An increasing number of investors are wanting to not only grow their wealth, but also make a positive impact.

And as they seek to use their wealth for good, many investors are tuning into a growing trend known as ESG investing. In doing so, they're aiming to give their investing a mission and putting their money where their hearts are.

When you step into the thrilling journey of investing, ESG investing can be a way to ensure your investments reflect your values, not just your financial goals.

Let's break down the process of ESG investing and explore how you can make your money matter.

What is ESG investing?

You may have heard the term ESG investing and wondered what all the fuss is about. In essence, ESG initiatives in investing are a way to think about where you put your money.

Firstly, what is ESG? ESG stands for Environmental, Social, and Governance. It's more than looking at companies based on how much money they might make, but also how they impact the world around us. Let's take a look at each component:

1. Environmental: This is all about Mother Nature. Companies that focus on the 'E' in ESG are those that aim to take care of our planet. They might be working on reducing pollution, cutting down greenhouse gas emissions, or investing in clean energy. For example, a company that builds solar panels or wind turbines to lessen the negative impacts of business on the environment.
2. Social: The 'S' in ESG' is about how companies treat people. Do they pay fair wages? Are their working conditions safe? Do they promote gender equality? For example, a company that provides employment opportunities for people with disability.
3. Governance: This is the 'G' in ESG and it's about how a company is run. Are the big bosses doing things the right way? Is there transparency in their decisions? For example, a company with a strong board of directors, clear ethical policies, and good leadership practices.

As you start to look more into ESG, you'll encounter terms like socially responsible investing, ethical investing, ESG stocks, ESG-tailored ETF, and ESG score. We'll cover some of these further down in this article. As you can see, ESG investing goes beyond thinking about profits, but also aims to make a positive impact.

What are the different types of ESG investments?

Now, there are several ways or “vehicles” to invest in ESG. Each investment type is different, but all are focused on doing good for people or the planet.

With so many choices, how do you know which one's right for you? Let's explore these options.

1. ESG stocks: These are shares in specific companies that do well in ESG areas. You pick each company based on how much they care about the environment, their people, and how they run their business. It's all about choosing companies that match what you believe in.
2. ESG exchange-traded funds (ETFs) : These are a collection of different ESG stocks that you can buy and sell, just like any other stock. ESG ETFs give you a mix of various companies that are doing good things for the environment, society, and in their governance approach. It's a way to diversify your investment across multiple value-aligned companies.
3. ESG mutual funds : Managed by investment professionals, these funds pool together money from different investors to buy a range of ESG stocks or bonds. The professionals managing these funds use an ESG score to pick appropriate investments. This means you don't have to do the picking yourself. Instead, you're relying on experts to make responsible choices for you.

Each type of ESG investment has its own perks, depending on the investor. ESG stocks let you get specific about where you put your money, ETFs offer a simple and diverse approach, and mutual funds let the pros take the wheel.

But be careful – some companies might say they do ESG well, then when you look deeper, you discover they don't. This is known as greenwashing.

What is greenwashing? How can I avoid it?

Greenwashing is when companies claim they’re engaged in ESG initiatives and responsible investing, but in reality, they're not living up to these claims.

This happens more than you'd think in the investing world. Companies do this to look good and attract investors who care about the environment and social issues. Because of this, greenwashing is a red flag to look out for in ESG investing.

Why does this matter to you as an investor? Well, if you’re investing in companies because you care about certain issues such as climate change, you want to be sure they're actually doing what they say.

How do I know if an investment is really ESG?

It's not always easy to tell if a company is genuinely engaged in ESG issues. It's like someone telling you they're a great cook – you won't know for sure until you try their food, right? With companies, it means looking closely at what they're doing for the environment, society, and how they manage their business.

But how can you tell whether they're doing what they say? There are a couple of ways:

1. ESG score: The ESG score (or ESG rating ) acts like a report card showing how well a company is doing in ESG. But not all scores are the same. Some are strict, while others might be a bit more lenient. It's important to look at who's giving these scores and how they're figuring them out.
2. Global ESG disclosure standards: These are rules about how companies should tell people about their ESG work. They're meant to make things clearer and more honest. However, not all companies follow these standards the same way, making it harder to get all the information you need.

Whether you're a novice or an expert investor, it's a good idea to do some homework on ESG investing. When choosing ESG investments, consider things like the ESG score and ESG disclosure standards. These standards show how open a company is about its ESG practices and efforts.

In short, while greenwashing is something to watch out for, don't let it scare you away from ESG investing. There are plenty of companies out there genuinely doing great things for our planet and its people; the key is to research them and ensure they live up to their claims.

