ESG investing, and similar approaches (such as socially responsible investing – SRI), aim to make money while avoiding buying companies viewed as having a negative impact on the world and encouraging those that have a positive impact. ESG stands for environmental, social and corporate governance, the areas in which good behaviour is particularly sought.
Traditionally, the idea is to avoid companies that are doing “bad” things – so-called “vice” stocks. So tobacco is out, as are gambling, pornography (not a huge part of the listed stock universe in any case) and, often, alcohol. As well as avoiding unethical companies, ESG funds may also invest in those that try to do good – to operate in an environmentally sustainable manner, for example, or to treat their customers and employees well and which have proper governance structures.
Precisely how this is done varies from fund to fund. Some will outright avoid companies they don’t approve of. Others will attempt to engage with companies to encourage them to adopt more sustainable practices. For example, certain ethical funds may invest in companies associated with heavily polluting industries such as mining in order to persuade management to do a better job of cleaning up or ensuring employees’ safety.
Clearly, ethical investing is subjective – what one person finds inoffensive (alcohol, for example), another may consider uninvestable. And do remember that investing ethically is no good if it leaves you poorer than when you started. If you opt for an ESG fund over a simple tracker, make sure you have good reason to do so. If you’re interested in finding the right fund, Monevator suggests looking at the Fund EcoMarket website.