If you put money into a 401(k) plan with every paycheck, some of it is probably going to support fossil fuel companies or other work that’s directly contributing to climate change. Right now, most employers don’t offer more sustainable options; only 4.7% of 401(k) plans offer the choice of an ESG (environmental, social, and governance) fund, according to the Plan Sponsor Council of America. And many so-called ESG funds have also been accused of greenwashing because they include fossil fuel companies in their own portfolios.
Carbon Collective, a Bay Area startup, is working to make it easier for companies—especially startups and other smaller businesses—to offer their employees better options. “We started investing with individuals because we broadly saw that ‘sustainable investing,’ as it was being labeled and sold by Wall Street, was fairly broken, especially when it came to climate change,” says Zach Stein, cofounder of Carbon Collective. After the company launched a robo-advisor platform for individual investing, the team started hearing from other workers who wanted similar options at their companies. “We kept hearing from founder friends and employees who work at sustainable companies and climate tech startups saying, ‘Hey, I really want my 401(k) at work to also align with this because I’m very uncomfortable being invested in fossil fuels,'” he says.
The companies that manage the logistics of 401(k) plans for businesses, called “record keepers,” are hesitant to change from the status quo, Stein says. “They don’t want to take on the liability of offering any investment advice that is outside of just investing with the market,” he says. “We’ve had them explicitly tell us this. They’re worried that if they say, ‘Oh, here’s a sustainable portfolio,’ and then that sustainable portfolio underperforms the market that year, that they’re going to get sued. What we found is that [executives] are happy to partner with an investment advisor like us, who will explicitly and contractually take on that liability of portfolio creation.”
When it works with a company to set up new 401(k) plan offerings, Carbon Collective sets up a platform with a few choices, including a traditional Vanguard target-date retirement fund, since some employees—even at climate tech companies—still prefer the traditional option. The company also offers a Vanguard ESG fund that’s “a less bad version of the world we have today,” Stein says. (The Vanguard ESG funds include fewer fossil fuel companies, but still have exposure to fossil fuels.) The last choice is Carbon Collective’s own climate-focused portfolio.
The startup begins by screening out companies that are technologically dependent on fossil fuels, from airlines to petrochemical manufacturers. These make up roughly 20% of the stock market, Stein says. Right now, the portfolio includes carefully selected funds. But the next iteration will allow the company to follow the same approach that it takes with its robo-advisor, picking out specific companies to invest in that are working on solutions from renewable energy and batteries to capturing methane from landfills. It also broadly buys and holds shares in companies across the rest of the stock market so that it can push those companies to improve.
“Coca-Cola is often an example I use,” he says. “They’re not an environmentally friendly company. But their business model can exist, and they could sell me a Coke with a secret recipe in a decarbonized world. It’s just powered with 100% of renewable energy, and their fleet is 100% electrified, and they’re protecting instead of abusing their watersheds. That is where we should be engaging with it as shareholders—to pressure the Coca-Colas of the stock market to reduce their demand for fossil fuels.”
More investment in the right companies now is crucial, Stein says, and holding more shares of climate-friendly companies in retirement funds is particularly useful because it can help raise share prices. (If fewer shares are on the open market, when the company has a good quarter and there’s demand for that smaller supply of shares, the price will go up.) With higher share prices, companies can borrow money more cheaply to build new projects. And that expansion of solutions is obviously critical now.
“Climate change is the issue of our time,” says Stein. “If we do not solve it, if we are not able to reach a point to put us on track toward the stabilization of climate change within the next 30 years, then basically our other major issues around the world are kind of moot. But the good news is that climate change is a solvable problem. We have a lot of the technology that we already need in place, we know exactly what we have to do . . . We have to build a lot to make that transition. And building requires investment.”