What is ESG investing?
ESG investing weighs Environmental, Social, and Governance factors alongside traditional financial metrics like revenue and profit when deciding what to invest in. Approaches range from negative screening, which excludes entire industries such as tobacco or weapons, to positive screening, which actively favors companies with strong ESG scores.
ESG ratings and why they differ
Multiple rating providers, both global and local, assess companies' ESG performance using their own methodologies and publish scores or ratings. Because each provider weighs different factors differently, the same company can receive noticeably different ratings from different agencies, so it is worth looking at more than one source and understanding what specific factors drove a given score.
How to invest in ESG funds and ETFs
ESG funds and ETFs can be bought through a regular brokerage account the same way as any other fund or ETF. Product names often include terms like 'ESG,' 'sustainable,' or 'responsible,' but it is worth checking the prospectus or fact sheet for the actual screening criteria and holdings rather than investing based on the name alone.
Spotting greenwashing
Greenwashing refers to a company or financial product presenting itself as environmentally or socially responsible without real substance behind the claim, purely for marketing purposes. Spotting it usually means looking past vague slogans for specific numbers, targets, third-party certification, and evidence of measurable improvement over time. Regulations around ESG labeling for financial products are tightening in many countries, so the rules in this area continue to evolve.
ESG investing and returns
Some research suggests ESG factors can reduce a company's long-term risk from regulatory action, reputational damage, or governance failures, while other research finds no consistent evidence that ESG investing outperforms the broader market. Excluding entire sectors, such as energy, can also mean underperforming during periods when those sectors do well. ESG investing is generally best understood as balancing values and risk management alongside return, not purely maximizing return.
How institutional investors are adopting ESG
Large institutional investors, including major pension funds and asset managers worldwide, have increasingly adopted responsible investment principles and stewardship codes that factor ESG considerations into investment decisions and shareholder voting. That said, how much weight is actually given to ESG factors, and how actively voting rights are used to press for change, varies significantly by institution and over time.