Getting Started with ESG Investing


Environmental, social and governance (ESG) investing. Sustainable investing. Socially responsible investing, by any name, is big and gaining traction by the day, as investors look for ways to better align their values and their investments.

But what exactly is it? And what should you consider if you’re thinking about making ESG investing a part of your portfolio? Read on to learn more about one of the hottest segments of the market right now, including a few things to think about before you dive in.

What is ESG investing?

While there is not one universally accepted definition of socially responsible investing, it generally refers to investments that are intended to both do good in the world and generate financial returns. Sustainability refers to the idea of addressing present needs while also considering long-term outcomes of investment decisions.

ESG investing specifically refers to investments that take into account environmental, social and governance criteria, such as a company’s greenhouse gas emissions, diversity and inclusion policies, or corporate culture.

On a high-level, there are three main ways you can choose to invest sustainably:

  • Exclusion – Screening to exclude companies, organizations and funds from your portfolio that don’t align with your values.
  • Integration – Screening to include companies, organizations and funds in your portfolio that do align with your values, along with your other investments.
  • Impact Investing – Targeted investing with the intention to generate a positive, measurable social or environmental impact in addition to financial return.

There are many ways to get started with ESG investing. Sustainable mutual funds, which include assets selected according to criteria set by the fund manager, are one way to diversify your portfolio and add these types of investments. Another option, particularly if you are interested in impact investing, is private funds. Whichever way you choose to go, your investment adviser can work with you to identify investments that best align with your values and financial goals.

What are some factors to consider with ESG investing?

Below are a few things to think about and discuss with your adviser before you jump into ESG investing.

Subjective nature of these investments

One big challenge in this type of investing is the subjective nature of deciding which companies are sustainable, socially responsible or ESG-positive.

For example, if you’re passionate about the environment, you may choose to include wind and solar energy companies in your portfolio, or exclude oil companies. If you also care about supporting the advancement of people of color, you may want to invest in mutual funds that hold stock in Black-owned businesses, or exclude companies that don’t have any people of color on their board of directors.

Where it gets especially tricky is when looking at companies, organizations or funds that could be considered ESG-positive in some ways but not in others. For example, what about an oil company that has very diverse leadership and a goal to reduce its carbon footprint by 50% over the next 20 years? Is that company in line with your values as stated above, or not?

With the highly subjective nature of ESG investing, it’s important to stay informed and engaged with your investment adviser to make sure your values are reflected in your portfolio in the way you want.

ESG ratings

ESG ratings are one factor you can look at to help inform your decision making.

Most public and many private companies are now being rated on their environmental, social and governance performance by third-party companies who compile reports and ratings. Investors, asset managers and other stakeholders look to these reports and ratings in determining which companies perform well on ESG criteria as compared to their peers.

However, keep in mind these ratings vary widely from one rating company to the next, as they each employ different ratings methodologies, scope and coverage.

Impact on your portfolio

The jury is still out on how ESG investments perform against traditional investments in the long term, but there are some encouraging signs that these types of investments are meeting investors’ goals.

Respondents in the Global Impact Investment Network’s 2020 Annual Impact Investor Survey report “portfolio performance overwhelmingly meets or exceeds investor expectations for both social and environmental impact and financial return, in investments spanning emerging markets, developed markets, and the market as a whole.”

Keep in mind that incorporating ESG factors may limit your ability to participate in certain investment opportunities that otherwise would be consistent with your investment strategies. Applying these criteria to your portfolio may result in excluding some investments, which could prevent you from benefiting from market trends that you would be able to take advantage of if you do not use such criteria.

Contact me or another member of the Kaufman Rossin Wealth team to learn more about ESG investing, and how you can incorporate these strategies into your portfolio.

Jay Pelham, CFP®, is President at Kaufman Rossin Wealth, LLC, a Registered Investment Adviser.

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