Understanding the Power of Impact Investing

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• ESG investing is a type of investing that considers a company’s sustainability and societal impact.
• Impact investing allows investors to support companies conducting ethical and sustainable business practices in the hope that it encourages others to do the same. 
• ESG funds can be just as lucrative as traditional funds and are generally lower risk than other market offerings. 

Sustainable investing allows folks to invest in target companies whose values align with their own. As impact investing has evolved and expanded, so have the opportunities for investors to build portfolios they truly believe in.

You can invest in ESG stocks and funds with some of the best online brokerages like Betterment and Ellevest. 

Here’s how ESG investing works and what brokerages are offering socially responsible investing options. 

What is ESG investing?

ESG investing is a type of socially responsible investing that allows you to support businesses that align with your environmental, social, and governance views. An institution’s priorities could be anything from reducing carbon emissions to providing community outreach initiatives, which all fall under the umbrella of ESG investing.

Individual companies or assets are then rated on how well they adhere to the ESG guidelines. Each letter that makes up the ESG acronym stands for one of the three factors used to assess and rank a given investment.

• Environmental: Conservation efforts aimed at protecting the Earth and our natural environment, including emissions and air quality, waste management, land usage, and energy footprint.
• Social: A look at the company’s connective tissues, including on-site labor practices, safety standards, community outreach, equal employment opportunities, and product quality.
• Governance:  A snapshot of the standards that leadership is held to, including ethical business practices, board diversity, executive compensation vs. employee pay, and overall transparency.

“An investor that holds socially responsible characteristics as their top priority when investing, and has a limited amount of time to conduct research on their own, should consider opening an account through a socially responsible investment app,” says Sandra Cho RIA, wealth manager, and CEO of Pointwealth Capital Management. “For this type of investor, the fee for the platform is worth it, as the investor will save hours of time not having to do the research on their own.”

Despite all these bars to clear, ESG funds can be just as lucrative as traditional funds and are generally lower risk compared to other market offerings. 

Best socially responsible investing apps

A great way to ESG investing opportunities is through some of the best socially responsible investing apps, including: 

The investment platforms and brokerages offer a variety of ESG funds, various portfolio options, educational resources, low fees, and more. Like many of the best free stock trading apps, you can open a brokerage account with a bank or investment platform that offers sustainable investing or ESG investing portfolio options.

“An investor that holds socially responsible characteristics as their top priority when investing, and who has a limited amount of time to conduct research on their own, should consider opening an account through a socially responsible investment app,” states Cho.

Although socially responsible investing apps offer an accessible way for investors to support ethical business practices and similarly related issues, it’s still in your best interest to research the institutions you’re investing in and ensure that their values align with yours.

History of ESG investing

While the term wasn’t coined until the 2000s, the practice of ESG investing stretches back much further. It began with religious groups such as Muslims, Quakers, and Methodists who avoided businesses dealing in alcohol, tobacco, and gambling and wanted their portfolios to do the same.

ESG investing has been adopted by other groups looking to align their investments and their beliefs, from the Vietnam anti-war movement in the 1960s and 1970s to a call for corporate accountability in the ’80s and climate change initiatives in the 1990s. 

Types of ESG investments

For those who want to explore promising ESG investments, scores of highly rated options exist in each category. To give you an idea, here are a few worth exploring:

• Environmental ESG investments: iShares Global Clean Energy ETF (ICLN) — tracks the S&P Global Clean Energy Index, providing exposure to companies pursuing renewable resources
• Social ESG investments: Vanguard FTSE Social Index Fund Admiral (VFTAX) — an inexpensive option that works only with companies with clean labor and human rights records
• Corporate Governance ESG investments: iShares ESG MSCI USA ETF (ESGU) — subjects each of its investments to a corporate governance review.

Other market leaders that aren’t specific to a certain category include:

• iShares MSCI USA ESG Select ETF (SUSA)
• Natixis Sustainable Future 2025 N (NSFEX)
• Shelton Green Alpha Fund (NEXTX)
• Vanguard ESG US Stock ETF (ESGV)
• Xtrackers MSCI USA ESG Leaders Equity ETF (USSG)

Finding ESG opportunities

You can find more ESG funds and follow current trends with resources like MSCI, a financial services company dedicated to corporate responsibility. There, you’ll find an entire vertical stocked with the latest research on ESG investing, including data and ratings.

