how esg investing works
esg investing is sometimes referred to as sustainable investing responsible investing impact investing or socially responsible investing sri to assess a company based on esg criteria investors look at a broad range of behaviors and policies esg investors seek to ensure the companies they fund are responsible stewards of the environment good corporate citizens and led by accountable managers based on criteria including esg investors help inform the investment choices of large institutional investors such as public pension funds esg specific mutual funds and etfs reached a record 480 billion aum in 2023 4brokerage and mutual fund companies offer exchange traded funds etfs and other financial products that follow esg investing strategies robo advisors including betterment and wealthfront have promoted these esg themed offerings to younger investors socially responsible investing sri is an investment strategy highlighting one facet of esg sri investors seek companies that promote ethical and socially conscious themes including diversity inclusion community focus social justice corporate ethics and racial gender and sexual discrimination esg metricsinvestment firms like boston based trillium asset management use a variety of esg factors to help identify companies positioned for strong long term performance the criteria are set by analysts who identify the relevant issues facing specific sectors industries and companies 5trillium s esg criteria preclude investments in companies that operate in higher risk areas or have exposure to coal or hard rock mining nuclear or coal power private prisons agricultural biotechnology tobacco tar sands or weapons and firearms they do not invest in companies involved in major or recent controversies over human rights animal welfare environmental concerns governance issues or product safety 5trillium s metrics include investments in companies that support the environment through renewable energy sources and published sustainability reports social metrics include companies that operate ethical supply chains and avoid overseas labor with questionable workplace or child labor policies metrics for governance require companies to embrace diversity on the board of directors and maintain corporate transparency 5investors and esgas esg business practices gain traction investment firms track their performance financial services companies such as jpmorgan chase jpm wells fargo wfc and goldman sachs gs publish annual reports that extensively review their esg approaches and the bottom line results 678the ultimate value of esg investing depends on whether they encourage companies to drive real change for the common good or merely check boxes and publish reports 9 that in turn will depend on whether the investment flows follow esg tenets that are realistic measurable and actionable tobacco and defense are two industries avoided by many esg investors but historically produced above average market returns and can buck recessionary trends to support esg u s investors may be sacrificing returns in exchange for values many esg investors are willing to make that tradeoff though according to a survey of investopedia and treehugger readers nearly half of esg investors said they d be willing to take a 10 loss over five years to invest in a company that aligns exceptionally against esg standards but 74 of respondents said that valuation price was very or extremely important to them 