Environmental Social and Governance

Environmental and social issues are heavily reported topics in American news these days. This heightened awareness among citizens has led to cultural changes in areas from environmental issues to human rights. Financial services firms have created a new form of sustainable investments in response to this cultural shift.

Growing Popularity

ESG mutual funds, an acronym for Environmental, Social and Governance*, are comprised of companies that work to address everything from human rights and climate change to fair pay and diversity. And while the definition of these funds is not always clear, their growing popularity is.

ESG INVESTMENTS HAVE TWO PURPOSES: INVESTING IN A SOCIALLY RESPONSIBLE HOLDING AND EARNING A PROFIT.

According to the 2022 Investment Company Institute Fact Book, 740 mutual funds and exchange traded funds (ETFs) with assets of $529 billion were invested in ESG securities at the end of 2021, up from 583 funds and $381 billion in assets the year before.

What type of stocks meet ESG criteria? One might be a company that uses technology to capture carbon from the atmosphere while another might simply be a waste management firm. Or an ESG company might populate a board of directors with diverse members while taking extra steps to avoid investments based in countries with human rights abuses.

There are dozens of other causes that could qualify as ESG initiatives. The problem is that average investors could have difficulty sorting through differing definitions of what is socially responsible.

Differing Definitions

Multiple organizations rate securities according to varied ESG characteristics, which can cause some confusion when exploring ESG stocks or, for that matter, ESG fixed income securities, for your investment portfolio. Other organizations benchmark ESG funds for financial comparisons and not ESG characteristics.

You could do the homework yourself by examining an ESG fund’s holdings or exploring an individual security’s activities to find holdings that meet your definition. Even then, you might find a company complying in one area, such as an electric vehicle maker reducing carbon emissions, but tripping up elsewhere because the materials in lithium-ion batteries that power these vehicles can be toxic when extracted.

Some companies may also “greenwash,” using deceptive practices to qualify as an ESG holding. Or they may simply overstate or exaggerate their ESG practices, making them difficult for investors to understand.

For More Help

How do you choose? You could look at all ESG ratings available and make a consensus choice. Or you could spending time reseaching online. But the easiest way might be to consult your financial professional about your investing and ESG goals.

*Investing in ESG funds may create risks or forego exposures available to other types of products which could negatively impact performance. Redeemed shares may be worth more or less than their original value. Past performance won't guarantee future results.