ESG investing uses ESG considerations -- or environmental, social, and governance factors -- to determine how sustainable any given investment is according to its risks and impact. Then, this strategy involves selecting the companies with the least risk and highest earning potential.

When you’re investing your hard-earned money, how do you choose which companies to invest in? More and more investors are using ESG.

ESG investing is a form of sustainable investing that considers ESG factors as well as financial factors to choose assets. ESG factors evaluate companies on their sustainability using environmental, social, and governance metrics.

ESG investing has been growing in popularity for a while, with as many as 89% of investors using ESG factors to choose investments in 2022, according to a study by Capital Group. Younger investors especially prefer this alternative to traditional investing.

Learn about ESG investing — including how to choose investments, how to interpret ratings, ESG risks, and more — here.

What is ESG?

Illustration that represents ESG investing with renewable energy, recycling, etc.

ESG stands for Environmental, Social, and Governance. Many different issues and causes fall under this umbrella, from climate change to corporate policy. These are called ESG factors.

ESG investing focuses on how (or if) companies respond to these factors. For example, do they work to make their business more environmentally friendly? Are they taking steps to combat human rights issues? What measures do they take against poor corporate governance? 

ESG factors are used to evaluate sustainability and determine which companies and businesses will succeed – and which ones will fail. In theory, a high ESG score or rating indicates a higher likelihood of long-term success while a lower score indicates the opposite.

The goal of ESG investing is to reduce risk and improve returns by considering relevant non-financial factors that affect business. The idea is that companies with policies in place to address environmental, social, and governance factors are more competitive than those without. They’re more responsible and responsive, making people want to support them.

There are a few ways to choose investments with this strategy. Many ESG investors use ratings to compare opportunities and then pick causes they care about from the top choices.

ESG categories

ESG factors encompass a broad range of areas and topics. And although technically non-financial, these criteria are closely related to risk. As you’re evaluating opportunities, look for signs of cracks that could lead to a company’s downfall as well as competitive advantages.

Here are some examples of what ESG criteria can cover.

Environmental criteria

Environmental factors measure a company’s overall impact on the environment. The overarching themes are accountability and reducing negative effects on the planet.

Here are some questions you could ask to assess a company’s environmental impact:

  • Emissions: Does the company use natural resources such as fossil fuels? What do they do about their emissions of greenhouse gases?
  • Resources: Does the company use renewable or nonrenewable energy sources?
  • Pollution: How much pollution is the company responsible for?
  • Waste management: How does the company manage its waste production for itself and its consumers?
  • Ecosystems: Does the company help or harm local ecosystems?

When researching businesses, you should also look at their histories of damage control as this can be an indicator of long-term sustainability. Remember the major BP oil spill in 2010? BP was openly criticized for handling the situation poorly, even going so far as lying about the extent of the spill (and eventually being fined billions of dollars by the government for it).

An ESG investor would want a company to be accountable for its mistakes and take meaningful steps to fix them. Environmental is about doing more good than harm.

Read more: 12 easy ways to make your money green and protect our planet

Social criteria

Social factors are all about human rights and equality. When evaluating a company on its social impact, you’ll be looking into internal conduct as well as community impact.

Here are some questions you can ask about social criteria:

  • Employee compensation: Are employees paid fairly for their work and compensated similarly despite differences in gender, ethnicity, etc.?
  • Diversity: Does the company employ people of many different backgrounds, from entry-level positions to management?
  • Philanthropy: How does the company give back to the community and make a positive impact?
  • Safety: How does the company create a safe workplace and prevent injuries? What data security measures does it have in place?
  • Supply chain: Is the company forthcoming about its supply chain practices from sourcing to manufacturing?

As an ESG investor, you’re interested in how a company treats its people and manages its product. Do people want to work there? Are its practices safe and ethical? Transparency is key.

Social criteria are difficult to evaluate on your own but annual reports can be helpful.

Governance criteria

Governance factors evaluate how a company is run. ESG criteria look at business ethics, responsibility, duty to shareholders, etc.

Here are some example questions to ask to measure governance:

  • Leadership: What are executives paid, what is the composition of the board, and how are new executives and board members chosen?
  • Compliance: How does the company conduct internal audits and how often?
  • Corruption: What measures does the company take to prevent and combat corruption?
  • Shareholder rights: What role do shareholders play in decision-making?
  • Political involvement: If the company makes political contributions, how much does it contribute, and to which platforms?

There are a lot of different ways companies can be shady about what goes on behind closed doors. Governance encourages accountability and preventative action.

Often, companies with high governance metrics are more responsible and better protected against threats. This can lead to increased profits and longevity.

Types of sustainable investing

Environmental, social, and governance investing varies from other kinds of sustainable investing but falls into the same category as ethical investing and impact investing.

Some of the most common types of sustainable investing include:

ESG investing and SRI are most commonly confused. Here are some important differences.


Although ESG investing and SRI are closely related and often overlap, these are two distinct investment strategies.

ESG scores different investments based on environmental, social, and governance criteria. ESG itself is a system for grading investment opportunities, not a strategy. ESG investing is a strategy that uses the ESG system along with financial information to inform decisions.

SRI, or socially responsible investing, is an investment strategy that focuses on the social impact a company has on the world. This differs from ESG investing in a few ways:

  • ESG investing focuses broadly on impact while SRI focuses on social.
  • SRI screens for companies that meet standards and chooses between these while ESG investing uses metrics to grade investments and chooses from the highest scores (typically).
  • ESG integration is common in SRI but ESG uses its own metrics for social impact.

