Environmental, Social and Governance (ESG) funds might be all the rage in the investing world, but they’re still largely shut out of company-sponsored retirement plans. A recent report from the Plan Sponsor Council of America estimates that less than 5% of 401(k) plans offered ESG funds as recently as 2020 – even though nearly three-quarters of 401(k) plan participants said they might increase their overall contribution rates if they were offered ESG options, according to the Schroders 2022 U.S. Retirement Survey.
One company working on a solution is Carbon Collective, a San Francisco startup that aims to make it easier for companies to offer employees more and better ESG options in their retirement plans.
Carbon Collective’s job is to convince 401(k) recordkeepers that ESG funds can be both profitable and environmentally sound. Another part is screening out funds that don’t live up to ESG standards – and there are many around. As GreenBiz recently reported, one study conducted by London-based think tank InfluenceMap found that 70% of funds with ESG labels don’t align with global climate targets.
Carbon Collective was co-founded in 2020 by Zach Stein and James Regulinski to offer a more transparent option to individual investors.
Its strategy is threefold: persuading investors, funds and 401(k) plans to divest from companies that potentially impact changes to the climate, reinvest in companies that work to reverse changes in the environment and pressure the rest to decarbonize.
Heavy demand for these services led Carbon Collective to launch its 401(k) portfolio that targets companies with fewer than 300 employees. The new platform offers three main choices: a traditional Vanguard target-retirement portfolio, a Vanguard ESG portfolio, and Carbon Collective’s own core climate portfolio.
The Carbon Collective option offers fixed income and equity investment funds, ranging from U.S. Treasury and green bond index funds to low-carbon economy exchange-traded funds (ETFs). It also offers a climate-only fund that screens out companies dependent on fossil fuels – such as airlines and petrochemical firms – and replaces them with companies specializing in renewable energy and other climate solutions.
“Climate change is the issue of our time,” Stein said in an interview. “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.”
Carbon Collective’s foray into ESG 401(k) offerings coincides with a federal government shift that might make it easier for ESG funds to find their way into retirement plans. The shift largely involves reversing a rule that said fiduciaries could only consider pure investment factors such as risk and return when choosing 401(k) funds, not ESG ones. When this rule is reversed, there should be an increase in employers looking to add ESG funds to their 401(k)s.
Carbon Collective has a four-point master plan to move more plan administrators and funds toward ESG investing. The first step was to launch a robo-advisor that is 100% focused on climate impact. Next, Carbon Collective aims to expand its own reach with a lineup of climate-friendly 401(k)’s and Donor Advised funds (DAFs).
The third part of Carbon Collective’s master plan is to launch its own ETFs focused on impact investing. The strategy here is to make its existing portfolios affordable and easily accessible on platforms such as Robinhood and Charles Schwab. Once the company’s ETFs are launched, Carbon Collective aims to drive a tangible impact by having its growing list of investors pressure companies to improve their climate programs.