Socially Responsible Investing For Retirement (2024)

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If you could take a deeper look at your retirement investments, do you think you’d be comfortable with what you found? For many people, saving for retirement means little more than 401(k) contributions on autopilot. But there can be more to investing than just dollars and rates of return. Socially responsible investing (SRI) helps you ensure that your retirement investments aren’t supporting activities that are counter to your values.

Understanding Socially Responsible Investing

Take a moment to think about what causes and values you would want your money to support. This includes understanding the connection between your values—for example, environmental activism, social justice or religious beliefs—and what sort of companies your retirement funds are being invested in.

Socially responsible investing means supporting companies that align with your values. Depending on their profile, SRI mutual funds would avoid investing in tobacco companies, gun manufacturers or the fossil fuel industry. Ave Maria mutual funds use criteria to screen out companies that promote or support activities contrary to the teachings of the Catholic Church.

SRI has secured a prominent place in investing. Over $12 trillion is invested in SRI assets in the United States, according to the U.S. SIF Foundation’s 2018 biennial report “U.S. Sustainable, Responsible and Impact Investing Trends.” SRI assets have grown at nearly 40% year-over-year since 2016.

And SRI means not only avoiding investments in certain companies, but also actively seeking to invest in companies that actively promote certain values. That’s where ESG ratings come in.

Environmental, Social and Governance Standards

Environmental, social and governance (ESG) is a set of socially conscious criteria that a company can choose to apply to its operations. ESG standards rate how a company supports environmental sustainability, how it promotes ethical management practices, leadership, executive pay, audits, internal controls and shareholder rights. Investors can use ESG criteria to screen potential investments.

Gary Matthews, CEO and founder of SRI Investing, a financial advisory firm dedicated to socially responsible investing, explains how SRI and ESG are related.

“ESG is an aspect of, or a way of approaching the construction and management of SRI portfolios,” Matthews says. “It’s a newer, more recent methodology to approach SRI.”

Companies are given ESG ratings by third-party agencies that assess the company’s performance and how it compares to others.

Related: Best ESG Funds

The Pros and Cons of ESG Criteria

It’s important to note that some investing experts push back on ESG rating companies due to inconsistent metrics and methodologies that can result in widely different outcomes agency by agency. There can be scoring bias depending on what industry the scoring agency specializes in.

“While deficiencies in the process don’t render ESG investment meaningless, they do indicate that the agencies’ influential findings must be viewed through a critical lens,” writes Timothy Doylefor Investor’s Business Daily. “It is imperative that investors understand what these ratings are: largely subjective and prone to serious methodological problems. They are not infallible, scientific measures of companies ‘doing good.’”

Matthews agrees “to a certain extent” with the concerns that ESG-ratings don’t have set standards across the industry. But he argues that investors can do their own due diligence in finding ESG-ratings that are appropriate and fair for their values and goals.

“The investor, I think, wants to know who’s behind the ESG ratings,” Matthews says. “What is the methodology there? Can I trust the people that are publishing that? Those are legit questions for investors who want to implement SRI for themselves.”

Investors should also be aware that while companies can be designed to be inherently “good” by promoting diversity and employee rights, it’s important to take a deeper look and analyze any controversial practices it may be employing, likeexploiting labor workers in foreign countries or paying women less after childbirth.

Though ESG investing comes with its own flaws, even the big investment platforms are embracing the concept; rightfully so, considering net flows to ESG funds in the U.S. topped $20 billion in 2019, a 300% increase from the year prior, according to MorningStar.

Vanguard, Pimco and Fidelity now offer their own ESG versions of funds, including the Vanguard Global ESG Select Stock (VESGX), which was introduced in 2018. There’s also an exchange-traded fund (ETF) that explicitly addresses issues of racial inequality and is backed by the NAACP, the Impact Shares NAACP Minority Empowerment ETF.

You can find a list of ESG mutual fundsvia the Forum for Sustainable and Responsible Investment.

How to Responsibly Balance Your 401(k)

If you make contributions to an employer-sponsored 401(k) plan, your contributions are generally invested in mutual funds, index funds or target-date funds. These funds may buy securities issued by hundreds or even thousands of different companies.

The funds available to you in your 401(k) are limited by the plan’s administrator. Only 2.9% of all 401(k) plans have ESG funds,according to the Plan Sponsor Council of America’s most recent study. That means your money could very well be parked in companies that don’t align with your values.

If you find that your 401(k) does not offer any ESG-rated funds, you can opt to customize your investments through a brokerage window, also known as “self-directed brokerage option.” This DIY-approach allows participants more investment options than the mutual funds offered by the retirement plan directly. After opening a brokerage window, investors can focus their money in companies that support their values.

If you choose to opt for a self-directed brokerage option with your 401(k) plan, be aware that it comes with challenges. A plan sponsor can limit choices offered through brokerage windows, and these windows can come with maintenance fees and higher than average trading costs.

Investors interested in exploring a brokerage window option should work with a financial advisorto determine a strategy that will be both cost effective and efficient for their investing goals.

How to Advocate for More ESG-Rated Options in Employer-Sponsored Plans

There’s another approach you can take if your company’s 401(k) doesn’t offer any ESG-rated options. You can initiate change by advocating for better, more socially conscious investment options in your retirement plan.

Start by enlisting colleagues who share the same desire for more ESG-rated options, and then bring your case to human resources. Be ready for pushback; many employers don’t want to include funds that don’t have proven track records.

Be ready to counter any arguments with evidence that ESG-focused funds have few to no financial trade-offs compared to traditional funds. There’s strong statistical evidence that ESG funds are actually more stable, according to this 2019 analysis by Morgan Stanley.

