Environmental, social and governance (ESG) investing is a type of ethical investing. It’s been growing in popularity as investors have become more in tune with their impact on the environment, and more aware of political movements focusing on equality and diversity. Find out more about how ESG investing works, whether it can be a win-win in terms of gains, how it differs from socially responsible investing (SRI) and how you can do it.
Environmental, social and governance (ESG) investing, also known as sustainable investing, seeks to make financial returns for you, the investor, and make a positive impact on society and the environment. In other words, the aim is win-win – you make a profit and a difference.
The attraction of ESG investing is that it allows you to use your money to boost causes that you believe in. If you’re the type of person that seeks out green energy options and reusable straws or that properly sorts their recycling, then it would be counterintuitive for you to use your money to invest in oil and disposable straws.
In a 2020 Finder survey, 90% of Brits said that they recycled plastic and glass, which demonstrates how mainstream these issues have become.
The aim is win-win – you make a profit and a difference.
To determine whether a company fits into this category, you must look at its environmental and social impact and how it’s governed. There are services that rate and score investments according to ESG criteria, giving them something like an ethical credit score. We cover this in more detail in our section on scores below. But what do each of these factors mean in practice?
Is a company pumping pollutants into the air? Does it add to the tonnes of plastic in the ocean? Is it cutting down trees or planting new ones? Companies with a good environmental score aim to prevent pollution and reduce emissions and their impact on climate change.
This focuses on how companies impact society. Are the employees happy and healthy? Does the company have suppliers or partners that don’t share its values? And what sorts of charities does it donate to, if any? A company with a good social score promotes good health – mental and physical – and protects human rights.
This focuses on the way the company is run. Does it have transparent accounting (including the tax that it pays)? Governance also covers aspects such as the gender pay gap and shareholder rights.
With ESG, you’re investing in the type of world that you want to live in. Of course, the question is whether you can make money by doing this. As with all investments, it depends on which stocks you pick, but there are plenty of experienced investors who believe in ESG. We quote the CEO of global investment management company BlackRock below.
Both of these types of investing fall under the umbrella term “ethical investing”. They aim to make the world a better place through investments.
Some people consider the two almost the same. However, socially responsible investing (SRI) was originally a method of excluding investments in specific areas, such as guns, tobacco and gambling. ESG is a framework that integrates environmental, social and governance factors into the process of choosing investments. A key example of the framework in action is the ESG score.
An ESG score aims to measure a company’s environmental, social and governance performance to help investors choose what they want to invest in.
Companies are measured on the three factors: environmental impact, social impact and governance impact. The total of the three elements makes up a score of between 0 and 100, with lower scores representing more ethical companies and those with a higher ESG score having more ESG “risk”.
ESG scores are like credit scores in that all the services that determine the scores have slightly different criteria and look at slightly different factors, but ultimately, they reach the same general conclusions.
At Finder, you can see a company’s ESG score by searching for the name of the company you want to buy shares in. Some trading platforms also show them.
The scores you’ll see are:
You’ll have spotted an addition to the list here: the controversy score. This isn’t used to determine the ESG score but it is worth looking at and is typically shown alongside the company’s ESG score. This reflects any incidences of controversy that the company has been involved in. It considers news stories, lawsuits and spills and is based on the company’s impact on the environment and society.
There’s no simple answer to this – profits will depend on the specific stocks or funds that you choose to invest in. In an open letter to CEOs of companies worldwide, Larry Fink, CEO of BlackRock, suggested that ESG companies offer better returns:
“Our investment conviction is that sustainability and climate-integrated portfolios can provide better risk-adjusted returns to investors. And with the impact of sustainability on investment returns increasing, we believe that sustainable investing is the strongest foundation for client portfolios going forward.”
– Larry Fink, BlackRock CEO
Some market-watchers have speculated that US policies under a Joe Biden administration will be a boost to ESG companies. And if investors continue to turn to more ethical investments, ESG companies are likely to grow. This could mean gentle growth initially, but ESG stocks could be a good choice for long-term investments.
We’ve included growth charts below so that you can see how ESG companies have performed over the past five years. Just remember that past results won’t tell you what will happen in future.
Many share trading accounts will help you find more ethical investments by including ESG scores in their information about the companies. Below are some companies with good ESG scores that you can consider (remember that scores are out of 100, and the lower the score, the better the ESG).
| Company | Ticker | Environmental | Social | Governance | Total ESG score |
|---|---|---|---|---|---|
| Alphabet | GOOGL | 0.5 | 9.9 | 12.5 | 22.9 |
| Progressive Corporation | PGR | 2.1 | 9.3 | 13.1 | 24.5 |
| Microsoft | MSFT | 0.5 | 9.4 | 5.1 | 15 |
| Mastercard | MA | 0.1 | 7.7 | 8.9 | 16.7 |
| Visa | V | 0.1 | 9.8 | 7.4 | 17.3 |
| Procter & Gamble | PG | 8.2 | 9.5 | 7 | 24.7 |
| Apple | AAPL | 0.5 | 13 | 10.2 | 23.7 |
Source: Sustainalytics
Source: Sustainalytics
There are existing funds that pool together stocks from more ethical companies to help you diversify your portfolio and get exposure to ESG companies. It’s worth looking further at the funds before you invest, to be sure you’re happy with the companies they invest in.
| Fund | Ticker | Environmental | Social | Governance | Total ESG score |
|---|---|---|---|---|---|
| Morgan Stanley Intl Advantage | MFAPX | 3.9 | 8.6 | 7.4 | 19.9 |
| Amana Growth | AMAGX | 3.8 | 9.4 | 7 | 20.2 |
| Iman | IMANX | 2.5 | 9.6 | 6.9 | 19 |
| Brown Advisory | BIAWX | 3.4 | 10.3 | 6.9 | 20.6 |
| Putnam Sustainable Leaders | PNOPX | 3.8 | 10.2 | 7 | 21 |
| Calvert Equity | CSIEX | 3.1 | 9.8 | 7.1 | 20 |
| Ave Maria Growth | AVEGX | 2.6 | 9.8 | 6.5 | 18.9 |
| Ninety One Global Environment Fund | 6.04 | 6.85 | 5.71 | 18.6 |
Source: Sustainalytics
Source: Sustainalytics
If you care about the turtles and are keen to see your investments driving diversity, this kind of investing is definitely worth considering. It’s not completely profit-centred, but there’s still the opportunity to make money. If you’ve got the time to do the research, or to use a trading platform that streamlines the process for you, then you can use ESG scores alongside other factors, such as the company’s profits and any newsworthy events, to steer your stock picking.
This article offers general information about investing and the stock market, but should not be construed as personal investment advice. It has been provided without consideration of your personal circumstances or objectives. It should not be interpreted as an inducement, invitation or recommendation relating to any of the products listed or referred to. The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please get financial advice. The author holds no positions in any share mentioned.
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