Using 401(k)s to drain the fossil fuel pool

Retirement plans are a hidden emitter at lots of companies, and one of the last big sources of fossil fuel investment. Yeah, right!? Call HR!

This week on the podcast, I learned two things:

1. There are entrepreneurs out there who are so committed to upstart climate solutions that they are willing to start multiple companies in order to get as many innovations into the world as possible.

2. Although it’s hard to measure, it’s possible that as much as a third of the market cap of US fossil fuel companies comes directly from retirement plans. A third. And most people have no idea their retirement accounts are funding global warming.

On top of that, 401(k)s and other retirement funds like pension plans are this weird source of hidden emissions for companies—up to 30 times (or more) their total emissions from basic business operations.

And listen, if you want your retirement accounts to be invested in fossil fuel companies—a historically declining asset class with high volatility, as my guest on the pod points out—I’m not going to stop you. But right now you’re being forced to do that with most of your pension and 401(k) options and that seems antidemocratic (not to mention anti-capitalist).

I spoke with Alex Wright-Gladstein¹ of Sphere, which is trying to build an even stronger social movement among employees and has created a mutual fund that companies can add to their 401(k) lineups. The fund strips out fossil fuel companies but is otherwise similar in cost and diversification to funds that already exist in retirement plans. Here’s what she told me:

There's $10 trillion invested right now in just US-based 401(k) plans and similar 403(b) for nonprofits. And that means, given that about 10% of the economy right now is made up of fossil fuel companies, that means there's about a trillion dollars invested directly in fossil fuel companies just from [retirement plans].

The reason, she said, is that:

There's been a huge divestment movement where Harvard and Middlebury and tons of, tons of universities have pulled their endowments from the fossil fuel industry. A lot of family foundations and family offices. Even the Rockefellers—the descendants who, their family wealth comes from Standard Oil, the company that got broken up into Exxon, Chevron, etc.—they have decided to stop investing in the fossil fuel industry.

And so it turns out retirement plans are one of the last sources of capital for this industry. And so it's very significant and it’s actually no surprise that as a result there's been a huge focus on trying to prevent climate-friendly investing from making its way into the retirement industry. It's become an extremely politicized area just within the past year, which has been a wild experience starting this company.

She reminded me that, in fact, President Biden's first veto was was to defend the ability of pension plans to consider ESG factors when making investment decisions.

Employees at various companies have been agitating for better 401(k) options—a petition at Microsoft by employees ultimately forced a shareholder vote. The activist shareholder group As You Sow has also been pushing companies like Amazon to align its retirement plan offerings with its public sustainability goals.

Also, you know I’ve recently become obsessed with shareholder voting, and Alex told me that where the Sphere 500 is invested in say, banks that may be financing fossil fuel projects, Sphere votes all its investors’ shares in favor of climate action.

There are a couple other startups that I know of (and possibly more) who are trying to create climate-friendly investment and specifically 401(k) options; the other I’ve talked to is Carbon Collective, which acts as a 401(k) advisor and offers retirement funds, in addition to encouraging investors to do the same thing—use their shareholder voting power to push companies to do the right thing.

Side note and speaking of shareholder voting, looks like the big oil giants are feeling their oats in terms of their short-term stock bumps: Exxon and Chevron held an investor meeting May 31 at which investors voted down every single climate-related proposal that was brought by activist shareholders.

I actually asked Alex about this idea of change from within, and whether it’s worth staying invested in fossil fuel companies to try to push for change. First of all, it doesn’t seem like it works—see above.

Second though, she gave a super interesting answer, especially considering that Exxon and Chevron and other oil and gas giants are at war-in-Ukraine-induced highs at the moment:

The data does show that despite the fact that energy stocks have spiked in value over the past two years, over the long term, it has been an industry in decline. When you just look at the S&P 500 index over the past 10 years compared to the S&P Ex-Energy Index, which, in financial lingo, energy is code for fossil fuels … so if you just look at the S&P 500, excluding those fossil fuel companies, the returns over the past 10 years have been lower. Also the S&P puts out data on volatility and the volatility of each sector in the S&P 500 and the energy sector has been the most volatile over the past 10 years.

So of course it will have periods of outperformance, but for longer-term investors who are saving for retirement and not, you know, day traders trying to make a quick buck, it actually can be a better financial decision to avoid this sector.

I looked it up. Here are some charts.

S&P 500:

S&P 500 Ex-Energy:

Now, is this the difference between buying Apple at $100 and buying Apple at $1000? Probably not. But it’s nevertheless a trend, and one I don’t see changing anytime soon.

So, how do you get in this pool? Be an agitator! Ask your company for climate-friendly 401(k) options and tell your fellow employees to ask for them, too. If you’re a benefits manager, look into your options and push for change internally. There are ways to invest directly in funds like the Sphere 500 and the Carbon Collective funds through a self-directed retirement plan—more info here and here. None of this, by the way, is investment advice but like dude, if your company offers a 401(k) and you’re not in it, get in it. Love, mom.

1. Alex is also the person who quite deliberately became a serial entrepreneur, and her last company, Ayar Labs, makes semiconductor technology for faster, higher-bandwidth, and significantly more power-efficient chips—aka, just the kind of thing we need in the age of increasingly power-hungry AI.