You don’t have to wait for the rule change to start investing some of your retirement savings in environmental, social, and governance funds.
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The Biden administration is proposing rule changes that would make it easier for retirement plans to consider environmental, social, and governance performance in investment decisions. The proposal would reverse Trump-era rules that banned funds from considering anything other than financial returns.
Trump administration officials argued that considering ESG factors would hurt financial performance. But that’s a myth, says Kylelane Purcell, a former Morningstar analyst and president of Purcell Communications, a consulting firm.
“If you're looking at long-term performance, the companies that performed best tend to be the ones that think and act as resilient sustainable businesses,” Purcell says. According to a study by Morningstar, ESG funds outperformed conventional investments in 2020. By the end of 2019, one out of every three dollars managed by professionals was done so under sustainable investing strategies.
The Department of Labor argues in the rule change proposal that ESG factors, like impact on climate change, can affect a business’ bottom line, so fund managers have a responsibility to pay attention to them. The change would clear the way for 401(k) providers to allow people to invest in funds that take ESG into account.
Until the rule change takes effect, your benefits manager may not be able to include ESG funds in your 401(k) plan, but you don’t have to wait to invest some of your retirement fund ESGs.
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While a benefits manager can limit which funds you can choose in your employer’s retirement plan, an individual retirement account is a tax-advantaged account that lets you invest in a wide array of funds, including long-term socially responsible investments.
“When you invest in an IRA, you can choose to [invest your money] anywhere that you like,” Purcell says.
Just be sure to do your research, says Johann Klaassen, certified financial planner and executive vice president, at Horizons Sustainable Financial Services. He warns of ‘green washing,’ where some companies rebrand existing portfolios to come across as environmentally conscious, but still invest in things like oil or fracking. Klaassen recommends consulting a financial advisor to help you vet your investments and spot bad actors.
If you want to do your research independently, Purcell recommends AsYouSow.org, which will let you compare investments and find funds that fit your interests.
Proposed rule changes can take months to take effect. The rule allowing ESG funds in employee retirement accounts was published Oct. 14. The Department of Labor will accept comments on the rule until Dec.13. A final ruling typically happens after the department reviews the comments.
Once that happens, you can head to your human resources department and tell them you’re interested in ESG options for your 401(k), says Purcell.
You can even bring some background information on socially responsible investments and retirement accounts to the table to give your benefits manager a better understanding of how these types of investments can benefit your retirement fund.
“You really want to focus on sustainability as a factor in the way that you invest because it can really benefit you financially and at the same time, it benefits a lot of other things that you may want in your retirement, like a healthy planet,” Purcell says.
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