A California-based robo-adviser wants to make climate-aware portfolios a centerpiece in 401(k)s, this week announcing a service for small businesses.
The firm, Carbon Collective, bills itself as “the first online investment adviser 100% focused on solving climate change.”
The 401(k) option, which is administered by plan providers Vestwell or Ubiquity, is designed for employers with 300 or fewer workers. It includes three portfolio options that are “diversified, low-fee and are fully integrated across all major cloud-based payroll providers such as TriNet, ADP, Gusto, Intuit and JustWorks,” the company stated in its March 14 announcement.
Those options are a “core climate” portfolio, an ESG portfolio “with less impact and lower tracking error” and a traditional index-based portfolio. The climate portfolio is free from any fossil-fuel holdings and invests more heavily than other ESG options on the market in securities that address climate change, according to Carbon Collective.
“We’re in this period where being slightly less bad [on climate change] is just not good enough,” co-founder Zach Stein said. That’s a major concern among employers that have missions around sustainability and climate, he noted. “For them, having the clarity about what we are able to offer is really helpful.”
The climate portfolio is intentionally overweight in its allocation to securities connected with addressing climate change, rather than just excluding fossil-fuel businesses, he said.
“This is in line with the reality of what we have to do to fight climate change,” Stein said. “The only way we get fossil-fuel [companies] to change is by changing the demand for fossil fuels.”
Ten clients have signed up for the plan, ranging from businesses with five employees to about 100, he said.
Workers have also indicated that having climate- or socially-conscious investment options in a company’s 401(k) can be a factor in deciding to where to work and how much to participate in the 401(k).
Carbon Collective serves as a 3(38) fiduciary for the service, meaning that it has sole discretion in choosing the investments. Aside from the climate portfolio, the plans include a Vanguard ESG funds portfolio option as well as a traditional, non-ESG Vanguard funds portfolio.
“We make it very clear that we are not forcing anyone to invest in green portfolios,” Stein said.
The company charges 25 basis points for the service. That doesn’t include administrative fees from the plan providers or the investment management fees of the underlying funds, which range from an average 12 bps in the Vanguard portfolios to 20 bps in the climate portfolio.
Carbon Collective manages about $12.5m in assets among 251 clients as well as about $1.8m for a high-net worth individual, according to the firm’s latest Form ADV filing with the Securities and Exchange Commission.
Although the adviser is offering the new plans through two record keepers that specialize in small and midsize businesses, it’s interested in also working with plan providers that serve large employers, Stein said.
Prior to staring Carbon Collective, Stein and cofounder James Regulinski worked together on a different venture, a water-quality sensing system. When that didn’t materialize, they changed direction and studied to become financial advisers.
“We had the fortunate blessing of our investors to go and build something completely different,” Stein said.