Last month I had the pleasure of attending the 30th annual SRI conference in Colorado Springs. Socially responsible investing is an important and growing field in the financial industry. While all investments generally seek a return on capital and allow for passive ownership of various companies through mutual funds, SRI takes a closer look at the impact those companies have on the environment and the populations in which they operate. There is a growing body of empirical data that supports the idea that ethical, sustainable companies will generally perform better over long periods of time than those that have questionable business practices, degrade the environment or exploit people to maximize profits. Some reports show that environmental, social and governance (ESG) investing allows managers to identify high quality stocks and bonds with less risk, which leads to a higher Sharpe Ratio or outperforms over time.
Currently, there is about $9 trillion invested in 401k, 403b and 457 plans in the U.S. Of that total, less than one percent is invested in a sustainable, responsible way using ESG criteria. Most employers don’t offer socially responsible choices in their 401k plans. Most employees don’t think to ask for them as it seems the financial industry is increasingly dominated by the largest players offering the most basic choices such as target date and index funds with no consideration of ESG. We’ve been conditioned by our consumption habits to seek the cheapest solution. But these investment choices have hidden costs, many of which are born by other people in other places or by the environment itself as landscapes, oceans and air get polluted or degraded. *
When asked in a recent survey, almost 75 percent of respondents said they would like to see their values reflected in their 401k plan choices.** Almost the same percentage said they would contribute more or contribute for the first time to a retirement plan if they knew their money would have a positive impact or be invested in a socially responsible way. How do we explain then the gap between what people say they would like to do versus the choices they’re given in their retirement plans? This could be indifference on the part of employers, but more likely it’s a lack of awareness of the SRI landscape and what innovative choices are now available in the 401k, 403b and 457 universe.
There are thousands of companies, employing millions of people, that claim to operate in a sustainable way or that place a high priority on corporate responsibility. Corporate values are defined by leadership teams and described in mission statements for all to see. There are hundreds of B corps in Oregon which have made this sort of alignment a top priority and they deserve high praise for their efforts. When it comes to 401k plans, however, we may find a disconnect. Employers and employees may be supporting businesses through a retirement plan that are antithetical to what they stand for themselves. The industry is opaque to many, and unless questions are asked and education is improved, these conflicts will persist. Change is hard, but it often starts with a simple conversation.
*About the 2019 Survey of Defined Contribution Plan Participants:
Natixis Investment Managers, Survey of U.S. Defined Contribution Plan Participants conducted by CoreData Research, January and February 2019. Survey included 1,000 U.S. workers, 700 being plan participants and 300 being non-participants. Of the 1,000 respondents, 503 were Millennials (age 23-38), 249 were Gen X (age 39-54) and 248 were Baby Boomers (age 55-73).
**Source: Natixis ESG Cross Survey Report Survey global sample including over 12,500 individual and institutional investors, financial professionals and professional fund buyers in 2018
Securities and advisory services offered by Charles Tompkins, CFP through KMS Financial Services, Inc. Member FINRA/SIPC and an SEC Registered Investment Adviser. Tompkins Wealth Management, 115 NW Oregon Ave., Suite 21, Bend, OR 97703
tompkinswealth.com • 541-797-7009
