Money secret No. 24: What is ESG?

The abbreviation ESG (environmental, social, and governance) is used for sustainable investments. It includes investments that are environmentally sustainable and that are responsible from a social and corporate perspective.

This means in practice that investments with the ESG label are selected according to specific criteria. Pertinent companies have to meet various environmental and social requirements as well as those related to responsible corporate governance. There are several ways sustainable investments can be incorporated in exchange-traded funds (ETFs). For example, some ETFs consider certain factors when evaluating companies from an ESG perspective and include those companies that meet the minimum requirements.

ESG investments are said to have lower returns for the investor than non-ESG funds. However, there is research showing that this is not always the case.

Additionally, you can invest in ESG and the theory of sustainability by basing your selections on issues you care about. For example, you could choose an ETF that focuses on companies from the cleantech sector or from those involved with the future of food.

The ESG criteria and selection process are still in development and are not quite yet perfect. ESG ETFs are a good point of entry, though, if you’re interested in sustainable investments.

When you’re buying an ESG ETF, you should look into the companies in the ETF to get better oriented. It could be the case that you don’t like all the companies in the portfolio. If sustainable investing is near and dear to your heart, this is still better than purchasing a non-ESG ETF, as you’re at least taking a step in the right direction.

Money secret No. 24: ESG investments grow quickly, and ESG ETFs are a good option if sustainable investing is important to you. Plus, research shows that you don’t have to sacrifice returns.