How to Invest in ESG in 2024

Growing climate concerns and social injustice have more investors wondering about how to invest in environmental, social, and governance (ESG) funds and stocks. The idea behind ESG investing is to make a difference with the dollars you invest by supporting companies that demonstrate policies congruent with improving the environment, positive social justice, and furthering sound governance. If you want to grow your wealth while creating a more just world, then you need to understand ESG in investing. Find out how to invest in ESG, from opening a brokerage account to researching ESG investments. This article will cover a range of ESG investments and strategies so that you can align your money with your values.

How to Invest In ESG

How to incorporate ESG factors in investing is straightforward. With accessible ESG screeners as well as funds dedicated to this investment approach, ESG investing is as easy as selecting a few screening parameters and searching through a database for the sustainable investments that fit your needs.

Steps Required to Invest in ESG

To begin your ESG investing journey, you’ll need to choose an investment platform, typically an online brokerage account. After opening and funding the account, you’ll visit the research section of the platform to screen for your ESG investments. Next, pick the assets that fit your criteria and proceed to buy shares in the stock, bond, or fund.

Here’s how it works.

Step 1: Open an Online Brokerage Account

Choose a brokerage account: Review features, available assets, and costs related to the investment platform. Evaluate the stock and fund screeners in particular for their ESG criteria. Check out trusted broker reviews. Decide whether you prefer a taxable or retirement account.
Begin the application process: The online process to open a brokerage account requires you to present your name, address, phone number, Social Security number, date of birth, driver’s license, and financial details.
Fund your account: After creating the account, set up a funding source. Link a bank savings or checking account to the newly opened brokerage account. Transfer funds according to the bank's requirements. It might take several days for the money to transfer from your bank to your brokerage account.

Step 2: Understand Your ESG Criteria

ESG factors encompass a range of criteria spanning the environment, societal issues, and sound government. ESG funds can be broad and include a range of companies that fit into a broad environmental, social or governance framework. Other ESG assets may focus on components of ESG investing, such as lowering carbon emissions, improving worker equity, gender diversity, minority empowerment, greater board diversity, investing in green projects, and ethical labor management.

Most screeners assign a company an ESG score. The score includes how well the company fits within widely accepted ESG criteria and typically consists of a five point scale from one to five. Before screening to find the best ESG companies to invest in, determine the lowest ESG score you’ll accept. Finally, decide whether you’re seeking a broad or targeted ESG fund, or prefer screening for individual ESG companies.

Step 3: Research ESG Investments

Next decide among two ESG investing approaches. With the self-directed investing route, you screen for and select your preferred ESG investments. Or, if you’d like to outsource your ESG investing, you might consider a robo-advisor that offers ESG investments. Robo-advisors are low-fee investment managers that offer various core and strategy portfolios in line with your goals and risk tolerance levels.

Self-directed ESG investing: From your investment broker’s research tab, access the screener for the type of asset (fund or individual stock) you’re seeking. Select the criteria that you prefer and choose the minimum acceptable ESG score. Additional search criteria depend upon your investment needs. You might screen for a U.S. or international ESG equity fund and a specific fee level. For stocks, you might select market cap, industry, or other criteria. From the screened list, you can adjust the criteria and then investigate the individual assets further to select the one(s) that meet your needs.
Robo-advisor for ESG investing: For those who prefer the DIFY or do-it-for-you approach, a digital investment manager is a good alternative. Most robo-advisors ask a few questions about your age, financial goals, and risk tolerance. From your responses, the platform recommends a specific asset allocation or mix of stock, bond, and alternative funds to meet your needs. For ESG investing with a robo-advisor, you’ll pick either a broad ESG portfolio or one that offers the option to choose a specific ESG factor portfolio, such as climate or social impact, in which to invest. Some platforms, like Sustainfolio and Betterment, give users the opportunity to choose from various types of ESG investing.

Step 4: Choose an ESG Investment

After you’ve selected your ESG investments, you’re ready to proceed. The final step in how to invest in ESG companies or funds is simply placing a trade on your brokerage platform app or desktop. While on the screen for the ESG investment there is usually a button labeled “Trade.” Or you can select the website’s “Trade” menu item.

Once on the trade screen, you’ll follow these simple steps:

Type in the investment's ticker symbol. Most trade tickets will pre-populate this information from the screener selection.
Select “Buy.”
Choose either a dollar amount or number of shares.
Select the order type, either market or limit.
Confirm the order.

The Orders page of the platform will show the details of the trade and whether it has been filled or not. Once the order is filled, money will be transferred from your cash balance to fund the new ESG stock or fund purchase.

What You Need to Open an Online Brokerage Account

Opening an online brokerage account is as easy as following the online prompts. Click on the button that says “start here” or “open an account.” Next, provide the personal and financial information listed below. After this, you simply link a funding source (usually a bank account) and you’re ready to begin your ESG investing journey.

Personal Information

The brokerage industry follows the highest security and compliance levels when dealing with your money and investing activities. All personal information requested is required by law to ensure that you are who you claim to be and is protected by the company.

Here is the personal information that you’ll typically need to open an online brokerage account:

Name
Social Security number (or Taxpayer Identification Number)
Address
Telephone number
E-mail address
Date of birth
Driver's license, passport, or other government-issued identification document

Financial Information

Investment brokers are closely regulated and must ensure your suitability for the various investment products that the firm offers. When opening your investment account you’ll need to provide financial information as part of the know your client standard, including:

Employment status and occupation
Whether you are employed by a brokerage firm
Annual income
Net worth
Investment objectives and risk tolerance

Understand the Basics

ESG investing is a strategy to ferret out companies that meet specific environmental, social, and good governance parameters.

