When most people think of sustainability, they typically associate it with initiatives to reduce a company’s carbon footprint or production of green products. But as the market for responsible investing assets continues to grow, investors are exploring new ways to address ESG issues.
ESG stands for environmental, social and governance factors. These are non-financial metrics that can help an investor understand the potential risks and opportunities related to a company’s impact on the environment, its treatment of employees and other stakeholders, as well as its accounting transparency and business practices.
An ESG investment fund is, therefore, designed to meet an investor’s desire to incorporate ESG factors into their equity portfolio.
Let’s take a closer look at what ESG investment funds are, their pros, and some examples of each type of fund so you can decide which is right for you.
What Is an ESG Fund?
An ESG fund is a socially responsible investment fund that is designed for both impact investors and conventional investors alike.
The majority of ESG funds are structured as open-ended investment funds that are managed by professional money managers. Some companies offer mutual funds with ESG objectives, which would be limited to high-net-worth investors.
Those are the basics of an ESG fund. Now let’s look at why you might use one.
Why Would You Use an ESG Fund?
There are many advantages to ESG investing. First, it lets you make a positive impact on the world. For instance, if you’re interested in investing in renewable energy, you have a few options. The majority of ESG funds have some type of focus on renewable energy. These funds are designed to give investors a diversified portfolio of clean energy assets.
Second, it provides an alternative to investing in companies with low social responsibility that might not provide a lucrative return. Third, it’s a good way of putting your money to good use. You can earn a profit while making a positive change in the world.
Types of ESG Investment Funds
There are a handful of different types of ESG funds. Here are a few of the most popular fund types:
- Socially Responsible Mutual Funds – These funds offer investors a diversified portfolio of stocks from companies that have high ESG ratings.
- Green Mutual Funds – Green mutual funds focus more on reducing a company’s carbon footprint than managing its impact on society. These funds typically have a smaller number of holdings and a higher percentage of stocks in the energy sector.
- SRI ETFs – SRI ETFs screen companies based on their environmental, social and governance (ESG) factors. They aim to provide diversification and low costs, while helping you build a socially responsible portfolio.
- Impact Investing Mutual Funds – Impact investing mutual funds focus on companies that are making positive impacts in a specific sector.
- Socially Responsible Bond Funds – Socially responsible bond funds invest in government, corporate and municipal bonds that have an emphasis on ESG ratings.
Final Words: Should You Invest in ESG Investment Funds?
Choosing to invest in an ESG fund is a great way to incorporate your values into your investment strategy. As the demand for sustainable products grows, it is likely that these companies will see higher demand and greater profit.
With that said, ESG investments are not guaranteed to perform better than other investment types. Plus, there are other inherent risks associated with ESG funds. For example, a fund may have high expenses that eat into your profits. Plus, some funds may have high risk due to their narrow focus. Now that you know what an ESG fund is, you are in a better position to invest in one.