What is ESG investing? A plain-English guide
ESG investing picks companies partly on environmental, social and governance factors. What it means, what it does not guarantee, and how to start sensibly.
Key takeaways
- ESG stands for environmental, social and governance: a way of choosing investments using those factors, per the US SEC's investor education site.
- There is no single official standard, and different funds weight the factors differently, so two ESG funds can look very different.
- ESG is a method for choosing investments, not a promise of higher returns or of real-world impact. Read the fund's rules.
In this article
ESG investing means choosing investments partly by how a company handles three areas: environmental, social and governance.
The three letters
- Environmental: emissions, energy use, water, waste and climate risk.
- Social: how a company treats its workers, customers and communities, including safety and supply chains.
- Governance: how the company is run, including board independence, pay, audit quality and shareholder rights.
The US Securities and Exchange Commission’s Investor.gov describes ESG investing as investing in companies based on their commitment to one or more of these factors. It lists sustainable, socially responsible and impact investing as other names for it, and notes that funds can weight the factors differently.
Why it is not one clear thing
There is no single legal or global definition. One ESG fund might exclude coal producers. Another might keep them but favour those with better governance. A third might hold large technology firms that score well. All three can be marketed as ESG.
That is why a fund’s own rulebook matters more than the label on the front.
What ESG investing does and does not promise
It can:
- Let you avoid businesses you object to.
- Add information about risks, such as climate exposure or governance problems, to your decision.
It does not:
- Guarantee higher or lower returns.
- Guarantee that your money changes what companies do.
- Mean every holding is “green.”
How to approach it as a beginner
- Decide what you care about: avoiding certain sectors, backing climate solutions, or simply owning better-run companies.
- Read the fund’s objective and exclusion list, and look at its top ten holdings.
- Compare fees with a plain, non-ESG index fund.
- Be wary of vague green language that has no rule behind it. That is how greenwashing works.
- Speak to a licensed adviser about your own situation. This article is education, not advice.
Sources
Frequently asked questions
What does ESG stand for?
Environmental, social and governance. Environmental covers things like emissions and resource use, social covers people issues like labour practices, and governance covers how a company is run.
Is ESG investing the same as ethical investing?
Not exactly. ESG is a framework for weighing certain factors. What counts as ethical is personal, and a fund can call itself ESG without matching your values.
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