What Is Sustainable Investing?
Sustainable investing considers environmental, social, and governance (ESG) factors alongside traditional financial analysis when making investment decisions. The goal is to generate long-term competitive returns while creating positive societal impact.
Understanding ESG Criteria
Environmental (E)
How a company impacts the environment:
- Carbon emissions and climate impact
- Energy efficiency and renewable energy use
- Waste management and pollution
- Water usage and conservation
- Biodiversity protection
Social (S)
How a company treats people:
- Employee treatment and diversity
- Labor standards in supply chain
- Community relations
- Customer privacy and data security
- Product safety
Governance (G)
How a company is managed:
- Board diversity and independence
- Executive compensation
- Shareholder rights
- Transparency and reporting
- Anti-corruption policies
Types of Sustainable Investing
1. ESG Integration
Incorporating ESG factors into traditional financial analysis. Doesn't exclude any companies but considers ESG alongside returns, risk, and valuation.
Example: A fund might invest in an oil company with strong governance and carbon reduction plans while avoiding one with poor environmental practices.
2. Socially Responsible Investing (SRI)
Excludes companies or industries that conflict with certain values. Uses negative screening to eliminate investments.
Common exclusions:
- Tobacco and alcohol
- Weapons and defense
- Gambling
- Fossil fuels
- Companies with poor labor practices
3. Impact Investing
Investments made with the intention to generate positive, measurable social or environmental impact alongside financial return.
Examples: Clean energy projects, affordable housing developments, microfinance institutions.
4. Thematic Investing
Focusing on specific sustainability themes or trends.
Popular themes: Clean energy, water scarcity, sustainable agriculture, gender equality, healthcare access.
ESG Funds and ETFs
| Fund | Focus | Expense Ratio |
|---|---|---|
| ESGU (iShares ESG Aware USA) | US Large Cap ESG | 0.15% |
| SUSA (iShares MSCI USA ESG Select) | ESG Leaders | 0.25% |
| ESGV (Vanguard ESG US Stock) | Broad US Exclusionary | 0.09% |
| ICLN (iShares Global Clean Energy) | Clean Energy Theme | 0.40% |
| VEGN (US Vegan Climate ETF) | Vegan/Climate Focus | 0.60% |
Does ESG Investing Hurt Returns?
The evidence is mixed but generally encouraging:
Bottom line: ESG investing doesn't require sacrificing returns, but fund selection matters. Look for low-cost, diversified ESG funds rather than narrowly focused thematic options.
How to Build a Sustainable Portfolio
Step 1: Define Your Values
What issues matter most to you? Environmental impact? Labor practices? Governance? Corporate diversity? Your priorities will guide fund selection.
Step 2: Choose Your Approach
- Simple: Replace broad index funds with ESG equivalents (e.g., ESGV instead of VTI)
- Values-based: Use SRI funds that exclude industries you object to
- Impact-focused: Allocate a portion to thematic or impact investments
Step 3: Research ESG Ratings
Multiple organizations rate companies and funds on ESG criteria:
- MSCI ESG Ratings: AAA to CCC scale
- Sustainalytics: Risk-based ratings
- Morningstar Sustainability Rating: Globe system (1-5)
- As You Sow: Fossil Free Funds tool
Step 4: Maintain Diversification
Don't sacrifice diversification for values. Ensure your ESG portfolio spans:
- US and international stocks
- Large, mid, and small companies
- Bonds for stability
- Multiple sectors
Challenges and Criticisms
Making Real Impact
Beyond investment selection, consider:
- Shareholder advocacy: Vote proxies on ESG issues
- Direct engagement: Support firms that engage with companies for change
- Community investing: Credit unions, CDFIs (Community Development Financial Institutions)
- Consumer choices: Often more direct impact than investment choices
