11 tips for investing sustainably in your retirement plan

Investors who want to create sustainable retirement portfolios face an uphill battle as ESG choiceswithin traditional 401(k) plans may be limited. Choosing a self-directed brokerage option within your employer plan is one way to broaden your investment options, but that requires more research and monitoring on your part than what many savers are comfortable with.

As the number of sustainability funds grows and ESG reporting by corporations becomes more common, creating a green retirement portfolio should become easier.

As for the state of play today, Leslie P. Norton, the editorial director for sustainability at Morningstar, offers these 11 tips to make your retirement portfolio greener in a recent post on the financial-information company’s website.

1. Don’t put all your money into a single ESG fund on offer. Make sure it fits your asset allocation. For example, my Morningstar plan offers me Vanguard FTSE Social Index VFTNX, which excludes energy companies as well as various companies operating in controversial businesses. It has a Morningstar Medalist Rating of Silver. But it doesn’t help me with exposure to smaller companies or fixed income.
2. If you do open a self-directed brokerage account in your retirement plan, research your options. Make sure you can dedicate time to managing your investments. For most of us, retirement plans are set-and-forget, which is why target-date funds are so popular. Still, depending on your plan, you may be able to work with a financial advisor, a robo-advisor, or use various investment models on offer.
3.  Look to replicate your existing asset allocation. Depending on your employer, you might be able to invest in one of the available sustainable target-date funds, such as Fidelity Sustainable Target Date 2045 Fund or BlackRock LifePath ESG Index 2040 Fund .
4. Allocate to thematic funds sparingly. If you plan to dabble in thematic investing—a clean tech fund, say—advisors typically recommend confining yourself to just 5% of assets.
5. Avail yourself of free research tools. Morningstar’s sustainable-investing page contains lists of sustainable actively managed and index funds. Or if you have a specific fund in mind, look at the Sustainability tab on the fund’s Morningstar Quote page. The Risk section shows the fund’s Morningstar Sustainability Rating: Anything with 4 or 5 globes has below-average risk. The Values tab shows how the fund ranks versus its peers on its involvement with such themes as coal power or tobacco.
6. Above all, avoid all the common 401(k) investing mistakes. Here’s a primer about how to set up your 401(k). And you can always check in with Morningstar’s page on 401(k) plans.
7. Get active. If you’re not happy with your choices, research your company’s 401(k) or other retirement plan, and then approach the retirement plan committee for your company—your colleagues who serve as fiduciaries for your plan and help choose the fund options—to ask for sustainable options. Go through the benefits of doing so. Focus on the financial reasons for avoiding fossil fuels. Explain that adding sustainable options increases savings rates, a win-win metric for employers who sponsor the retirement plan and employees who invest in it.
8. Frame ESG and climate-friendly options as additional options, rather than an attempt to force all employees to invest sustainably. Here’s a handy guide to how to approach your employer by Zach Stein, author of “The Ultimate Guide to Sustainable Investing” and cofounder of the Carbon Collective, which offers climate-friendly 401(k) plans. “If portfolios don’t take [ESG or climate risk] into account, they’re not adequately preparing for the future” and opening up plan sponsors to future litigation, Stein says. That said, understand that your employer won’t agree immediately.
9. Push for a climate-friendly 401(k) target-date fund, or default option. A single ESG fund is too “random,” says Stein. For example, Carbon Collective offers four lineups: Conventional Passive, Active ESG, Passive ESG and Climate. The climate lineup includes Carbon Collective’s own ClimateSmart target-date option, Sphere 500 Climate Fossil Fuel Free S&P 500 , and Calvert Green Bond . Target-date options will grow more important, as auto enrollment gains popularity. “Many default options capture 50% to 70% of assets in the plan,” says Andrew Montes of As You Sow.
10. Be clear about your expectations. “Investors think they’re going to save polar bears or the planet,” says Adams. “I don’t think I’m saving a polar bear when I recycle my Diet Coke can. But I want to be contributing to systemic change. When you’re an investor and you’re looking for more plan options, you’re sending a strong signal and it forces plan sponsors to start contributing more solutions.”
11. Organize your colleagues. You won’t be the first one with these ideas. And collective action is more powerful than individual action.

Read more: Thematic investing — the risks and rewards of putting your values to the test