When Peabody Energy—the largest coal company in the U.S.—filed for bankruptcy in April, it was the latest in a long list of coal companies to fold. Oil stock prices also keep falling. As renewable energy grows, it's hard to argue that fossil fuel companies are a good long-term investment—but your retirement savings are probably tied up in them.
Of the 100 largest public company 401(k) plans, only one option is divested from fossil fuels, according to an analysis by Fossil Free Funds, an online tool that checks each fund's investments.
By the time world leaders met at the climate talks last November in Paris, hundreds of universities and institutions like the Rockefeller Brothers Fund—collectively representing $3.4 trillion in assets—had pulled out of fossil fuels. Now some employees are starting to demand the same thing in 401(k)s.
"It's easier, medium, or hard depending on if you're working for a small, mid-sized, or large company," says R. Paul Herman, CEO of HIP (Human Impact + Profit) Investor, a company that rates the social and environmental impact of 15,000 stocks, bonds, and mutual funds. "What we've found with small companies is that they are very adept and agile and listen to their employees."
At Stok, a small consulting startup that helps the building industry with sustainability issues, employees weren't willing to invest in the standard 401(k) the company originally offered.
"Basically, they were saying, 'I work all day long to mitigate the impacts of climate change...I'm not going to turn around and invest in fossil fuels and toxic products and bad labor practices,'" says Burke Pemberton, principal at Stok.
When company leaders approached their retirement plan advisor asking for a fossil-free option, they were told they'd have to work with someone else. They reached out to HIP Investor, which rated all of the funds their plan offered, and screened out anything with fossil fuel investments. Now, when employees sign up for a 401(k), they have a fossil free option for every level of risk tolerance. Each option is also screened for expected financial performance.
After making the shift, participation in the 401(k) went from 14% of employees to 95%.
Changing plans may also be a way to get employees interested in retirement plans who didn't really care before. "Most companies have to provide a 401(k) education meeting, and usually these are around financial lessons, and they're generally not that well attended, or it's not that exciting," says Herman. "But what we found is in companies that have created 401(k)s that have gone fossil free, that's created an excitement among employees."
Stok, like others in the social impact investing space, also believes that eliminating fossil fuel investments also makes financial sense.
"Companies' investment options for employees should be reflective of the future and not the past," says Herman. "The future of energy has to be clean and renewable."
The oil and gas industry, which used to perform closely in line with the S&P 500, has been lagging for the past few years. "If your 401(k) is invested for the next one to three decades, your options should be reflective of what the solutions will be in the next one to three decades," he says.
It's also possible for investors to screen out funds based on other social issues. HIP Investor looks at how companies in each fund handle concerns like gender equity and child labor.
"If you get enough companies doing this, then you have shareholder activism," he says. "You can go to the funds in the plan and say you would like to invest in this fund, but you have these equities or businesses in your fund that have these practices that we don't agree with, and we're going to quit funding them unless you change your operating practices. And then you have leverage."
For employees at larger companies, convincing management to change 401(k) plans will probably be more challenging, as the companies often have less flexibility and may have to make changes through a board of directors.
"In a big company, my guess is that it will either take a sort of top-down directive from an enlightened leadership, or it will take a strong coalition of dozens or even hundreds of employees to speak up that it's important," says Herman.
HIP Investor, along with Fossil Free Funds, Divest Invest Individual, and Environmental Action, recently launched a petition asking employers to divest retirement funds from fossil fuels. The organization plans to deliver the petition to the country's 100 largest retirement plans.
At your own job, here's one place to start: visit Fossil Free Funds and figure out where your retirement money is invested now.