Fiduciary or Not: Are You Fulfilling Your Duties to Protect Your Employees’ Savings From Climate Risk?

By Steven M. Rothstein and Randi Mail


Environmental Risk Sustainability Investing

From news headlines to corporate boardrooms, the pressing material impacts of climate change are becoming impossible to ignore. Investors in the US and worldwide are sounding the alarm to act on climate risks as the increasing number of climate disasters result in billions of dollars in annual losses and untapped climate business opportunities forecast trillions in potential revenue.

All of this begs the question: Why aren't more board leaders asking about the impact of climate risk on the company's retirement plan? After all, the employees at the companies they oversee are counting on these funds to provide long-term returns to pay for their hard-earned retirements.

Board directors, corporate officers, and others empowered to make decisions about a company’s 401(k) plan carry a fiduciary responsibility. When the employer is designated as the fiduciary on a retirement plan, which is the case for most companies, certain board members and leadership are obligated to act in the best interests of the plan’s participants, including current and retired employees.

The Business Case for a Responsible Retirement

Those saving for retirement both need and want the option to invest in a way that mitigates climate risks in their portfolio and invests in climate solutions that will help create a stable world for their future retirement.

A retirement plan participant’s best interests should always be improving returns and lowering risk. The impacts of climate change, which are already being felt throughout the economy, are escalating quickly. According to Swiss RE, they could cut US GDP nearly 7 percent by 2050. Given that millennials are expected to make up 75 percent of the workforce by 2025 and most won’t be taking out retirement distributions for another 20–40 years, considering the growing impacts of the climate crisis on their lifesavings is especially critical.

At the same time, employees are asking for responsible options in their 401(k)-fund menu. Yet less than 5 percent of plans currently offer even a single responsible fund option despite interest from 75 percent of employees across age brackets.

The good news is that studies of responsible funds demonstrate lower risk, particularly during periods of high market volatility, compared to traditional funds.

With financial regulators identifying climate change as an emerging and increasing threat to financial stability, the Department of Labor finalized a rule that clarifies plan fiduciaries can consider all relevant risk-return factors, which may include the economic effects of climate change, when selecting plan investments.

A conservative court in Texas upheld the Department of Labor’s rule in September, reaffirming its neutrality and consistency with the Employee Retirement Income Security Act. This ruling followed a politically motivated challenge to restrict the consideration of environmental, social, and governance factors by retirement plan fiduciaries.

How the Board Takes Action

With the knowledge of both climate change’s impact on investment returns and the supportive regulatory framework in place, directors and board members must take action in their companies to mediate the impact on retirement. Here are three steps to take to kickstart the process:

1. Identify which colleagues are making decisions about the plan’s construction. 

This will likely be in the form of an internal investment committee, which may have already been established by the board or company leadership. The committee is often made up of some combination of representatives from human resources or benefits, finance, senior management, and/or plan participants.

2. Ask the internal decision makers about the plan’s integration of climate considerations.

The following questions will help you ascertain whether climate has been taken into consideration in your plan and if not, where action should be taken.

  • Is our retirement plan’s investment lineup currently offering options that address climate-related financial risks? 
  • Have we surveyed our employees to understand their interest in designing the investment lineup?
  • If we are offering a responsible investment option or considering offering a responsible option, is it an easy set-it-and-forget-it option, like a target date fund, or a model portfolio solely comprised of responsible options? 
  • If we are offering a responsible investment option, or considering offering a responsible option, how is the fund assessed by third parties on climate criteria? If the fund uses a term like “sustainable” in its name, how is it allocating assets in accordance with its name?

Are our service providers actively engaged in helping us identify responsible fund options that meet our standard investment criteria while addressing climate concerns?

3. Bring your plan advisor into the conversation.

In many cases, a company will delegate fund decision making power to the retirement plan advisor. If the investment committee cannot answer the above questions, your plan advisor will be able to. Any answer that is “no” or “unsure” should stir action. 

In requesting the consideration of responsible fund options to your plan advisor, the key thing to remember is that a responsible fund will undergo the same due diligence process as any other fund in the plan. It will likely take more than one conversation to identify the criteria that meets your company’s desires for a responsible investment. Advisors are inherently risk adverse, so document your process at every stage and keep the dialogue going. The protection of your employees' lifesavings is a cause worthy of your dedication. As the rest of the world accelerates its efforts to address climate risks, you can ensure that your employees aren’t left behind.

Steven M. Rothstein
Steven M. Rothstein is the managing director of the Ceres Accelerator for Sustainable Capital Markets at the sustainability nonprofit Ceres.

Randi Mail is director of campaigns for the Ceres Accelerator for Sustainable Capital Markets at the sustainability nonprofit Ceres.