As You Sow’s Invest Your Values program released a new tool for analyzing retirement plan exposure to fossil fuel bond holdings, with an accompanying analysis. The tool covers 43 U.S. retirement plans, and found an average fossil fuel bond exposure of 0.5%; with $9.3 trillion invested in U.S. 401(k)s and similar retirement plans, that would amount to an estimated $46.5 billion invested in fossil fuel bonds. Information on bond holdings in retirement accounts is important because coal, oil, and gas companies are increasingly turning to the bond market to access inexpensive debt for new production, extraction, and pipeline projects. Bringing on new fossil fuel projects can negatively impact retirement funds.
Since the Paris Agreement, coal companies with the largest expansion plans have raised 2.5 times more capital through bond issuance than through bank loans. Oil and gas companies have secured $2 trillion in bond issuances. Employer-offered 401(k)s and similar retirement plans hold nearly $10 trillion; where those assets are invested can be critical to shaping the future. When retirement plans offer fund options containing high-carbon fossil fuel bonds, employees are exposed to greater climate risk. As the climate becomes destabilized by climate-related emissions, investors, including employees, are at greater risk of financial losses from extreme weather, stranded assets, systemic risk, and spillover effects. The International Energy Agency has warned that no new coal, oil, and gas development is warranted under a 1.5-degree pathway.
Because pension funds and asset managers make up a majority of bondholders, many retirement savers end up unknowingly financing new fossil fuel projects.
“Investors have tremendous power to support the transition towards a low carbon economy. By reducing their exposure to fossil fuel bonds, investors can reduce their climate-related financial risk while sending a powerful message that they will no longer use their money to invest in climate destruction,” said As You Sow CEO Andrew Behar.
Through As You Sow’s tool, employees can gauge their exposure to fossil fuel bonds by simply looking up their employer-offered 401(k) plan, or by selecting from a list of target date fund series. One key finding of the analysis is that while retirement plans have more assets invested in fossil fuel stocks than fossil fuel bonds, for most plans the concentration of fossil fuels within the corporate bond asset class was double the concentration within stocks — in other words, any given corporate bond holding was about twice as likely to be issued by a fossil fuel company or project than any given stock holding.
None of the retirement plans analyzed offered sustainable bond funds that minimize climate-related financial risks. Older employees are likely to have higher exposure to fossil fuel bonds, because as investors get closer to retirement, their allocation usually becomes more bond-heavy, meaning their risk of investing in fossil fuel bonds rises.
The analysis recommends that to protect employee savings and the environment, retirement plan administrators should add climate-safe bond fund options; measure and reduce the climate risk of corporate bond holdings in the plan’s default option (where new plan participants are invested unless they specify otherwise); and engage asset managers like Vanguard, BlackRock, and State Street who are responsible for many of the portfolios offered by 401(k)s, letting the firms know about employee demand for sustainable, climate-safe investment options.
Surveys have found that nearly 75% of plan participants would or might increase their overall 401(k) contribution rate if offered sustainable fund options, and 40% say having those fund options would improve how they view their employer.
Shareholder resolutions have been submitted by As You Sow with Amazon, Netflix, and Comcast, asking companies to report on how they are protecting plan beneficiaries with a longer investment time horizon from climate risk in the companies’ default retirement options. These resolutions will be voted on at the upcoming company annual general meetings, taking place on May 24, June 1, and June 7 respectively.
As You Sow, a nonprofit corporate accountability organization, publishes monthly report cards rating mutual funds and retirement plans as part of its Invest Your Values initiative.