An increasing number of investors are seeking a more ethical portfolio with an emphasis on socially responsible and sustainable investing. An emerging trend is environmental, social and governance (ESG) investing, with these factors used to evaluate the financial return and overall impact.
The ESG score measures how investments and companies perform in these categories:
- Environmental – carbon emissions, air and water pollution, deforestation, green energy initiatives, waste management, water usage
- Social – employee gender and diversity, data security, customer satisfaction, company sexual harassment policies, human rights at home and around the world, fair labor practices
- Governance – diversity of board members, political contributions, executive pay, large-scale lawsuits, internal corruption, lobbying
Many view “sustainable” investing as very vague. The ESG criteria hopes to provide a grading of investments that clarifies what sustainable involves. ESG scores are calculated using different methods. Some ratings are created by using data collected from company disclosures and government, academic and NGO databases. Other scores are developed with self-reported data from participating companies.
Recent benefits of ESG investing include higher returns and a lower downside risk than traditional funds and conventional investments. To start investing, you can search on your own to identify an ESG fund or an individual stock with a high ESG score that fits your investment beliefs and goals. Investors can also use a robo-advisor to guide their ESG investment choices.
For additional information on ESG investing, click on the following links:
Teaching Suggestions
- Have students search online to identify ESG funds or companies they might consider for their investment portfolio.
- Have students talk with others to obtain the level of interest for ESG investing among potential investors of various ages.
Discussion Questions
- What aspects of ESG investing do you find attractive? What are your concerns?
- What concerns might be associated with methods used to create ESG scores?
Melissa Hart
Focus on Personal Finance, 7e 