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ESG investing

Invest for financial gain but also to support socially and environmentally conscious companies.

ESG investing is when an investor uses a set of standards to choose a company to invest in. It can also help investors avoid companies that are at higher risk of lawsuits due to some environmental or social practices, such as poor waste management, toxic emissions or employee harassment.

What does ESG stand for?

ESG stands for environmental, social and governance. Here’s what that means:

E is for environmental

The environmental side of ESG measures how the company affects the planet through various aspects, including energy use, natural resource conservation, animal welfare, waste and pollution.

S is for social

The social aspect of ESG covers the company’s relationship with suppliers, customers, employees and the community. This includes employee gender and diversity, customer satisfaction, human rights and fair labor practices.

G is for governance

The governance side of ESG covers how the company is run, including company leadership, executive pay, eternal controls and shareholder rights.

3 reasons you should care about ESG investing

Investing in ESG stocks may not seem like a big deal. But it can have a noticeable impact on your portfolio.

1. Reduced portfolio risk

If a company implements the ESG policies, chances are low that it will be hit by a lawsuit from its employees, customers or even the government.
For example, Tyson Foods is a company that saw numerous lawsuits filed against it in 2021 for allegedly misleading shareholders about the company’s ability to combat the spread of coronavirus in its facilities. This dropped the stock price by 8% in the days following the news about the lawsuits. If the company fully implemented the ESG policies, this likely wouldn’t have happened.

2. Potentially higher returns

You may find claims online that ESG-friendly companies tend to perform better than those that don’t follow ESG policies. This could be true in the long run. However, the performance may also depend on who’s tracking it. Three agencies that track and rank companies based on ESG policies have shown different results, according to one Wall Street Journal article.
For example, Refinitiv showed that companies with poor ESG scores performed better in 2021 than companies with high ESG scores. On the other hand, companies ranked by Sustainalytics showed that those with average ESG scores performed better than those with high and poor scores. Finally, companies ranked by MSCI that had high ESG scores outperformed those with poor scores.

3. Strong corporate leadership

Companies that follow ESG rules in general tend to have strong leadership. This can positively affect company stock performance.

2 benefits of ESG investing

Choosing a company based on its ESG policies may come with some benefits, including:

  • Lower risk of lawsuits. Because the company is trying to meet the ESG criteria, chances are it will avoid lawsuits on fronts covered by the ESG standards.
  • Popularity. Companies that implement ESG standards are often published in annual reports by companies such as Goldman Sachs, Wells Fargo and JPMorgan Chase, which can drive interest for investing in ESG companies.

2 drawbacks of ESG investing

Despite having some positive sides of ESG investing, there are some things to keep an eye on.

  • Lack of ESG ranking standards. Multiple companies track and rank companies based on their ESG policies. This can create inconsistency as not every company would be ranked the same, which may cause investor confusion.
  • It can be misleading. Companies can game the system by ranking high on one or two of the ESG parts. For example, an oil company ranks poorly on the environmental side, but it can boost the social and governance parts to get a high ESG score.

ESG vs. socially responsible investing

Socially responsible investing (SRI), also known as ethical investing, is an investment strategy that, aside from financial gain, is focused on companies that practice social responsibility and bring social change.
ESG, on the other hand, is a framework by which companies are ranked. The main difference between ESG investing and SRI is that some investors that follow the latter avoid companies that are involved in tobacco, firearms, gambling, fast food, pornograhy and fossil fuel production.

Socially responsible investing:

an investing strategy that aims to generate both social change and financial returns for an investor.

3 steps to start ESG investing

Investing in ESG companies and funds is simple. Here’s how to do it:

1. Figure out what ESG and social responsibility means to you

If you want to invest in companies that share your values for climate change, employee diversity or any other environmental and social value, investing in ESG may be the right option. When you compare stocks, see how the companies rank on each of the ESG values to choose the one you like the most.

2. Choose to DIY or go with a robo-advisor

There are two ways to invest in ESG companies: finding the companies by yourself or through a robo-advisor. The first option means you have to do the research yourself.
The second is more of a hands-off approach. Betterment and M1 Finance are two popular robo-advisors that allow you to choose socially responsible companies for your portfolio. Once you set your criteria, the algorithm allocates your funds.

3. Find the right ESG company and invest

Now that you know what to look for, here’s how to invest in the right company:

  1. Research ESG stocks. Start by searching the companies online or through your broker.
  2. Open a brokerage account. Some brokers, such as Interactive Brokers, show an ESG score for each company that’s ranked. If you don’t have a brokerage account, consider one that provides ESG scores.
  3. Fund your account and buy the stock. Once you have the funds, go ahead and buy the companies you want.

ESG ETFs

Investing in exchange-traded funds (ETFs) is another option to get exposure to ESG companies. An ESG ETF is a basket of companies that follow ESG criteria, which can sometimes be a better alternative than investing in individual stocks.
Save money on transaction costs with ETFs because you hold multiple companies with a single transaction. Also, with ETFs, you don’t have to do a lot of research to find the right company —- the fund has already done that for you.

Compare stock trading platforms

If you’re ready to start investing, the first step is to sign up with a broker. See how these platforms stack up against one another before you choose.

1 - 6 of 6
Name Product Available asset types Stock trade fee Minimum deposit Signup bonus
SoFi Invest
Stocks, Options, ETFs, Cryptocurrency
$0
$0
Get up to $1,000
when you fund a new account within 30 days.
Winner of Finder’s Best Low-Cost Broker award.
Finder Award
eToro
Stocks, Options, ETFs, Cryptocurrency
$0
$0
FINDER EXCLUSIVE: Get a guaranteed $15 bonus
when you sign up and deposit $100
Winner of Finder’s Best Broker for Beginners award. Not available in NY, NV, MN, TN, and HI.
tastytrade
tastytrade
Stocks, Options, ETFs, Cryptocurrency, Futures
$0
$0
Get $100 - $2,000
when you you open and fund an account with $5,000 to $100,000+
Highly commended for Best Derivatives Trading Platform award.
Robinhood
Stocks, Options, ETFs, Cryptocurrency
$0
$0
Get a free stock
when you successfully sign up and link your bank account.
Make unlimited commission-free trades, plus earn 4% interest on uninvested cash in your account with Robinhood Gold.
JPMorgan Self-Directed Investing
Stocks, Bonds, Options, Mutual funds, ETFs, Treasury Bills
$0
$0
Get $50 - $700
when you open and fund an account with $10,000 - $250,000+
E*TRADE
Stocks, Bonds, Options, Mutual funds, ETFs, Futures
$0
$0
Get up to $600 or more
when you open and fund a new account.
E*TRADE offers commission-free stocks, access to mutual funds and advanced trading tools. Other fees apply.
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