Putting Pension Plans to Work Retirement Billions Can be Harnessed to Green the Economy

The headlines are full of corporate scandals involving Enron, WorldCom, Xerox and even Martha Stewart Omnimedia, with the result that big business is under scrutiny as never before. In an effort to improve companies” social and environmental practices while also maximizing long-term revenues, many public and private pension funds are discovering the benefits of investing in a sustainable future.

In the United States alone, the top 1,000 pension plans counted $4.8 trillion in assets in 2001, placing retirement funds third (after commercial banks and mutual funds) in terms of capital available for investment. And since pension plans are composed primarily of small investments from employees and union members, these assets are distributed among a vast number of participants. Taken together, this adds up to a mighty political force.

“A retirement fund is one of the main ways that small savers wind up invested in the stock market,” says Michelle Chan-Fishel, coordinator of the Green Investments Project at Friends of the Earth (FOE). Environmental groups such as FOE and the National Wildlife Federation (NWF) long ago recognized that these small-scale investors could significantly influence corporate behavior by targeting their plans” investment choices, without jeopardizing financial performance. This sort of influence was initially detailed by Jeremy Rifkin and Randy Barber in their 1978 book, The North Will Rise Again: Pensions, Politics and Power in the 1980s. In the book, Rifkin and Barber explain how people can wield power as pension investors to deter companies from relocating factories and laying-off employees, or to encourage companies that employ large numbers of union workers.

Using Their Clout

Credit: Elizabeth Prager

Many plan participants hope to build on the success of socially responsible investments (SRI) in mutual funds, some of which are also available as retirement plan options. These funds, offered by companies such as Domini Social Investments, Pax World Fund and Green Century Funds, incorporate social and environmental screening criteria in choosing their investments. Negative screens weed out industries such as nuclear power or fossil fuels, and positive screens select sustainable technologies such as solar and wind power. These funds are highly competitive: In 1999, 21 percent of the SRI funds analyzed by Morningstar (a firm that evaluates the financial performance of mutual funds) received its highest five-star rating, twice the rate for mutual funds overall. Today, all SRI investments combined (including mutual funds and pension plans) add up to more than $2 trillion in assets, representing one out of every eight dollars under professional management in the U.S.

Increased demand is leading to greater availability of SRI options in employer-sponsored retirement funds, especially in defined contribution plans such as 401(k) or 403(b) plans. “You can see if your 401(k) plan has an SRI option,” says Chan-Fishel. Some major retirement platforms such as Vanguard and Fidelity Investments offer SRI options. Employers may also contract their pension management out to firms like Domini and the Calvert Group that specialize in socially responsible investments. “If you don’t have that option,” Chan-Fishel adds, “you should work with your plan sponsor to see if you can get one added.”

Many defined benefit plans, frequently offered to government or large corporation employees, are also active in socially responsible investing. In 2000, the California Public Employees Retirement System, the nation’s largest public pension fund, began screening all of its investments in emerging overseas markets with strict environmental and human rights criteria. The fund is also directing investments into economically distressed areas.

Pressure Tactics

Pension plans with significant SRI accounts are increasingly pressuring companies to improve their environmental practices. The New York City Teachers Retirement System, for example, cosponsored a shareholder resolution with the NWF earlier this year, calling for General Electric to disclose how much it spent on efforts to avoid dredging toxins from the Hudson River.

“A shareholder resolution can really send a message to senior management,” says Julie Tanner, a globalization and environment program manager at the NWF. Tanner says that, as more employees ask for environmental guidelines in their pension plans, companies will continue to improve their practices.

The financial issues that often occur during retirements are troubles you probably want to avoid. One way to do that is by using your home to partially fund your retirement. Your home value, or equity, can be converted to cash you can use for any purpose with a reverse mortgage. It is a mortgage design specifically to assist people of retirement age by providing long-term loans to ease financial strains. When you get non-traditional reverse mortgages, you receive money with no immediate repayment necessary. In fact, it can take years for a reverse mortgage balance to be due. That usually only occurs when you cease using the property as your main residence or when certain other issues arise, such as if you file for bankruptcy.

The website for the Social Investment Forum (www.socialinvest.org) is a detailed industry resource.