SRI and ESG investing are often used interchangeably, but they’re not technically the same.

How to choose ESG investments

Clean tech, green tech, renewable energy, and more to represent eco-friendly investing

If your head is spinning at the thought of doing your own ESG research, you can relax. There are many ways to get started with ESG investing that don’t require so much work on your part.

ESG funds

Rather than choosing individual investments, you can start with ESG funds. These are portfolios of pre-selected assets optimized for returns and sustainability.

Many investment firms have ESG mutual funds and ETFs. Here are some examples.

  • The Aspiration Redwood Fund – This fund invests in companies with high potential for growth and focuses on ESG factors including climate change and racial and ethnic diversity. It uses a “pay what’s fair” fee structure and requires a $10 minimum deposit.
  • Dow Jones Sustainability Index – This fund is comprised of the top 10% of companies in the S&P Global Broad Market Index with favorable ESG and economic prospects. This includes information tech companies, healthcare companies, financial firms, and more.

Of course, every fund is different. Before choosing one, you’ll want to look into how it selected investments to make sure you’re aligned. From there, you’re diversified and invested in multiple sustainable assets.

ESG scoring platforms

To find out if a fund or investment is right for you, there are platforms you can use to screen ESG ratings.

MSCI, for example, is a research firm that provides tools and analyses for finding assets to invest in. You can use the MSCI ESG Fund Ratings Search Tool to search specific mutual funds and ETFs, the ESG Ratings & Climate Search Tool to search individual companies, and the Index Profile Search Tool to search indices.

Research platform Morningstar also provides ESG data to managers and individual investors with its Sustainability Ratings. Its Sustainability Ratings go into detail not just about a company’s top ESG strategies but also about its carbon metrics, overall risk, history of controversial incidents, and more.

Pro tip: ESG ratings are helpful, but you should always dig a little deeper to find out what a business is actually doing and why it received its score.

Investing platforms

Many brokerages and robo-advisors make it easy to build or customize dedicated ESG portfolios. These may be referred to or found under socially responsible portfolios.


Wealthfront logoWealthfront is a robo-advisor known for its unique approach to customization that ensures your portfolio is aligned with your goals. ESG investors can choose the Socially Responsible portfolio rather than Classic if they want a portfolio made up of sustainable investments. Both options offer benefits like tax-loss harvesting

Read our full review.


Betterment, a great robo-advisor for beginners, offers three types of portfolios for socially responsible investing. These include a Climate Impact portfolio that focuses on emissions and green projects; a Social Impact portfolio that focuses on diversity; and a Broad Impact portfolio that considers all elements of ESG.

Read our full review.

Read more: 4 best robo-advisors for socially responsible investing

Benefits of ESG investing

Person watering plan on a bar graph showing air pollution

Both individual and institutional investors can take part in ESG investing, and there are many potential benefits to doing so.

ESG investing is about more than just investing for profit, as many traditional investment strategies focus on. By putting your money into companies with environmental, social, and governance policies, you can directly support causes you care about like the fight against climate change or the global reduction of carbon emissions. If you believe in what a company is doing and want to see it succeed, invest in it.

And by putting your investment dollars into businesses and brands with forward-thinking initiatives, you might be able to earn more profit. A major component of ESG investing is reducing risk, and this can translate to higher earnings.

Drawbacks of ESG investing

Though ESG investing can be profitable, this is not guaranteed. Some ESG funds underperform against standard index funds and sometimes it can take a while for ESG investments to grow.

It’s also very easy for companies and funds to make claims about their responsibility without backing them up. For example, a business can claim to make “eco-friendly” products, but if you do a little digging you find that its products use only 5% recycled materials.

And there’s a good deal of grey area when it comes to ESG ratings, which can be fairly subjective. For instance, can a company with a history of unethical hiring practices really be considered “socially conscious” if it donates profits to the community?

Is ESG investing right for you?

Ultimately, this is a decision you have to make. ESG investing is a strategy and it’s not going to be a good fit for every investor.

Those interested in ESG investing need to decide a few things before getting started. Here are some questions to ask yourself.

  • Will you consider ESG factors above financial factors or vice versa?
  • Which ESG issues are most important to you?
  • What is your risk tolerance and how much of your portfolio will you dedicate to ESG?
  • Which platforms do you trust for ESG ratings and recommendations?

ESG integration is not all or nothing. You don’t have to replace all of the assets in your portfolio with sustainable alternatives to take part in ESG investing.

If you can stomach a bit of risk and you’re willing to do the extra legwork required for ESG integration, maybe give it a shot on a trial basis. Allocate a small percentage of your portfolio to ESG and keep an eye on it.

If you’re passionate about something, do something about it. Maybe that’s investing and maybe it’s not. That’s your call, but you should understand your options.

Talk with a financial advisor if you’re not sure what investment strategy is right for you.

Read more: Should I get a financial advisor?


ESG investing is about making investment choices based on ESG factors, which are used to measure sustainability. Like any investment strategy, there are advantages and disadvantages to this approach. And while investments with high environmental, social, and governance marks might outperform others in some cases, it’s important to be aware of ESG risks too.

Whatever you decide, don’t make any financial or investment decisions because you feel pressure from someone else. You are the one who has to live with your choices. If you’re unsure, talk to a professional.

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About the author

Total Articles: 26
Lauren Graves is a personal finance writer specializing in honest brand and product reviews. She wants to help people feel less stressed when they spend their hard-earned cash and do her part to make money make sense.