Investing can help us thrive. Today, however, investing can go beyond just the monetary aspect. Institutions, investors and governments alike are recognizing the need to take greater accountability for their role in the health and sustainability of the planet. This is where ESG factors come into play. What exactly is ESG investing? It is an investment approach that considers non-financial factors like environmental, social and governance (ESG). In simple terms, it means investing in companies that are wholeheartedly committed to responsible environmental practices, ethical and social policies and strong corporate governance.
Individual investors can play a major role in driving positive impact through ESG investing. When ESG investors support businesses that align with these values, they use their financial influence to promote the change they want to see and position themselves for long-term success. Thanks to a focus on long-term resilience and forward-thinking business models, ESG investments are increasingly viewed as a smart way to build wealth sustainably.
Join us as we explore what ESG investing really means, the different factors of ESG investments and how they can help you grow your wealth while doing good.
Key Facts at a Glance
Get an at-a-glance look at what you need to know about ESG investing below. Ready to dig into the details? Keep going to get a thorough look at this sustainable wealth-building strategy.
- ESG investing allows individuals to grow wealth while supporting environmentally and socially responsible businesses.
- Sustainable investments often offer competitive returns and lower risk, making them a smart choice for long-term financial success.
- ESG investing is not the same as impact investing or socially responsible investing, although there are overlapping practices.
- It isn’t too challenging to start ESG investing, but it’s essential to always be cautious when making financial investments, especially those that aren’t traditional.
ESG investing is not without risks, and financial performance is still up in the air despite studies indicating it is a sustainable long-term investment option that can lead to significant financial gains.
What Is ESG Investing? The Concept Explained
In the investment world, those looking to make a positive change with their monetary resources often consider ESG investing. But exactly what are ESG investments?
ESG Investing On the Rise
ESG investing isn’t anything new, even though ESG investing trends have seen an uptick since the COVID-19 pandemic, and more individuals, governments and companies have recognized the need for more sustainable investing practices.
During the pandemic, $45.6 billion found its way into sustainable investment funds.
Core Components of ESG Investing
There are three components to ESG investing to understand. Most investors look for companies based on their commitment to one or more of the ESG factors–environment, social and governance. The environmental aspect of this investment strategy focuses on:
- Conserving the natural world
- The social aspect of the consideration of relationships and people
- The governance element of the company’s standards
Let’s unpack what this means:
- Environmental: Investors consider aspects such as pollution, climate policies, energy use, resource conservation, treatment of animals and more. Compliance with environmental regulations and greenhouse gas emissions are also elements that are evaluated.
- Social: With the social element, investors evaluate customer satisfaction, gender and diversity, employee engagement, community relations, labor standards and human rights.
- Governance: There are many governance factors considered, but most ESG investors consider aspects like board composition, political contributions, executive compensation, bribery and corruption, lobbying and whistleblower schemes.
However, it’s essential to know that even if investments don’t have ‘ESG’ in their name, it doesn’t mean they don’t still incorporate elements of ESG investing into their portfolios.
Related: Core Investing Basics to Understand
How ESG Investing Differs from Impact Investing and SRI Investing
ESG investing is not the same as impact investing or socially responsible investing (SRI). These types of investing all promote ethical investing, but they differ in their approach. ESG investing was initially born out of investment philosophies like SRI.
An ESG investment approach integrates governance, social and environmental factors into financial analysis to identify opportunities and manage risk. On the other hand, SRI investing actively avoids or excludes businesses that conflict with ethical or personal values, like those dabbling in fossil fuels, weapons or tobacco.
Impact investing that takes it a step further, aiming to generate positive financial returns alongside measurable social and environmental impact. Although similar, these strategies have differing depths of engagement.
Why ESG Investing Matters
In many countries, ESG investing has become a polarizing issue, with many experts in the field claiming ESG investment strategies are corporate examples of ‘greenwashing.’
In the U.S., particularly in 2025, ESG investments are facing severe scrutiny under President Donald Trump’s administration. However, despite the controversy surrounding them, many investors see the importance of ESG investments.
Some of the top reasons to consider ESG investing include:
Financial Performance
There are different opinions on whether or not ESG investments perform as well as traditional investments. However, several promising studies in recent years suggest that companies that integrate ESG practices could have better long-term financial returns than those that don’t or have weaker ESG strategies.
