Understanding the E, S, and G
ESG investing is a focused approach to socially responsible investing.
In addition to considering financial performance, ESG investing looks at how the three factors influence a company or investment, such as:
1 Environmental—the effect a company has on our environment, and the effect our environment might have on the company. This means how the company handles factors such as climate change, pollution, resources, biodiversity, and waste management.
2 Social—the relationship between a company and its employees, consumers, suppliers, and communities. This refers to how a company manages labor relations, diversity, human rights, political freedoms, wage disparity, respect for the community, and other similar issues.
3 Governance—the structures or systems a company uses to make sure there’s accountability, transparency, and trust. This is all about how a company governs itself through their accounting practices, ethics policies, the makeup and oversight of the board of directors, how they pay their executives, and more.
What makes a fund ESG?
ESG funds can be mutual funds, exchange-traded funds (ETFs), or other investment vehicles that invest in companies that meet the criteria defined by the fund manager. Exactly how a fund meets the ESG criteria can vary, for example, by:
- Making improvements in all three categories—environmental, social, and governance practices
- Focusing on only one of the three factors (e.g., the social component)
- Concentrating on specific functions within a category, such as a company that focuses on governance by creating a diverse board of directors
- Committing to integrating ESG principles into the company’s operations, even if they haven’t done so yet
- Meeting any of the above criteria, and satisfying certain financial requirements
ESG investors are looking for more than just financial returns
When companies include ESG factors, they aren’t just looking to help reduce potential risk or make the most of an opportunity, they're looking to make an impact on responsible investing, and those actions have the potential to result in financial gains. Why? Because sustainability strategies can have material impacts on a company’s performance over time.
Companies that are more efficient and less wasteful tend to be more likely to spend less time scrambling to meet sustainability regulations and more time developing products and services that could be essential to a brighter future.
Companies that honor social change, embrace diversity, and respect the people they work with are more likely to see greater employee commitment and higher productivity.
Companies that run their business carefully and ethically are generally more likely to be free from scandal, respected within the media, and trusted by their partners and potential customers.
ESG investing requires doing some research
Unfortunately, there isn’t a standard ESG metric that’s used consistently, which can make it difficult to compare companies and funds. So, you’ll need to do your own research on how a fund is defining ESG to make sure it aligns with your investment goals. And you’ll want to decide what your ESG investing priorities are, such as:
- Are you comfortable investing in companies or a fund that invests in companies only focused on one of the three principles? If so, which principle is most or least important to you?
- Do you want to invest in a company or a fund that invests in a company that has a plan to improve in these areas but isn’t doing anything for the environment, society, or governance today?
Are ESG funds offered in retirement plans?
ESG funds offer investors the opportunity to invest in companies that share similar priorities as you: pursuing environmental improvements, social equity, and fair governance. Some retirement plans are even including ESG funds in the investments they offer their employees.
While it’s exciting to think that you can invest according to your values, remember that you’re also investing for your yourself, your goals, and your retirement. As an investment strategy, ESG investing still considers the performance of different companies and the performance of funds that invest in those companies, so just like any other fund you invest in, you’ll need to do your research before you invest.
For complete information about a particular investment option, please read the fund prospectus. You should carefully consider the objectives, risks, charges and expenses before investing. The prospectus contains this and other important information about the investment option and investment company. Please read the prospectus carefully before you invest or send money. Prospectus may only be available in English.
Investing involves risk, including possible loss of principal. There is no guarantee that any investment strategy will achieve its objectives. Past performance is not a guarantee of future results.
Incorporating environmental, social, and governance (ESG) criteria and investing primarily in instruments that have certain ESG characteristics, as determined by the manager, carry the risk that the fund may perform differently, including underperforming, funds that do not use an ESG investment strategy.
The content of this document is for general information only and is believed to be accurate and reliable as of the posting date but may be subject to change. It is not intended to provide investment, tax, plan design, or legal advice (unless otherwise indicated). Please consult your own independent advisor as to any investment, tax, or legal statements made.