This startup helps create climate-friendly 401(k)s

If you pour money into a 401(k) plan with every paycheck, some of it will likely support fossil fuel companies or other work that directly contributes to climate change. Currently, most employers do not offer more sustainable options; only 4.7% of 401(k) plans offer a choice of an ESG (environmental, social, and governance) fund, according to the Plan Sponsor Council of America. And many so-called ESG funds have also been accused of greenwashing because they include fossil fuel companies in their own portfolios.

carbon collective, a Bay Area startup, is working to make it easier for companies — especially startups and other smaller businesses — to offer better options to their employees. “We started investing with individuals because we saw widely that ‘sustainable investing’ as Wall Street called it and sold it, was pretty broken, especially when it came to climate change,” says Zach Stein, Co-founder of Carbon Collective. After the company launched a robo-advisor platform for individual investing, the team heard from other employees who wanted similar options at their companies. “We kept hearing from founding friends and co-workers who work in sustainable companies and climate tech startups to say, ‘Hey, I really want my 401(k) at work to match this too because I’m very uncomfortable to invest in fossil fuels. ‘” he says.

The companies that manage the logistics of 401(k) plans for companies, known as “record keepers,” are reluctant to change the status quo, Stein says. “They don’t want to take on the obligation to offer investment advice that goes beyond just investing in the market,” he says. “We let them tell us that explicitly. They fear they will be sued if they say, “Oh, here’s a sustainable portfolio,” and then that sustainable portfolio underperforms the market this year. What we found is this [executives] enjoy working with an investment advisor like us who explicitly and contractually takes on this responsibility for portfolio construction.”

When it partners with a company to set up new 401(k) plan offerings, Carbon Collective sets up a platform with a few choices, including a traditional target-date Vanguard retirement fund, because some workers — even at climate tech companies — still prefer it the traditional variant. The company also offers a Vanguard ESG fund, which is “a less bad version of the world we have today,” Stein says. (Vanguard’s ESG funds include fewer fossil fuel companies, but still have fossil fuel exposure.) The final choice is Carbon Collective’s own climate-focused portfolio.

The startup is beginning to weed out companies that are technologically dependent on fossil fuels, from airlines to petrochemical manufacturers. These make up about 20% of the stock market, says Stein. The portfolio currently includes carefully selected funds. But the next iteration will allow the company to take the same approach it’s taking with its robo-advisor, selecting specific companies to invest in and working on solutions from renewable energy and batteries to capture Working on methane from landfills. It also buys and holds shares in companies in the rest of the stock market on a broad basis to push those companies to improve.

“Coca-Cola is often an example I use,” he says. “They are not environmentally friendly Company. But their business model can exist, and they could sell me a coke with a secret recipe in a decarbonized world. It simply runs on 100% renewable energy, and their fleet is 100% electrified, and they protect their watersheds rather than abuse them. This is where we should get involved as shareholders — to pressure the stock market’s Coca-Colas to reduce their demand for fossil fuels.”

Investing more in the right companies is now critical, Stein says, and holding more stocks of climate-friendly companies in pension funds is particularly useful because it can help boost stock prices. (If there is less stock on the open market when the company is having a good quarter and there is demand for that smaller supply of stock, the price will go up.) With higher stock prices, companies can borrow money more cheaply to build new projects. And this expansion of solutions is obviously crucial now.

“Climate change is the topic of our time,” says Stein. “If we don’t solve it, if we’re not able to get to a point that puts us on the path to stabilizing climate change within the next 30 years, then our other big problems around the world are basically kind of contentious. But the good news is that climate change is a solvable problem. We already have a lot of the technology we need in place, so we know exactly what to do. . . We have to build a lot to make this transition. And building requires investment.” This startup helps create climate-friendly 401(k)s


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