ESG Investing Made Easy: A Guide to Sustainable Funds

More people are getting curious about investing in environmental, social, and governance (ESG) funds and stocks because of growing concerns about climate change and social injustice. ESG investing is all about using your money to support companies that are good for the environment, promote social justice, and have solid governance practices. If you're looking to grow your wealth and make the world a better place, it's a good idea to learn about ESG investing. This article will guide you through everything from opening a brokerage account to researching ESG investments, helping you align your money with your values.

Defining ESG Funds

ESG stands for sustainable investing, which means aiming for financial returns while doing good for society. It's a broad concept that includes strategies like excluding a few "bad" companies from big indexes or investing in firms that pursue specific environmental goals, like clean water. Experts hope asset managers will get better at branding to help people understand ESG funds better. The SEC even proposed rules to make fund names clearer. But for now, you'll need to do some research before getting into long term investing in this sector. Generally, sustainable funds fall into three main categories:

Impact funds

ESG is about risks to a company's valuation, not necessarily about community benefits," says Stankiewicz. Impact funds aim to make real progress toward sustainable goals. Morningstar breaks these funds into five groups:

• Human development
• Basic needs
• Resource scarcity
• Healthy ecosystem
• Climate action

While an ESG fund might favor companies with low carbon footprints, a climate impact fund might invest in firms making solar panels or wind turbines.

ESG funds

ESG funds look to invest in companies that score well on environmental, social, and governance criteria. These companies usually work to reduce their environmental impact, treat employees and customers well, value diversity, and align their policies with shareholder interests. Ignoring these factors could threaten a company's success, say ESG advocates. Issues like climate change, racial justice, and diversity are all seen as financial metrics because they impact a company's ability to succeed.

Socially responsible funds

Socially responsible investing (SRI) has been around since the 1950s and usually focuses on what a fund doesn't invest in. These funds might avoid companies in controversial industries like alcohol, gambling, tobacco, firearms, and fossil fuels.

Importance of ESG

For many, ESG investing is a practical way to see how a company serves its stakeholders: workers, managers, communities, customers, and shareholders. Some even consider the environment a stakeholder. Identifying the impact on these stakeholders should be the measuring stick for quality ESG investing. Companies that actively pursue ESG goals tend to be well-run and, therefore, good investments.

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Functioning of ESG Investments

Let's break down the three criteria for evaluating ESG investments:

• Governance: How does the company's board and management drive positive change? This includes executive pay, leadership diversity, and shareholder interactions.
• Social: How does the company improve its social impact? This covers equality, diversity, inclusion programs, and social advocacy.
• Environment: What impact does the company have on the environment? This includes their carbon footprint, use of toxic chemicals, and sustainability practices.

Reasons for ESG Investments

Making sure your investments match your values is a solid reason to go for ESG investing. Lots of people care about issues like climate change, inequality, and data privacy. They want to avoid putting money into companies that make these problems worse and prefer supporting those that lead the way in ESG. Besides helping tackle big issues, ESG investing can also give you better returns. For example, investing in an ETF like ESGV has beaten the S&P 500 recently, so you'd be supporting companies with strong ESG scores and getting a good return on your money.

There's a myth that you have to sacrifice returns to invest responsibly, but more research shows ESG can actually lower risk. Keep in mind, though, that many ESG funds have outperformed broad indexes partly because they include more tech companies. It's important to have a mix of sectors in your investments to avoid putting all your eggs in one basket. Chatting with a financial advisor can help you balance the risks that come with focusing on ESG.

Calculating ESG Scores

ESG research firms give scores to lots of companies, making it easier to compare different investments. These scores come from ratings that research firms assign based on various criteria for the E, S, and G parts. Big names like Bloomberg, S&P Dow Jones, JUST Capital, MSCI, and Refinitiv provide ESG research. Scores usually follow a 100-point scale: the higher, the better. Scores can differ because firms use different methods and metrics. Typically, ESG rating firms look at things like annual reports, sustainability measures, and board structure. They also check out how companies manage resources, employees, pay, and finances. Plus, they score companies involved with weapons, especially if they're illegal or controversial.

Finding ESG Investments

If you're ready to dive into ESG investing, there are a few ways to go about it, like doing your own research, using robo-advisors, or working with a financial advisor.

ESG Financial Advisors

Teaming up with a financial advisor can be a smart move, especially for ESG investing. They can get a big-picture view of your finances and align your investments with your personal values. If you already have an advisor, they can help you find high-rated ESG options that match your goals. If you're looking for one, ask about their experience with ESG investments. Though it might cost more than doing it yourself or using a robo-advisor, you get a full-service relationship and a partner in making positive impact investments.

ESG-Savvy Robo-Advisors

For a mix of DIY and some guidance, check out robo-advisors with ESG portfolios. Options include Betterment, Ellevest, Wealthsimple, Sustainfolio, Earthfolio, and OpenInvest. Fees might be higher than doing it all yourself, but you get investment research and automated management.

ESG Mutual Funds & ETFs

Instead of picking individual ESG stocks, you can invest in ESG mutual funds or ETFs. This way, fund managers make the choices for you. Use online tools to research and buy these funds. Many brokerages offer highly rated ESG funds, and websites like Morningstar and As You Sow provide rankings and details on fund adherence to ESG goals. Keep an eye on expense ratios, as ESG funds can be pricier. Weigh the cost against the potential impact on your returns.

Do Your Own ESG Research

For those interested in individual stocks, check out annual "best of" lists of top ESG-rated stocks. Use these lists to build a diversified portfolio that fits your investment timeline.

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Conclusion

ESG investing is about promoting ethical behavior and the common good, like caring for the planet and treating people fairly. It's tough to say if ESG investing always makes society better, but encouraging companies to operate in a way that's good for everyone is generally seen as ethical. So, ESG investing aims for higher societal goals and is usually considered a good thing.

This content was created by AI