When it comes to ratings, no one method has yet been adopted industry-wide, but companies like Morningstar, MSCI, Bloomberg, and Sustainalytics are all popular data providers.

Morningstar’s methodology is a tri-pronged equation that gives you a number between one and 100, rating the amount of ESG risk carried by that investment:

• 0-9.99: Negligible ESG Risk
• 10-19.99: Low ESG Risk
• 20-29.99: Medium ESG Risk
• 30-39.99: High ESG Risk
• 40+: Severe ESG Risk

You can also use online trading programs to find and build a portfolio based on ESG Investments, like BTheChange.com, which breaks investments into five categories: those best for the environment, community, governance, workers, and customers.

Pros and cons of ESG investing

The main advantage of socially responsible investing apps is that you can support businesses with morals and ethics that align with your own views.

Rather than investing in large tech companies or businesses participating in unethical business practices, you can make a positive impact by supporting institutions dedicated to sustainability, community outreach, environmental conservation efforts, and ethical business practices.

Moreover, funding these businesses may encourage them to continue supporting sustainable and ethical policies.

However, you may not get the most you can out of your investment portfolio. Just because a business has good morals and ethical business practices doesn’t guarantee it will have high rewards. There’s still a possibility that your investments will fail or produce smaller returns compared to other sectors of the market. 

ESG funds can also be pricey. “This fee covers the platform’s cost of research, analysis, and other operating expenses,” says Cho. “Compared to a standard platform that allows investors to open an account for free, this a significant disadvantage.”

ESG investing vs. Socially responsible investing

The terms ESG investing and socially responsible investing (SRI) are often used interchangeably in the investing space, and they do have a fair amount of overlap. For each strategy, investors make decisions based on social impact instead of rates of return alone, and both represent ways of making your voice heard as a conscious investor. 

It’s in the method where the two factions diverge.

SRI relies on excluding problematic investments from your portfolio. If one of your passions is carceral reform, for example, and it’s revealed that a successful company exploits prison labor for its profits, you wouldn’t invest in that company no matter how high its profits soared. 

With ESG, things are less black and white. The strategy is based on a rating system, and while higher-ranked investments are preferred, there’s no rule that states you can’t invest in a lower-ranked company. Because of this flexibility and potential for customization, investors often don’t have to choose between their morals and bottom line but can incorporate both.

Finally, there’s a third term at work: impact investing. In direct opposition to SRI, this method adopts an inclusive technique, seeking out companies that work toward specific goals for social betterment, like eradicating world hunger or poverty.

Why does ESG investing matter?

ESG investing allows individual investors to engage with the market and the economy in small but marked ways, aligning with businesses that share their values, a process known as conscious capitalism. 

As the practice spreads and increasingly larger groups use ESG investing, it allows socially conscious investors to put pressure on corporations from the inside via shareholder activism — using their influence as partial owners to encourage businesses toward a brighter, more sustainable future.  

In March 2021, the SEC created a task force focused on climate, other ESG issues, and accountability standards. The initiative comes as companies are setting their own ESG goals in a larger push to define ESG.

What is ethical consumerism?

Ethical consumerism, while similar to ESG investing, is not quite the same thing. There are several ways to think about ethical consumerism. At face value, ethical consumerism is the idea that your consumption has an impact on the world, so you want that impact to align with your values. This means understanding the footprint of the products you consume, how they were made, and how they will be disposed of. 

An extension of this is known as dollar voting, in which you view your money as a statement to companies. For example, when you buy sustainable products, you’re signaling to companies that its customers care about these kinds of products — there’s a market for it.

Similarly, you can refrain from buying from companies that engage in activities that don’t align with your values, such as unfair labor practices or unsustainable production methods.

ESG investing — Frequently asked questions (FAQs)

Is ESG investing worth it?

ESG investing is a sustainable approach to the market, which weighs an investment’s impact in environmental, social, and corporate governance spheres more heavily than it does its profitability. 

Cho recommends that investors pursuing ESG funds ensure they are familiar with all the risks involved.

“I would make sure that socially responsible characteristics are of paramount importance to them,” says Cho. “I would also make sure that they understand the fees associated with the app that they choose and how that can impact long-term returns.”

Luckily, more online brokerages and investment platforms have started offering socially responsible investments as an option for taxable brokerage accounts and even IRAs.