Sustainable Retirement Investments Exist, And You Can Make the Switch

“A lot of people, if you ask them say, “Yes, I would love to have my investments align with my values,” said Andrew Montes, director of digital strategies at As You Sow, “But then we also see a low adoption of sustainable funds within 401(k) plans that offer them.”

It’s a contradiction seen in recent research from As You Sow, a nonprofit dedicated to advancing corporate accountability through shareholder advocacy. The research found that faculty retirement plans at five top universities — Columbia, Harvard, Northwestern, Notre Dame and Princeton — have more than $1 billion invested in fossil fuels. The faculty retirement plans also have substantial investments in prison and armament contractors.

These investments not only jeopardize the future their students will be left with, but they often go against these universities’ policies, according to As You Sow. For example, Harvard aims to be fossil fuel neutral by next year and completely fossil fuel free by 2050, making it hard to reconcile the university’s staff retirement investments with its campus goals. 

The need for education and more sustainable investing options

“Where is this disconnect? I would suggest that there are some limitations in the approaches being taken by the plan administrators towards sustainability,” Montes said.

Sustainable plans may screen out investments tied to fossil fuels or defense, or screen in companies with higher environmental and social ratings. But education is often lacking in the retirement plan selection process, causing most employees to go with the default option instead of choosing a sustainable portfolio. It’s not just the plan administrators at universities who are dropping the ball. Employers across the board aren’t including enough education about which sustainable options are available, Montes said. But the solution is also an opportunity to do better by employees.

“Employees might not be aware that [sustainable investment plans] even exist,” he said. “They might not be aware of the environmental and social risks that these sustainable investing approaches are trying to mitigate.”

Beyond educating employees about the plans available to them, Montes said more sustainable investing options need to be available in the first place. “If you're a plan and you've got several dozen funds on your menu, but only one or maybe two of them are sustainable, you're sending a signal to employees that this is not the normal approach,” he said. “We really do think that sustainability ought to be the standard across the investing sphere.”

Comparable returns

Offering a limited number of sustainable options may also unintentionally reinforce mis-held beliefs that sustainable investments suffer from lower returns or higher risks. That simply isn’t the case. Sustainable funds demonstrated a 4.7 percent higher median return compared to traditional funds over a five-year period ending in 2024, according to Morgan Stanley. 

“Market research suggests that sustainable investing has comparable returns and can even outperform similar non-sustainable investments,” Montes said. 

As an example, he pointed to research from As You Sow and the University of Waterloo which found that underperformance by fossil fuel investments led to lower returns for employees at 12 tech companies. These retirement funds may have missed out on as much as $5 billion over 10 years, affecting 2 million employees, according to the report. 

Instead of sacrificing returns, research suggests that sustainable investing could actually have a protective effect, whereas putting retirement funds in environmentally and socially destructive industries can be a risky investment, Montes said.

“So many of these companies face market pressure because of their negative environmental and social impacts,” he said. “As the world transitions to a clean energy economy, fossil fuel companies that fail to align their business models with global climate goals may be affected by regulation, competition from lower-cost renewable technologies, stranded assets, and other negative pressures on their valuations.”

Institutional investors like state pensions and sovereign wealth funds have adjusted their strategies accordingly, Montes said. While many universities continue to invest their employee retirement funds in risky portfolios, they’re placing safer bets with their endowments. 

“Most defined contribution plan admins are not following their lead,” he said of retirement fund administrators. “This is creating a scenario where America's workers are being set up to be the investors of last resort in these risky sectors.”

Tools and action plans for employees

But there are actions that university staff — and all employees — can take to make sure their retirement funds are invested in a way that reflects their values and mitigates risk. One option is to contact the plan administrator for more information about available plans and switching to a sustainable option. If other options are not available, employees can join forces to request sustainable funds be added. As You Sow offers a free toolkit to help guide employees through the process.

The nonprofit also offers a retirement plan sustainability scorecard that allows employees from over 50 employers to see how their plans measure up with their values. The nonprofit aims to continue adding employers until it includes all of the companies represented in the S&P 500. And it has a mutual fund sustainability database where investors can look up how individual mutual funds score on sustainability and social issues. 

Still, it is important to note that there will always be limitations on how well investments can align with values. “There aren't any perfect companies, but you can weigh yourself in a certain direction,” said Andrew Behar, CEO of As You Sow. 

With the right motivation, employers can do better. The University of California Retirement Savings Program, which removed fossil fuels from its plans, is one example. Likewise, individual investors can put their money in funds that represent their values, even if their employers don’t.

“The truth is that we actually have a tremendous lever of power in our financial systems,” Montes said. “Collectively, American workers own trillions of dollars in these plans — and we can shift our investments ourselves.”