ESG for Beginners: Environmental, Social and Governance Investing
ESG, or environmental, social and governance investing, is a way to build a more ethical portfolio.
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Environmental, social and governance factors (ESG) are used to evaluate a company or investment's sustainability.
ESG investing is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact.
What is ESG?
Environmental, social and governance criteria, or ESG, is a framework companies use to evaluate their sustainability. Environmental factors look at the conservation of the natural world, social factors examine how a company treats people both inside and outside the company and governance factors consider how a company is run. Here are some examples of what each ESG category covers:
Environmental
Carbon emissions
Air and water pollution
Deforestation
Green energy initiatives
Waste management
Water usage
Social
Employee gender and diversity
Data security
Customer satisfaction
Company sexual harassment policies
Human rights at home and abroad
Governance
Diversity of board members
Political contributions
Executive pay
Large-scale lawsuits
Internal corruption
Lobbying
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ESG investing
ESG investing is a form of sustainable investing that considers environmental, social and governance factors to judge an investment’s financial returns and its overall impact. An investment’s ESG score measures the sustainability of an investment in those specific categories.
» Ready to get started? Jump to learn how to build an ESG investing portfolio.
ESG investing benefits
Aside from having a more sustainable investment portfolio, ESG has other compelling benefits.
Potential for high returns
The Morgan Stanley Institute for Sustainable Investing compared the performance of sustainable funds with traditional funds and found that from 2018 to 2025, the total returns of sustainable funds were higher than those of traditional funds. Other studies have found that ESG investments can outperform conventional ones.
Lower risk
A Morgan Stanley study found that sustainable funds consistently showed a lower downside risk than traditional funds, regardless of asset class. The study found that during turbulent markets, such as in 2008, 2009, 2015 and 2018, traditional funds had significantly larger downside deviation than sustainable funds, meaning traditional funds had a higher potential for loss.
ESG investing vs. socially responsible investing vs. CSR
Another common term for the process of creating a sustainable investment portfolio is socially responsible investing, or SRI. While SRI and ESG both seek to build more responsible portfolios, there are a few differences between the two terms.
ESG is a system for how to measure the sustainability of a company or investment in three specific categories: environmental, social and governance. Socially responsible investing, ethical investing, sustainable investing and impact investing are more general terms. Often, “socially responsible investments” are measured using an ESG-based grading system.
Historically, certain forms of sustainable investing varied in how they created their portfolios. For example, SRI used an exclusionary-only approach to filter out investments some considered immoral, like tobacco or alcohol. ESG investing excluded those same investments but also included companies deemed to be creating a positive impact.
The larger the world of sustainable investing has grown, the more those terms (among others) have been used interchangeably. You’ll see providers who offer a “socially responsible” portfolio that includes ESG funds (as opposed to just excluding certain investments), and ones with the same title that use a solely exclusionary approach. That is why it’s important to look into the methodology used to create a portfolio — no matter what it’s called.
CSR, or corporate social responsibility, is a business practice taken on by a company to improve a local community, the environment or society at large. Beyond helping their cause, CSR initiatives can improve a company's public opinion. CSR initiative planners may take ESG factors into consideration when mapping out their CSR strategy.
Types of ESG investments
There are several kinds of ESG investments, but here are a few of the more popular ones and how to research them.
ESG stocks
Some companies offer an impact report, which will highlight sustainable or cultural initiatives they’ve implemented and how they handle issues such as carbon emissions. If you want to know how a company scores in terms of its work environment, check out a third-party site such as Glassdoor. You’ll also want to look at more typical factors such as revenue and net income. Learn more about how to research stocks.
ESG mutual funds
ESG funds often focus on a particular issue, such as green energy, making it easy to personalize your portfolio’s area of impact. If your broker offers a mutual fund screening tool, you can compare different funds to see how their ESG ratings stack up.
To learn about the specific details of a particular fund, such as what companies the fund invests in, you’ll want to look through its prospectus. This document should be available on your broker’s website and will include other helpful information such as the fund’s expense ratio. To figure out how much you’d pay to own a specific fund, you can use a mutual fund calculator.
It’s usually a good idea to diversify your portfolio and avoid holding a high percentage of your portfolio in one or a small handful of individual stocks.
ESG investing: How to get started
Starting a portfolio and filling it with environmentally, socially and governance-minded investments doesn’t need to be difficult. And since there are more ESG investments than ever, you’ll have lots of options to choose from. Here’s how to build an ESG portfolio.
1. Choose to DIY or get some help
You’ll have to decide whether you want to do it yourself by picking specific ESG investments or find a financial advisor who will do the work for you.
A. I want to find my own ESG investments
If you like the idea of reading up on a company’s sustainability initiatives or ensuring a fund’s companies are in alignment with your moral compass, you may want to build your own ESG portfolio. If you need a brokerage account, here's how to open one. Some brokerages have screening tools that can help you sift through various ESG (or sustainable/socially responsible/ethical) investments.
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B. I want help with ESG investing
Building an investment portfolio takes time, especially when you are trying to find investments that align with a particular framework, such as ESG. A financial advisor can help ensure you choose investments that best meet your risk profile and long-term goals. Robo-advisors are also an option if you prefer an automated algorithm. Just remember to investigate a potential robo-advisor’s methodology to make sure they use filters based on what’s important to you.
2. Know your own ESG criteria
ESG has some pretty clear boundaries, especially in comparison to “ethical investing” or “socially responsible investing,” but that doesn’t mean it fits perfectly with your beliefs. Values differ from person to person, so take a little time to identify some of the values most important to you, and see if any fall outside of what “ESG” entails.
3. Choose ESG investments
Reading reviews from independent research firms such as Morningstar can show you how a company or fund scores in terms of ESG investing factors, and whether you’d like to invest in them. When you’re creating your own ESG portfolio, you’ll likely include funds such as ESG mutual funds or exchange-traded funds or ESG stocks.