Environmental, Social & Governance (ESG) Investing & How to Get Started

Environmental, Social & Governance (ESG) Investing & How to Get Started

ESG investing has taken the world by storm, and suppliers and investors are rushing to join the sustainable movement.

Unfortunately, the "sustainable" zone contains many gray areas. ESG, or environmental, social, and government investments, is trying to change that. ESG investments use specific criteria to rank investments to clarify exactly what sustainability should be.

What is ESG?

ESG criteria measure the performance of investments or companies in certain categories. Environmental factors take into account the conservation of the natural world, social factors take into account the treatment of people inside and outside the business, and governance factors assess how a business is run.

Here are other things ESG looks for:


  • Air and water pollution.

  • Emission of carbon dioxide.

  • Green energy initiatives.

  • Registration.

  • Waste Management.

  • Water consumption. 


  • Client satisfaction.

  • Company policies against sexual harassment.

  • Data security.

  • Fair labor practices. 

  • Gender and diversity of employees.

  • Human rights at home and abroad.


  • Diversity of board members.

  • Executive payment.

  • Internal corruption.

  • Large-scale lawsuits.

  • Lobbying.

  • Political contributions.

What is an ESG investment?

ESG investing is sustainable investing that takes into account environmental, social, and governance factors to assess the financial return of an investment and its overall impact. The ESG score of investment measures the sustainability of investment in these specific categories.

According to the US SIF Foundation's Trends Report, US assets managed using ESG strategies reached $17.1 trillion in early 2020. This is a 42% increase from $12trillion at the start of 2018.

Benefits of ESG investments

High returns

A 2019 technical report from the Morgan Stanley Institute for Sustainable Investment compared the performance of sustainable funds with conventional funds and found that from 2004 to 2018, the total returns of stock exchanges and sustainable mutual funds were similar to those of traditional funds. Other studies have shown that ESG investments can outperform conventional investments.

Low risk

The same study found that sustainable funds consistently have a lower downside risk than traditional funds, regardless of an asset class. The research found that during turbulent markets, such as 2008, 2009, 2015, and 2018, traditional funds had a significantly higher downtrend than sustainable funds, meaning that traditional funds had the potential for higher loss. 

ESG funds even managed to perform well in 2020. Of the 26 sustainable index-linked funds analyzed by investment research firm Morningstar outperformed comparable conventional funds in the first quarter of 2020 (and the onset of the Covid-19 pandemic).


Examples of ESG Investing

Investing in ESG can take many forms: you can invest in an ESG fund or in a stock with a high ESG score. Here are some examples of ESG investments from our list of the best ESG funds:

  • 1919 Socially Responsive Balanced A (SSIAX)

  • iShares MSCI USA ESG Select ETF (SUSA)

  • Parnassus Core Equity Investor (PRBLX)

  • Pax Large Cap Fund Institutional (PXLIX)

  • Thornburg Better World International I (TBWIX)

Getting Started ESG investments

Starting a portfolio and complementing it with investments aimed at the environment, society and government don't have to be difficult. And with more ESG investing than ever, you'll have plenty of options to choose from. Here is how to build an ESG portfolio.

Choose to do it yourself or get help.

If you want to build an ESG-style investment portfolio, you'll need to decide whether to do it yourself, choose a specific ESG investment, or find a Robo-advisor to do the work for you.

Remember to research the methodology of a potential Robo-consultant to make sure they are using the inclusion and exclusion filters if they decide this is important to you. If you decide to work with a Robo-advisor, you don't have to go through the remaining steps.

Know your ESG policies

ESG has fairly clear limits, especially when it comes to "ethical investing" or "socially responsible investing," but that doesn't mean it fits your beliefs perfectly. Values vary from person to person, so take the time to identify some of the most important values to you and see if any of them don't align with what the "ESG" implies. If so, be sure to seek out investments that also embody these ideals. For instance, Muslim investors may want to ensure that their investments comply with Islamic law.

Find your ESG investment.

Once you have a brokerage account and know which industries you want to support with your dollar investment, you can start building your portfolio.

Reading analysis from independent research firms like Morningstar can show you how a company or fund ranks in terms of ESG investing factors and whether you want to invest in them.

When you create your ESG portfolio, you will likely include the following two types of investments.

Individual Funds: In general, it's a good idea to limit the part of your portfolio that is made up of individual stocks, but if you really like a particular company (and think it will perform well over time), you'll want to maybe buy its shares. Some companies provide an impact report, which will highlight any sustainable or cultural initiatives they have implemented and how they are tackling issues such as carbon emissions. If you want to know how a business works in terms of the work environment, talk to a professional. You will also need to look at more common factors, such as income and net income. Learn more about stock analysis.

Mutual Funds: Funds can quickly fill your portfolio and instantly diversify your holdings. The number of ESG funds has exploded in recent years. Some of these funds focus on a specific topic, such as green energy, making it easier to customize your portfolio impact area. If your broker offers a mutual fund valuation tool, you can compare different funds to see how their ESG scores stack up.

We recommend that you consult its prospectus for the specifics of a particular fund, such as the companies in which the fund invests. This document should be made available on your online broker's site and will include other useful information, such as the proportion of the fund's expenses. Expenses are annual taxes taken as a percentage of investment.



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