Environmental, social and governance — or ESG — is a form of investing that allows you to choose investments in companies or funds that align with your priorities and avoid those that don’t.
While many people have practiced this kind of investing for years, demand for ESG investing is growing rapidly. ESG is now a common way of describing investments and portfolios for any investor. Learning more about ESG can help you when choosing investments for your portfolio.
On this page you’ll find
ESG investing surged over the past decade
US$1 trillion and growing — ESG-related traded investment products available to institutional and retail investors across major financial markets.
Source: Organisation for Economic Co-operation and Development (OECD)
While ESG investing could include investments related to all three components (environmental, social, or governance), it’s also possible to involve just one or two elements.
What is the E in ESG?
Environmental
Interest in environmentally sustainable investing has grown, due to the realities of climate change and the desire to shift away from fossil fuels. More investors are seeking ways to support low-carbon economic growth as well as environmental sustainability. This may include broader considerations such as protecting water resources and biodiversity.
ESG investing that is focused on the environment can include screening for companies that perform well on criteria such as low carbon emissions, clean technology, sustainable agricultural practices, and more. An example would be investing in companies that have a net zero carbon footprint.
What is the S in ESG?
Social
Socially conscious investors tend to be concerned with the human impact of companies and their workers. This could include healthy working conditions, diversity and equity in hiring, and fair wages. It can also include considering how the company engages with the community and other companies, such as Indigenous inclusion and reconciliation, ethical supply chain management and advocacy work for social good.
Investors screening for socially conscious investments may choose criteria such as avoiding companies operating in conflict zones or prioritizing those that pay a living wage.
What is the G in ESG?
Governance
Investors who are interested in corporate governance practices want to know about the internal oversight of the companies they invest in. Governance screening criteria could include board diversity, communications and transparency, executive compensation, or the existence of whistleblower protections.
One example of ESG investing that is focused on governance would be choosing companies based on the percentage of people on their boards who are from historically under-represented groups.
3 ways to find ESG investments:
1. Work with an advisor
Your financial advisor may have expertise in ESG investing, or there may be another advisor at your bank or investment firm who can offer advice. Having the conversation with your advisor may be an opportunity to review your portfolio and check in on your investment goals.
2. Take a DIY approach
Many investment research firms publish ESG ratings for individual companies as well as investment funds. The ratings may reflect slightly different criteria used by each firm, which is why it’s good to compare rating in multiple places if you can. You can research the performance of individual companies or different ESG-oriented ETFs or mutual funds.
3. Use a robo-advisor
Many online investment platforms now identify ESG or socially responsible investments. These robo-advisors may offer exchange-traded funds (ETFs) and other investments identified as ESG-focused, as well as advice in meeting your overall investment goals.
As with mainstream investing, when choosing ESG investments, be sure to consider the fees involved, and the risk level you are comfortable with. And remember, some ESG investments are not what they seem — what is ESG greenwashing?
Take action
1. If ESG investing interests you, decide the criteria you would like to use when choosing investments.
2. Work with your financial advisor to select the investments that meet these criteria.
