ESG investing involves putting your money towards companies that are rated for their approach to issues that fall under the “environmental, social, and governance” umbrella.
For investors, ESG can be an attractive way to try to invest more sustainably. Let’s take a closer look at what exactly ESG investing means.
An ESG framework evaluates companies based on how they advance critical environmental, social, and governance causes.
For example, some companies like Amazon and Coca-Cola have committed to reducing their carbon footprint and reaching net zero emissions in the next few decades — a cause that may rank high on the E in ESG.
Governance, on the other hand, may look a bit different. Companies that rank highly in governance factors may have a diverse executive team or even a female CEO.
Other corporate ESG initiatives could include:
Environmental: Using renewable energy, eliminating deforestation
Social: Improving diversity in high-ranking roles, following ethical data policies
Governance: Limiting large-scale lawsuits, improving diversity in the workplace
Many investors see the act of investing their money in companies that prioritize any one of these factors as an opportunity to do good and do well — that is, invest in a way that aligns with their values while still working toward a long-term financial goal.
One potential downside of ESG investing is there’s still no standard way to assess a company’s ESG efforts. Some investors use their own systems to evaluate a company’s exposure to the three ESG factors. Others rely on existing frameworks developed by rating agencies, like MSCI.
MSCI ESG Ratings measure a company’s long-term exposure to environmental, social, and governance risks. Its ratings fold in thousands of data points from key ESG issues affecting the company’s core business and the industry. For instance, a company like ExxonMobil may face more risks from carbon emissions and renewable energy than, say, a software company.
With all this information, MSCI calculates a score ranging from AAA to CCC. An AAA score means a company excels at managing the most significant and relevant ESG risks and opportunities. A CCC, however, suggests just the opposite. The company may face substantial issues by failing to manage ESG risks.
You can look up how companies you’re interested in are rated using this tool from MSCI.
The most obvious benefit is the option to align your money with your beliefs and values.
If, for example, you want to support clean technology, it’s now easier to identify and invest in companies that rank highly for the E in ESG. When investors have visibility into what their investment companies support, they can feel good about where their money is going.
We’re still in the early innings of ESG investing, so the way investors evaluate companies can vary. Rating agencies have provided some transparency into this process, but even they don’t have it down to a science.
One of the biggest hurdles right now is reporting requirements. Companies aren’t required to report ESG initiatives or numbers in their company disclosures, which can make it difficult for everyday investors and agencies to assess what’s happening and what’s working.
That may soon change, however. The SEC recently proposed a new rule to standardize how companies disclose climate-related risks.
Another downside is that doing good and doing well doesn’t come without some costs. One study found that ESG funds can charge as much as 40% more than a traditional fund.
Now that you know the basics, here’s how to get started.
One option is to do it yourself. Assess companies based on ESG scores. Find ETFs or individual holdings that match your values. Incorporate the new holdings into your current portfolio. And maintain all the upkeep — all on your own. It’s a lot of work, even for the savviest investors.
Or, Acorns offers an easy way to invest in an ESG portfolio built with ETFs from the experts at BlackRock.
These portfolios, by design, give investors a diversified portfolio of ESG funds that matches their investor profile. For existing users, you can access ESG Portfolios in the Portfolio tab of your Invest, Later, or Early account. But remember, changing your asset allocation may modify your potential returns and could result in tax consequences.
This content is for educational purposes only and is not intended as financial advice. The views expressed are generalized and may not be appropriate for all investors. ESG investment strategies limit the types and number of investment opportunities available, as a result, portfolios may underperform others that do not have an ESG focus. Companies selected for inclusion in the portfolio may not always exhibit positive or favorable ESG characteristics and may shift into and out of favor depending on market and economic conditions. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions.