Now that the general public is becoming aware of ESG (environmental, social, and governance) for investing, we hear this question all the time:
Q: How can an individual investor get started with ESG?
A: If you’re already investing in mutual funds or ETFs, it’s easier than ever to find investments that reflect your goals.
Most investors use ESG for a mix of two reasons: to invest ethically and to seek improved returns. Surprised by the latter? You’re not alone!
Though ESG first grew alongside the socially responsible investment movement, it is actually designed to measure issues that can affect a company’s bottom line. But it turns out the two motivations aren’t at odds.
ESG analysis supplements traditional investment analysis by finding risks and opportunities. ESG data can also help investment managers theme a fund or even green a portfolio. Hand in hand, these two applications may help investors approach that fabled place where their money can do well and do good.
But these individual investors don’t usually get the same tools as large money managers, who invest tens of thousands of dollars for access to ratings and research. But fund managers’ research translates into an array of off-the-shelf products with wide appeal.
If you work with an advisor, ask about responsible or sustainable investing options that use ESG, or talk to an advisor who is ESG-literate. More and more advisors are responding to public demand for these once-niche strategies, particularly as the benefit has become more clear.
If you’re investing your own money, you can combine solid starting points — like US SIF’s list of sustainable mutual funds or ETFdb’s list of top SRI ETFs — with your usual research tools to find funds that match your goals.
Do you want your investments to align with Catholic values? There’s a fund for you. Shariah? You’re covered. Want a carbon-neutral portfolio? Green light. Interested in promoting board diversity? Welcome to the party. Giving up guns, drugs, porn, smokes, gambling? Support is available! Want to take them up again? You can have a full relapse with a mutual fund focused entirely on vice.
Whatever each fund’s selling point, look beyond the marketingese! Check under the hood. Read the prospectus — especially the investment strategy and risks sections — to understand whether it truly addresses your ethical goal, and discover what else you might be giving up to achieve it.
If you don’t find ESG-enhanced funds to suitably replace your core strategy, you can mix and match to create a portfolio that improves your footprint without increasing risk. Morningstar offers sustainability scores for over 20,000 ETFs and mutual funds — including many which weren’t explicitly designed to be sustainable or responsible, but still deliver a high ESG score.
This is a good starting point for most individual investors. Interested in learning more? The OWLshares Guide to Getting Started with ESG is coming soon! Sign up for our newsletter to get the free guide as soon as it’s available.