Initiating a conversation with your employer about why ESG-rated funds are an important option, and then maintaining the dialogue can pave the way for including these investment options for you and your coworkers.

How to Responsibly Balance Your IRA

Individual retirement accounts (IRAs)are tax-advantaged retirement accounts. Unlike 401(k)s, individuals can open IRAs on their own and make contributions whether or not they have a separate workplace retirement plan available to them.

In most cases, there are broader investing options available for IRAs than with 401(k)s.If you open an IRA with an online brokerage account, you can seek out socially responsible ETFs or mutual funds with ESG ratings that help verify they fit your values.

FidelityandSchwab, for example,haveETF screenerswith filters to help investors find and compare SRI funds.

The Pros and Cons of Robo-advisors for IRA Values Investing

Investors who don’t want to sort through compiled lists can open an IRA account through a robo-advisor, which handles fund selection for you. Wealthsimple and Betterment, two popular robo-advisors, offer dedicated SRI portfolios. Wealthsimple’s SRI portfolio, for example, includes ETFs that pledge low carbon exposure and support for human rights around the world.

Sam Adams, CEO of Vert Asset Management, says most SRI offerings from robo-advisors are a great way to get the word out about SRI and help investors understand how it works and how they can get involved in it.

“I think the number of people who need an individually attuned portfolio is smaller than a lot of people assume,” Adams says.

There’s also the issue of how often robo-advisor SRI portfolios are evaluated. Jill Fopiano, president and CEO of O’Brien Wealth Partners,warns that robo-advisors that offer more limited SRI portfolios risk including companies that aren’t closely watched to ensure they’re actually living up to responsible and ethical standards.

“My concern with a robo-advisor in the ESG world is that a company that’s claiming to be ESG has to be monitored for it’s ‘ESG-ness’ on a frequent basis to make sure it doesn’t deviate from that,” Fopiano says.

Bottom Line

Saving for retirement is a necessary step in your financial journey, but many people might not be aware of what their retirement portfolios are investing in. The current options for socially responsible investing are ambitious, but not perfect. For now, SRI investors should remain skeptical of ESG ratings while also working to make sure their investments align with their values and make a difference in the world.

As an enthusiast and expert in socially responsible investing (SRI), let me draw upon my extensive knowledge and experience in the field to provide a comprehensive understanding of the concepts presented in the Forbes Advisor article.

The article emphasizes the importance of taking a deeper look at retirement investments, beyond just contributions to a 401(k) on autopilot. It introduces the concept of Socially Responsible Investing (SRI), which involves aligning your investments with your values. SRI ensures that your retirement funds support companies that uphold your beliefs and avoid those engaged in activities contrary to your values.

  1. Understanding Socially Responsible Investing (SRI):

    • SRI involves supporting companies that align with your values, such as environmental activism, social justice, or religious beliefs.
    • SRI mutual funds screen out investments in industries like tobacco, firearms, or fossil fuels. For example, Ave Maria mutual funds adhere to criteria based on Catholic Church teachings.
  2. Environmental, Social, and Governance (ESG) Standards:

    • ESG is a set of socially conscious criteria applied to a company's operations.
    • ESG standards assess a company's support for environmental sustainability, ethical management practices, leadership, executive pay, audits, internal controls, and shareholder rights.
    • ESG ratings are provided by third-party agencies, offering a way for investors to evaluate potential investments.
  3. Relationship Between SRI and ESG:

    • ESG is described as a newer methodology within the construction and management of SRI portfolios.
    • Companies receive ESG ratings from third-party agencies, indicating how their performance compares to others in terms of socially responsible criteria.
  4. Pros and Cons of ESG Criteria:

    • Some experts raise concerns about inconsistent metrics and methodologies in ESG ratings, emphasizing the subjective and potentially biased nature of these assessments.
    • Investors are encouraged to conduct their own due diligence and choose ESG ratings that align with their values and goals.
  5. ESG Investing Trends and Flaws:

    • Despite flaws, ESG investing has gained popularity, with significant flows into ESG funds, including offerings from major investment platforms like Vanguard, Pimco, and Fidelity.
  6. Balancing Your 401(k) with Socially Responsible Investing:

    • Many 401(k) plans lack ESG funds, limiting investors to traditional options.
    • Investors can customize their investments through a brokerage window for more socially responsible choices.
    • However, this approach may come with challenges such as limited choices, maintenance fees, and higher trading costs.
  7. Advocating for ESG Options in Employer-Sponsored Plans:

    • Investors can advocate for more socially conscious investment options in their company's 401(k) plan.
    • Strong statistical evidence is presented to support the stability of ESG funds, countering potential concerns from employers.
  8. Socially Responsible Investing with IRAs:

    • IRAs provide broader investing options compared to 401(k)s.
    • Investors can seek out socially responsible ETFs or mutual funds with ESG ratings for their IRAs.
  9. Robo-Advisors for IRA Values Investing:

    • Robo-advisors like Wealthsimple and Betterment offer dedicated SRI portfolios.
    • Concerns are raised about the evaluation frequency of robo-advisor SRI portfolios and the potential inclusion of companies not closely monitored for responsible and ethical standards.
  10. Bottom Line - Challenges and Opportunities:

    • The article concludes by highlighting the ambition but imperfection of current socially responsible investing options.
    • SRI investors are encouraged to remain skeptical of ESG ratings while actively working to ensure their investments align with their values.

In summary, this article provides a comprehensive guide for individuals seeking to align their retirement investments with socially responsible and ethical considerations, addressing various aspects of SRI, ESG, and potential challenges in implementing these strategies.

Socially Responsible Investing For Retirement (2024)


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