What are the benefits of ESG investing?

Now, some folks think that because these companies focus on doing good, they're not making much money. That's not necessarily true. This assumption comes from the idea that spending money on ESG initiatives could cut into profits.

Let's bust that myth and look at the bigger picture:

1. Long-term performance: Companies that score high in ESG factors often think long-term, not just about quick profits. They're preparing for the future, like adapting to new environmental laws or changes in society. This can make them more stable and potentially more profitable in the long run.
2. Lower risk: Companies that are good at ESG are often lower risk. Why? Because they're usually operating well on the right side of the law and ethics. This means they're less likely to run into legal troubles or big scandals, which can be good for your investment.
3. Growing interest: There's a growing interest in ESG investing, not just from individual investors but also from big investment professionals and funds. As more people and money move into ESG, it can boost the performance of these investments.
4. Staying ahead of the curve: ESG-focused companies are often ahead of trends and changes, like new technology to reduce pollution or initiatives to improve the workplace. This forward-thinking approach can keep them ahead in the market, which is great for investors who back them.

These benefits can make ESG investing a potentially good investment option to consider. Remember, like with any investment, the first step is to understand how ESG investing works, including concepts like screening and ESG integration . It's also important to remember that ESG investments are vulnerable to the same risks as regular investments. Do your research or talk to a financial adviser if you're unsure.

How can I invest in ESG funds?

The thought of diving into ESG investing might feel like jumping into the deep end of the pool. There's a lot to consider – things like ESG scores, following global ESG disclosure standards, and avoiding greenwashing.

But integrating ESG into your investment strategy doesn't have to be as complex as it seems. There are ways to make it more manageable. Let's start with how to find ESG investments and identify ethical investment funds .

Besides looking at ESG scores and disclosure standards, there are several other ways you can identify good ESG investments:

1. Research companies’ activities: Look at what a company actually does. For instance, a company that's into renewable energy or has a strong policy on reducing waste is likely to be a good ESG bet. You can often find this information on the company’s website under sections like 'Sustainability' or 'Corporate Social Responsibility'.
2. Follow ESG news and trends: Keeping up with the latest news in ESG investing can be helpful. This includes staying informed about key ESG trends, changes in regulations related to climate change, and new green technologies. You'll start to notice which companies are often mentioned positively in the ESG space.
3. Use investment platforms: Some investment platforms and brokerages offer tools to filter stocks and funds based on ESG criteria. These platforms can simplify the process of finding ESG investments.
4. Look at industry rankings: Sometimes, there are rankings or lists published that show which companies are leading in ESG within their industry. This can be a quick way to spot companies that are serious about ESG.

Remember, investing is a journey. You don't have to figure everything out at once. Start with understanding the basics of ESG, and then gradually explore your options and how they fit into your investing strategy.

How ESG investing can fit into a long-term investing strategy

If you're thinking about how ESG fits into your strategy as a long-term investor, here are a few tips to help you weave it in:

1. Start with your goals: Think about what you want to achieve with your investments in the long run. ESG investing can be a part of reaching these goals while also aligning with your values on environmental and social issues.
   Figure out what parts of ESG matter most to you. Knowing what you care about helps you decide where to invest.
2. Diversify with ESG: Incorporating ESG investments into your portfolio is about balance. You can mix ESG stocks, ESG-tailored ETFs and mutual funds with other types of investments. This way, you're not betting on one type of investment and putting all your eggs in one basket. This balance can help protect your portfolio over time.
3. Think long-term: ESG investing is often about looking ahead. Companies that are good at ESG are usually preparing for the future, like new environmental laws or changing social trends. This forward-thinking can be good for long-term growth.
4. Review your portfolio: Over time, check how your ESG investments are performing. Are they meeting your financial goals and staying true to ESG principles? Adjust as needed.

Incorporating ESG into your long-term investing strategy is a way to invest in your financial future and the future of the planet and society. It's not just about the returns; it's about supporting the kind of world you want to live in.

Wrap up – what is ESG investing?

ESG investing offers a comprehensive way to contribute positively to the world while seeking financial returns.

Being aware of practices like greenwashing and knowing how to verify true ESG compliance is key to making informed choices. The benefits of ESG investing extend beyond personal gains. And incorporating ESG criteria into your long-term investing strategy can be both rewarding and impactful.

With the right approach and perhaps guidance from financial advisers or investment professionals, ESG investing can be a worthy addition to your investment portfolio.

So, embark on this path with confidence, knowing you're investing not just for yourself, but for a better world.

Happy investing!