By Susan Koe

As consumers we vote with our dollars, and the same goes for our investments.  As more and more investors direct their monies toward companies that seek to lower their carbon footprint and promote corporate responsibility, various boards of directors are taking notice. Bloomberg Intelligence estimates that by 2025, more than one third of the total funds under management will be invested with an ESG (environmental, social, governance) mandate. But what does this mean and is it right for you?  Here are the answers to some of the most common questions investors have about ESG investing.

• How are companies evaluated for their environmental impact?

Companies are rated on how well they operate under environmental criteria and issued a score so investors can compare. There is currently no standard evaluation system for rating companies when it comes to ESG. MSCI and Sustainalytics are two major independent ESG risk rating companies, and each uses different criteria to come up with their scores.

Environmental criteria may include:

• Climate change policies.
• Recycling and waste disposal practices.
• Water use and conservation.
• Carbon emissions.

•  Will sustainable investing impact my portfolio’s performance?

It doesn’t have to! While future returns can’t be guaranteed, recent research has shown that ESG investments are performing very closely to their non-ESG counterparts.   Morningstar found that 41 out of 56 ESG indexes performed better than similar indexes that weren’t focused on environmental, social, or governance factors.  Additionally,  research published in 2020 by Morningstar concluded that holding ESG funds does not affect risk. In other words, ESG investing doesn’t typically mean opening your portfolio up to more risk than you might have with non-ESG holdings.

Another important consideration that impacts performance is cost.  It is important to choose low cost investments so that you can keep more of your investment’s returns. The good news is that there are now many low cost ESG funds to choose from.

• How do I get started?

There are thousands of ESG investments to choose from, so the process can become a bit overwhelming. It is important to go back to the reason that you are investing the money and make sure any investment fits with your goals, time frame, and risk level.  The best way to do this is to work with a certified financial planner to make sure that you have a comprehensive financial plan that makes sense for you and your values.