You’ve heard about ESG, but you’re not sure how to align your beliefs with your investments. Investors with a leaning toward purpose as a motivator aim to find a deeper sense of meaning in where they put their money, and ESG funds may be a great way to express a purpose-based financial personality. In this post, we share what ESG means, and what investors should consider when approaching this investment strategy.
To break it down, ESG funds focus on companies that have strong environmental, social and governance practices. Today, you can invest in actively managed mutual funds with an ESG focus, as many asset managers have worked to integrate ESG considerations into their fundamental research process for analyzing securities.
You can also invest in ESG-oriented ETFs, or exchange traded funds. These ESG investments may target a broad market or sector index but only include those companies with the strongest environmental, social and governance practices. A number of rating agencies have emerged that score companies for their ESG practices or assess the risk related to how companies handle ESG issues. You can also invest in companies that focus on a specific environmental or social goal, like clean water or renewable energy.
But First, What, Really, is ESG?
Within the three broad categories of environmental, social, and governance issues, various factors are taken into consideration.
On the environmental front, overall stewardship is considered, including a company’s carbon footprint, whether it has ever had a history of soil or water contamination, how much it relies on or supports renewable energy, and what it is doing to either exacerbate or address climate change.
When it comes to social issues, a number of factors are evaluated including how workers are treated and paid, whether workplaces and a company’s products are safe, if ethical employment standards are also applied with vendors, and whether a company fosters gender equality and diversity.
On governance issues, executive compensation, the independence of boards of directors and the diversity of those boards, and the company’s track record for following local, state, and federal laws and regulations are reviewed, among other factors.
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So How Do I Find The Best ESG Funds?
Finding the right ESG funds to invest in is not that different from the process that can be used to find the best performing mutual funds and ETFs within certain time periods, understanding that past performance is not indicative of future results. Third-party agencies like Morningstar and Refinitiv Lipper rate funds. Investors can use these resources and others to review returns from the funds that align with their ESG interests. Morningstar now also has an ESG-oriented complement to its well-known, star-based rating system. The Morningstar Sustainability Rating is globe-based, meaning the funds and ETFs that focus on companies with strong ESG practices are awarded five globes. Infinitv Lipper now also provides ESG scores on funds and ETFs. A number of other firms rate ESG investments, as well. For example, MSCI provides ESG Fund Ratings.
Ready To Invest in ESG?
The first step to learning what ESG funds are best for you may be to learn more about yourself. Take our free 3-minute assessment to learn whether purpose investing is core to your financial personality and to receive insight on which funds may be of interest.
If you’re a purpose-oriented investor, for example, you may be naturally drawn to funds that have meaning for you because they serve a deeper purpose. On the other hand, if you discover you are a viewpoints-focused investor, you may be more enthused by themes that are changing the world. Of course, you may also discover your financial personality skews to one of the other four key personality attributes. You may find your dominant trait is security, whereby investments that provide security and peace of mind will appeal to you, or your defining attribute may be touch because you are drawn to investments that support meaningful relationships.