For instance, a 2021 study by NYU Stern Center for Sustainable Business analyzed over 1,000 research papers and found that most showed a positive relationship between ESG performance and financial performance, particularly over the long term. But why is this?
Risk Management
Companies with strong ESG practices tend to have lower risks, so even if ESG factors don’t immediately lead to better financial performance, some investors believe that it’s better than traditional investing.
By choosing companies that focus on one or more ESG factors, an investor can mitigate long-term risk and increase his or her chances of achieving improved financial gains. However, how is this possible? Well, think of it this way: the world could look very different in the next few years because of climate change.
Companies that realize, accept and act on the threat of climate change now may be likely to be better positioned to navigate issues that arise in the future. For example, they may be prepared to address issues like supply chain disruptions and population displacements. Those who invest in companies focusing on the environmental implications in these situations could come out on the other end with profits higher than those who invest solely traditionally. It’s food for thought.
Social and Environmental Impact
Technically, impact investing is its own type of investment strategy, but ESG investing is an offshoot, meaning there is some overlap. ESG investing, like impact investing, also pushes investors towards putting their money into companies that benefit the environment and society.
ESG might not be as heavily influenced by these factors as impact investing. It focuses more on risk mitigation as it relates to environmental and social benefits. However, investors will be supporting ethical business practices and sustainability efforts when they choose ESG investments.
How to Start ESG Investing
Beginning ESG investing can be challenging if you’re unfamiliar with this investment niche. However, these simple steps can help you get started.
1. Research Companies or Funds
To start with ESG investing, research companies or funds that align with your goals, vision and values. Then, explore if they are genuinely embodying ESG practices.
2. Assess ESG Ratings
Next, assess ESG ratings through trusted platforms like Morningstar, Sustainalytics and MSCI. With these tools, you can evaluate a company or fund’s performance on environmental, social and governance factors alongside its financial health. This will further broaden your knowledge of the investment opportunity and help you make the right decision.
3. Narrow Investment Options
Once you’ve used these tools to investigate ESG ratings, look into ESG-focused investment options prioritizing sustainability and ethical governance. This is not the same as researching potential prospects, as this step narrows your search so you can make actionable moves toward investing. Usually, it’s best to explore options like EFTs, mutual funds and individual stocks that are ESG-focused. For further guidance, utilize brokerage platforms that offer ESG filters to help simplify your search.
Additionally, exploring green bonds or impact investments might be worth considering if you’re not quite ready to fully commit to ESG investing. These directly fund projects with measurable environmental and social benefits. Moreover, these investment avenues can help show you the ropes.
4. Monitor Your Investments
Finally, continuously monitor your investments. With various tools, you can track ESG metrics and financial returns to ensure your portfolio stays aligned with your goals. Periodic adjustments can help you build wealth sustainably and retain a financially sound strategy over time as companies evolve and ESG standards shift.
Challenges and Misconceptions
ESG investing offers several benefits, including benefits for communities and the environment. It also offers investors lower risks and remarkable growth in return over the long run; however, there are a few challenges and misconceptions you should know:
- Performance: As mentioned, the jury is still out on whether ESG performance is truly better than traditional investing performance. It’s also best to be cautious with ESG investing when ESG performance can be affected by short-term issues like political changes that affect environmental regulations and geopolitical conflicts that disrupt energy pricing.
- Greenwashing: Despite industry rules to prevent it, greenwashing is a common tactic companies use to deceptively market themselves as environmentally friendly with regard to their goals, products or policies when they are not. That’s why it is crucial to research and identify truly sustainable investments. To do this, look at third-party verifications and annual impact reports to see what is truly happening.
- Measurement: Unfortunately, ESG scores often involve a degree of subjectivity. Since companies don’t always disclose consistent or standardized information, ESG data can lack the clarity and precision typically found in conventional financial metrics. As a result, investors may struggle to gain a clear and accurate picture of a company’s long-term sustainability and its alignment with ESG principles.
It’s also worth noting that ESG investing may come with higher costs compared to more traditional approaches. Many sustainable investment platforms tend to have elevated annual fees relative to typical brokerage accounts, which is an important factor to consider when evaluating ESG-focused options.
Consider Your Next Investment Steps
The ESG investment strategy can benefit our communities and the environment. It’s possible for this form of investing to have remarkable growth in return over the long run, making it a sustainable way to build wealth.
It’s an avenue that is worth considering, using the correct tools while following best practices. With all this in mind, it might be time to start researching ESG funds and making sustainable investments.
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