NerdWallet: It might take time for ESG funds to show up in your 401(k)—how to invest sooner

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This article provides information and education for investors. NerdWallet does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks or securities.

Investing in a greener planet and more equitable society sounds good on paper, but what does it mean in practice?

Historically, adding sustainable investments to your portfolio was no easy task: Fees were high, funds were few and far between, and 401(k)s didn’t offer them. Now, fees have dropped, there are more sustainable funds than ever, and the Biden administration has announced that it won’t enforce a previous ruling that largely excluded environmental, social and governance, or ESG, funds from 401(k)s.

Aron Szapiro, head of policy research for investment advice company Morningstar,

thinks access to ESG funds in employer plans is a good step. “I don’t think there’s much of an argument to be made for restricting these funds,” Szapiro says. Plan participants seem to agree: According to a 2021 survey by investment management firm Schroders,

when participants know their defined-contribution plan offers ESG options, 9 out of 10 say they invest in them.

But the wheels of legislation and bureaucracy turn slowly, and it may be a while before sustainable investments are routinely available within workplace retirement plans. If you’re eager to get into sustainable investing, here are some ways to do it now.

1. Invest in ESG funds

ESG funds are mutual funds that are graded using ESG principles. ESG funds invest in companies with business practices that allow them to have a sustainable and societal impact in the world. Some ESG funds are broadly focused, while others are fairly specific. For example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF

allows investors to invest in companies that don’t own fossil fuel reserves.

And according to Marguerita Cheng, a certified financial planner, chartered SRI (sustainable, responsible and impact investments) counselor and CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland, sustainable investors can really tailor their portfolios to their values. “What may be socially responsible for one person may not be for another, because this is very personal. So people have the ability to focus on issues near and dear to their heart, whether that’s gender equality, companies that provide domestic benefits, that champion LGBTQ communities or that support Black Lives Matter.”

Also read: Investors may be willing to sacrifice returns for ESG — but here’s where they haven’t had to, says Deutsche Bank

Cheng also points out that ESG ETFs, or exchange-traded funds, have become more popular, since they make sustainable investing more accessible and affordable than other types of mutual funds. ETFs can be traded on an exchange like a stock, but offer the diversification of a mutual fund.

2. Invest in sustainable stocks

Individual stocks are typically riskier than funds since they don’t have the diversification of holding multiple companies, but they do let you have full control over which companies you’re investing in. For example, you can find renewable energy stocks if you’re passionate about green energy, or invest in companies with a diverse set of board members.

When you’re considering adding a stock to your portfolio, you’ll want to look at more than just its performance. Think about what the company does or makes and how that could impact the environment and local communities. Look up its ESG score and check out its employee reviews on a third-party site such as Glassdoor.

3. Find a robo adviser that offers ESG portfolios

If picking and choosing your own investments isn’t your idea of a good time, don’t worry — you don’t have to. Robo advisers use computer algorithms to build and manage an investment portfolio based on your timeline, risk tolerance and other personal factors. Robo advisers often charge a fee that’s a fraction of the cost of working with a traditional financial adviser. And more robo advisers than ever now offer automated sustainable investment portfolios for no additional charge.

These portfolios go by many names, such as impact portfolios or socially responsible portfolios. But no matter what they’re called, almost all of them are made with ESG funds and exchange-traded funds.

4. Make your sustainable investments go further

If you invest in sustainable funds or stocks, you may be able to help the companies you’ve invested in make decisions by exercising your proxy vote. As a shareholder, you have the ability to vote on certain issues at shareholder meetings.

Don’t miss: Dutch court in landmark case orders Shell to cut net emissions by 45%

Voting your proxy can have a significant impact on a company’s decisions. According to Cheng, palm oil is one such example. “People always use palm oil, it’s everywhere, but because of shareholder advocacy and proxy voting, investors were able to make sure there was less deforestation [linked to the palm oil industry] in Southeast Asia. They could see the impact that they were having — that there was less pollution and fewer greenhouse gases.”

You might like: 5 of the Best Books on ESG and Impact Investing

As an investor, you can also request an impact report that will detail the effect your investment has had on the real world.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.

Alana Benson writes for NerdWallet. Email: [email protected].

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