ESG investments have grown in popularity in recent years as investors increasingly recognize the importance of sustainability to the long-term success of companies. Because of this, some mutual fund and exchange-traded fund companies have introduced ESG funds to investors. Here’s everything you need to know about ESG funds and how to decide if you should invest in them.
Key Findings
- ESG investing is investing in companies that promote positive environmental, social and governance principles.
- Investing in ESG is controversial as some see it as a waste of money.
- Investing in ESG is very similar to socially responsible investing (SRI) and people often switch between the two terms.
What are ESG funds?
ESG is short for “Environmental, Social, and Governance”. The acronym denotes companies that practice business practices consistent with the ESG stock selection framework.
ESG funds are portfolios of securities and bonds from companies that have included environmental, social and governmental factors in their investment process. A company with a rich history and prospects in these areas is eligible for inclusion in such an investment portfolio. Conversely, a fund may not consider a company with a poor record in these areas for inclusion in its portfolio.
Some fund managers deliberately focus on companies that they believe can be improved upon considering the risks and opportunities of ESG. Increased exposure may encourage a company to further align its operations with ESG standards.
The rationale for ESG funds is simple. Improving resilience and quality of life noble deeds for the people. Research has shown that companies that include ESG in their investment decisions perform better than those that do not.
For example, a company that decides to stay ahead of government regulations by installing air purification equipment or finding ways to reduce energy consumption may get good press. After hearing about the responsible risk management of a company, investors can extrapolate that the company as a whole is efficient and adheres to sound principles.
ESG funds also allow investors to participate in solving environmental and social problems that improve life on the planet, while receiving a return on their investment.
Why the push to ESG?
ESG as a concept is controversial in many ways. On the one hand, investors who want to help build a better future for the planet are looking for companies that demonstrate these principles. On the other hand, many industry names ideologically contradict this concept.
The ESG concept has snowballed, and investors have embraced it as a way to make sustainability profitable by encouraging companies to adopt green practices. However, investors should be aware that this is a relatively new tool compared to other investment vehicles.
Arguments for ESG
Many investors, from individuals to large brokerages, have enthusiastically turned to investing in ESG. A small investor can sleep peacefully knowing that their hard-earned money goes to a responsible company.
Meanwhile, brokerage firms may be offering a new portfolio product that combines sound investment principles with stocks of companies committed to a better world. Investing in these companies encourages them not to give up and to use their financial resources for the greatest good possible.
Criticism of ESG
Arguments against ESG usually focus on the lack of definition of the concept and concerns about green laundering.
Some critics argue that there should be more standards for using ESG as a label, and that many businesses use the acronym to attract investors who won’t look deeper to determine if companies are as socially responsible as the ESG rating makes them seem.
Some conservative critics argue that ESG funds do not focus on getting investors the highest possible return, but instead try to make the funds appear more “awakened”. Because of this, ESG has inadvertently become part of the recent culture war.
Both former Vice President Mike Pence and Florida Gov. Ron DeSantis publicly opposed investing in ESG. Some ESG investing advocates criticize the Republican backlash as a form of climate denial.
ESG has a promising way to combine investing with activism. It satisfies many of the global concerns about our world and encourages companies to create a brighter future for the children of tomorrow.
However, questions remain about the label’s standards and whether the ratings accurately reflect the company’s ethics. Resilience can mean different things to different people. So while businesses may think they are ahead of the curve in their commitment to specific environmental issues, experts may disagree.
ESG vs. socially responsible investing vs. corporate social responsibility
Many investors use ESG, socially responsible investing (SRI) and corporate social responsibility (CSR) interchangeably. However, there are slight differences between them.
ESG investing considers environmental, social and governance factors when deciding where to invest money. The SRI is broader and can include anything an investor considers important. It could be environmental protection, religious principles, or support for companies with good customer service. CSR is what a company does in return. This includes things like sustainability programs, community involvement, and philanthropy.
In most cases, you will see ESG and SRI used together. This is because they include many of the same principles. Some argue that SRI is a type of investment in ESG. The critical difference is that the SRI can be more flexible in what it considers. ESG has specific environmental, social and governance factors that it focuses on.
How can a company get an ESG rating?
No organization verifies companies and assigns the most ethical ESG rating. Instead, various investment firms, consulting groups, non-governmental organizations, and even government agencies can use their own scoring systems to rank companies.
For example, the Institutional Shareholder Service (ISS) is an advisory service that assigns various scores and ratings to companies, including a carbon risk rating. The Group may evaluate a company by talking directly to its employees about its sustainability efforts or by reviewing publicly available information.
Any of the following factors can influence the group’s assessment of a company:
- Air and water pollution
- Deforestation
- Waste management
- labor standards
- Gender Diversity
- Composition of the board
- Bribery allegations
In the future, if groups apply a more generic rubric to ESG ratings, investment practices may become more popular among skeptics. Because there is no single SEC rating for ESG, this label may seem inconsistent or arbitrary. Why should we believe that a company upholds the values of ESG if it is labeled by one group and not another?
Examples of ESG Funds
There are currently over 580 sustainable ESG funds and ETFs available for investment. Here are five of the most popular ones. This is not an investment recommendation on our part. We want to give you the names of some of the funds so that you can continue to study them and better understand the ESG funds.
Vanguard FTSE Admiral Social Index Fund (VFTAX)
The Vanguard VFTAX Foundation includes Apple, Microsoft, Amazon and Alphabet. It is classified as an aggressive fund and its income tends to be volatile. However, despite this, investments in the fund are solid.
Vanguard’s website says the fund is excluding stocks. “companies that do not comply with certain labor, human rights, environmental and anti-corruption standards defined by the UN Global Compact Principles.”
Shelton Green Alpha Foundation (NEXTX)
The Shelton Green Alpha Fund focuses on identifying green economy companies with solid growth potential. It invests in companies focused on products and services that reduce environmental and economic systemic risks.
Parnassus Equity Core Fund (PRBLX)
This fund’s managers are focused on finding stocks that participate in ESG and exclude those that derive most of their income from fossil fuels, tobacco, nuclear energy, gambl*ng, and alcohol. They use ESG screeners to refine their search and identify companies with competitive advantages and ethical principles.
iShares Global Clean Energy ETF (ICLN)
The iShares ICLN ETF is an example of how fund managers are trying to create and balance ESG funds while adhering to ESG principles. In April 2022, the fund underwent a change in methodology to balance its holdings. ICLN holds securities, including companies producing solar, wind and other forms of renewable energy.
1919 Socially Responsible Balanced Fund (SSIAX)
The 1919 Fund SSIAX focuses on high returns from a socially responsible portfolio. It identifies undervalued securities and determines whether issuing companies are operating in a socially responsible manner. SSIAX aims to hold 70% of its assets in US equities and 30% in investment grade US debt.
bottom line
ESG Funds include environmental, social and governance issues in their selection processes. They allow investors to invest in companies with ethical practices. ESG’s critics only occasionally speak in good faith. No central organization decides which companies to include in ESG funds, so it’s always a good idea to research different fund selection processes.
Investing in ESG funds comes down to the individual investor and their beliefs about environmental, social and government change. Investing in these types of funds does not require a diversified portfolio. Investors typically invest in these funds to support businesses that positively impact the world. But other investors not interested in investing in these ventures can still invest successfully.
Fast What are ESG funds? appeared first on Due.