Here’s an example of the factors that are considered in each of the ESG or sustainable investing categories:

Environmental: Carbon footprint, climate impact, and natural resource conservation
Social: Employee wellbeing, company health, and safety track record
Governance: Accounting practices, business ethics, and board of director diversity

The growth in ESG investing is driven by a broad desire for a more just society. ESG investors hope that by investing in sustainable companies, capital will flow into companies that meet the ESG standards and thus further a healthier planet and more compassionate corporate society.

How Are ESG Scores Calculated?

An ESG score is a quantifiable determinant of a company’s rank on a range of environmental, social, and governance issues. Various organizations calculate and attempt to standardize ESG scores. ESG scores are based on information from securities filings, corporate disclosures, government databases, academic studies, media reports, and more. Screeners typically assign companies and funds an ESG score between one and five.

When searching for ESG investments, select your preferred ESG score. Scores will vary by industry and reporting agency, and like any published metric, should be considered as one of several inputs into an investment decision.

ESG Investing Benefits

Wondering why to invest in ESG? The reasons vary and include the potential personal, financial, and societal benefits. Ranking companies by ESG criteria provides a rubric that enables governments, businesses, and individuals to work together to progress on societal and global issues.

ESG investing benefits include:

Sustainable investing can have a positive impact on the world.
Sustainable investing can deliver equal or, in some cases, superior investment returns when compared to traditional investing.
ESG investing enables investors to invest in accord with their personal values.

Types of ESG Investments

With the popularity of sustainable ESG investing, there are many ESG investments available. Self-directed investors can screen for ESG funds and individual companies. hose who prefer robo-advisors or managed portfolios have many choices as well.

Types of ESG investments:

Stocks
Bonds
Mutual funds
ETFs

Factors to Consider When Investing in ESG

ESG investing remains a strategy to build long-term wealth. Sustainable investors should consider ESG scores along with the traditional investment selection strategies. These might include fundamental analysis for stock picking, meaning ESG ratings are a metric along with debt-to-equity ratios and earnings-per-share. For fund selection, it’s wise to review expense ratios, performance metrics, and the stated investment strategy.

Begin your search for ESG investments by choosing a platform with robust investment selection and screening. This might be your financial firm like Schwab or Fidelity. Research sites such as Morningstar can also provide useful ESG investment research information. Next, you will select the screening factors, both ESG and traditional.

Following are factors to consider when investing in ESG:

Type or asset class of investment: Begin by choosing the type of investment you’re seeking. Popular choices are stocks, ETFs, or mutual funds.
Sector or industry: You may choose U.S. or international stocks or funds. Other options include specific sectors such as healthcare or technology. Global investors might search for developed or developing markets ESG funds. ESG bond funds are also available at many brokers.
ESG score: Scores will typically range from one to five. There’s no right or wrong ESG screening score, and you might consider adjusting the rating depending upon how many investments are available.
Fees: For fund investors, the annual expense ratio is important. Set a maximum expense ratio. Abundant research supports the correlation between lower cost funds and higher performance over the long-term.
Investment metrics: ESG stock pickers might search for low P/E ratio stocks, high momentum, revenue growth, low debt ratios, or other factors. For bond investors, you might consider credit quality or type of debt, such as government, corporate, or municipal.

FAQs

What Are ESG Companies?

ESG companies meet one or more of the widely accepted environmental, social, or governance criteria. Depending upon the ESG certification platform, the company will receive a specific score that is based upon the rating criteria. It is important to dig into the criteria to understand how companies are being evaluated and avoid greenwashing. Various ESG tracking organizations provide lists of ESG companies.

You won’t find tobacco companies on an ESG company list due to the health risks of smoking. Companies who make firearms are also usually omitted. A quick internet search will yield multiple lists of ESG companies to use as a springboard for your ESG company research.

What Are the Best ESG Funds?

There are a few fund families dedicated solely to ESG investing such as Pax World Funds and Calvert Group. That said, the majority of ESG funds are created by popular fund families like iShares or Vanguard. A quick Morningstar ETF search of ESG funds with a 4 or 5 ranking (out of 5) yielded 640 offerings. From that list, you can screen for the ESG criteria that matter most to you.

If you’re seeking an ESG fund that focuses on gender diversity, you might like SPDR® MSCI USA Gender Diversity ETF (SHE). If you’re seeking a diversified U.S. or international ESG equity fund, there are scores from which to choose such as iShares ESG Aware MSCI USA ETF (ESGU) or Calvert International Responsible Index Fund (A) (CDHAX). Unfortunately, there is not any list of best ESG funds that is universally agreed upon.

Does ESG Investing Make a Difference?

The results are inconclusive. A recent Harvard Business Review article included research from Columbia University and the London School of Economics that compared the ESG record of 147 U.S. companies found in ESG portfolios with 2,428 U.S. companies found in non-ESG portfolios. The surprising finding was that the companies in the ESG portfolios had worse compliance records for labor and environmental metrics. This study also determined that those companies added to ESG portfolios didn’t improve the companies’ labor or environmental compliance.

Adding to the confusion, there is no universally accepted definition or ESG scoring method. Performance of ESG funds has been comparable with their non-ESG competitors. It remains to be seen whether ESG investing actually helps companies comply with standard global ESG initiatives or not.

Is ESG Investing Ethical?

ESG investing relates to ethical behavior and ascribes to the common good theory, which encourages citizens to sacrifice for the good of society. ESG strives to further ethical behavior, such as caring for the earth, treating all individuals fairly, and righting societal injustices.

It’s difficult to definitively determine whether ESG investing is furthering ethical behavior and creates a better society. That said, as a society, it is ethical to encourage companies to transact their businesses in a way that is beneficial to society. In that light, ESG investing is focused on the higher societal goals and therefore ESG investing is generally considered ethical.