Video Lesson
Prefer watching? This video covers the key concepts from this article.
What Is ESG Investing?
ESG investing evaluates companies through three lenses beyond traditional financial analysis: Environmental (climate impact, carbon emissions, resource use), Social (labor practices, diversity, community relations), and Governance (board structure, executive pay, shareholder rights).
ESG vs Traditional Investing: The Performance Debate
Multiple studies show ESG funds perform comparably to traditional indexes over the long term. Strong ESG scores often correlate with lower volatility and reduced tail risk. Poor governance is a genuine financial risk — Enron, Wirecard, and similar scandals often had warning signs in their governance scores before collapse.
How to Invest with ESG Criteria
- ESG ETFs: Low-cost, diversified, easy to implement
- Best-in-class: Own top ESG scorers within each sector
- Exclusionary: Screen out specific industries (tobacco, weapons, fossil fuels)
- Impact investing: Directly fund companies solving major challenges
Key ESG Ratings Resources
MSCI ESG Ratings and Sustainalytics are the most widely cited. When evaluating an ESG fund, check the expense ratio and understand what's actually being excluded — not all ESG funds screen for the same things.
Key Takeaway
ESG is a risk management framework, not just a values statement. Start with a broad, low-cost ESG index ETF and customize from there as you learn more about what matters to you.