pension fund, the third largest in the US, announced plans to sell $238 million worth of stock and debt in oil and gas companies. Maine's Public Employees Retirement System said it seeks to divest investments from fossil fuel companies by 2026.

For individuals looking to divest their own money, many large companies do not offer their employees any sustainability-focused retirement options, according to an inventory by As You Sow. Others offer just one. (Among the plans inventoried is that of Bloomberg LP, the parent company of Bloomberg News.) 

"This has not been a priority to companies," says David Pinsky, a campaigner with the activist group WorkforClimate, which helps employees organize for greener 401(k)s. "They add one supposedly ESG fund to their lineup and consider it a win."

The problem is there are not a lot of good options — yet. The gold standard would be offering green target-date portfolios with a mix of bonds and stocks, the balance between the two shifting as a person nears retirement, says Zach Stein, co-founder of the green financial advising company Carbon Collective. The biggest investment companies and fund managers don't really offer these now, he says, so it's up to employees to get their employers to push for them. 

Read more: Ask an Adviser: How can we work with employees to meet ESG goals and raise our social-impact profile?

Change is happening, slowly. Take Patagonia: After offering one green 401(k) for years, the outdoor apparel and gear company started what turned into a multi-year project to expand its sustainable retirement choices. Patagonia workers wanted a "one-size-fits-all" fund, comparable to a target-date fund, says Yvonne Besvold, Patagonia's head of finance, but "there weren't a lot of options available." 

What they came up with instead, with outside help: a climate-friendly bonds option and a customized fund that roughly tracks the Russell 3000 Index minus fossil fuels, mining and other extractive companies. More than 6% of Patagonia employees' total retirement funds are currently invested in The Cleanest Line Fund. "We had to work with Vanguard to admit this separately managed fund to their platform," Besvold says.