Skip to main content

The rise of green retirement plans

A new federal policy change opens the door to more environmentally minded nest eggs.

Retirement plans can benefit from long-term stability and minimal risks. Now, investors will have the opportunity to see more of these benefits by including funds centered on sustainability and governance ideals as part of their retirement plans.

The Department of Labor's latest bulletin replaced language from 2008, which had steered fiduciaries away from investing in environmental, social and governance funds.

Now that ESG investing is approved for retirement plans, we can expect an increased interest in ESG factors among investors, who have seen the long-term benefits of socially responsible investing.

Danielle Andrus of Think Advisor predicted that retirement plans will drive the "next evolution" in sustainable investing as ESG investing assumes a larger role in the financial world. 

Investing in the best tnterests

Specifically, the new DOL permission covers "everything from environmental, social and governance (ESG) investments to the ability to put money into community development funds and other types of economically targeted investments (ETI) without the worry of being penalized for ERISA violations," noted Ted Knutson of Financial Advisor Magazine.

Funds that take ESG factors into consideration no longer need to be considered "inherently suspect or in need of special scrutiny." 

In a press release from the Department of Labor, U.S. Secretary of Labor Thomas E. Perez explained, "investing in the best interests of a retirement plan and in the growth of a community can go hand in hand." Perez's statement should be no surprise to individuals who have been following news of ESG funds performing as well or better than the S&P 500.

ESG funds don't hinder performance, and actually can enhance investment performance.

Funds that ignore ESG factors have done so at their own risk. Environmental disasters, poor employee relations and other governance issues can ruin a company's reputation and open it up to increased regulations.

Ignoring social ideals also can turn off potential employees, with millennials often choosing to work with companies whose ideals mirror their own.

Now more than ever, it's increasingly clear that investing with ESG factors in mind is a smart financial decision — in addition to a moral one, thanks in part to lower long-term risk factors. 

Going mainstream

Blaine Aiken of Investment News referred to the Department of Labor ruling as another way that ESG investing is "going mainstream."

Funds and individual investors who previously had overlooked ESG values will be taking a longer look at corporate sustainability and governance in their decision-making.

Nine major companies, including Unilever, GE, Ikea and Nike, have shown that sustainability can be profitable on a grand scale. Target is expected to become the 10th of these "green giants." 

A recent editorial from Investment News predicted that the Department of Labor ruling could lead to "the foundation for all funds effectively coming under the aegis of ESG measurements."

With the understanding that ESG funds don't hinder performance, and actually can enhance investment performance over the long term, we should see an increase in impact investing interest across the board.

Integrating ESG issues into everyday investment decisions also will help to bring more focus on topics, such as corporate governance, environmental impact and other social issues while minimizing risk.

This story first appeared on:

IW Financial

More on this topic

More by This Author