Unlocking the Power of ESG in Retirement Planning

In today’s world, many nearing retirement are not solely interested in investing for wealth accumulation for their own benefit, but investing in companies that share specific environmental, social, and governance values working to improve society and the world.

ESG (environmental, social, and governance) investing is a type of investing where social, environmental, and governance factors are considered when deciding where to invest your money. Over the past few years, this form of investing has gained significant traction as investors align their investments with their core values. Some of these factors include:

Environmental

The level of carbon emissions a company is producing.
The fair treatment of animals.
Thoughtful management of toxic waste.
Energy use, climate policy, and natural resource conservation.

Social

Labor practices and workplace conditions.
The percentage of profits donated to community programs to benefit society.
Does the company consider the concerns of its stakeholders?

Governance

Integrity and diversity of the Board of Directors
Businesses' impartiality to outside influence is a point of interest, such as political contributions for preferential treatment.

Tips for unlocking the power of ESG

Determine which ESG values and priorities interest you and are financially conducive to your retirement strategy and goals.
Set clear and manageable objectives.
Monitor ESG scores of funds and companies within your sphere of interest.
Understand the company’s business model by conducting your own research.
Consult your financial professional.

Interest in ESG investing has grown considerably over the past few years. Even investment companies have taken steps to satisfy the interests of clients who focus heavily on ESG. Some companies offer options for investing opportunities tackling funds that focus on health and wellness to improve life expectancy, reducing or mitigating the effects of climate change, companies helping to deliver safe, reliable, and easily accessible water, and more. They also consider businesses exposed to potential conflicts of interest or ESG-related risks such as firearms or fossil fuels. Some companies even offer personalized indexing for clients with specific criteria they are looking for in their investment strategy.

Things to keep in mind when considering ESG investment opportunities

Rules and regulations

One aspect of ESG investing that some investors may see as somewhat of a disadvantage or an obstacle is that 401(k) and pension plans must adhere to federal pension law, which requires financial professionals to make investment decisions and recommendations with the participants’ “financial interests” in mind. Therefore, it is up to the participant to take the lead in conducting their research based on ESG principles, values, and interests while getting help on the impact of those decisions with their financial professional.

Diversification

Pursuing an interest in ESG may be fulfilling and give meaning to your investment strategy. The satisfaction you get from investing will make you more enthusiastic about researching the companies and making sounder decisions than if it was strictly for wealth preservation or growth. However, be careful not to get such tunnel visions that you put all your eggs in one basket. Should there be volatility in the market, you want to have a balanced portfolio to try and mitigate some of the market risk.

Consult a financial professional

Making informed financial decisions is critical regarding your retirement investment strategy. ESG investing is becoming popular, but like any investment strategy, you may want to consider the fact that risk is inevitable and market volatility occurs, generally without any forewarning. Be open and transparent with your financial professional and try not to engage in tunnel vision or emotional investing. This can be a dangerous practice if you ignore the importance of a diversified portfolio, not just in stocks, bonds, mutual, and index funds, but also considering other low-risk instruments, for example, certificates of deposit, treasury bills, and high-yield savings accounts. Remember, though, even diversification can’t safeguard you one hundred percent. Take the time to consult a financial professional to review your financial situation and determine a course of action that works for you, your family, and your retirement and ESG goals.

Important Disclosures:

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.

Socially Responsible Investing (SRI) / Environmental Social Governance (ESG) investing has certain risks based on the fact that the criteria excludes securities of certain issuers for non-financial reasons and, therefore, investors may forgo some market opportunities and the universe of investments available will be smaller.

All information is believed to be from reliable sources; however, LPL Financial makes no representation as to its completeness or accuracy.

Sources: How ESG Factors Should Be Bundled Inside Your 401(k) Funds (bloomberglaw.com) ESG investing—what it is and how it can help investors make a positive impact on the world | Fortune Recommends ESG Investing: Pros, Cons, and How to Comply (linkedin.com) Removing Barriers to Considering ESG Factors in Retirement Plan Investments | U.S. Department of Labor Blog (dol.gov) 6 Steps to Get Started With ESG Investing | Financial Advisors | U.S. News (usnews.com) ESG funds that reflect what matters most to you | Vanguard

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