The Complete Guide to ESG Investing
Environmental, social, and governance (ESG) investing considers financial returns as well as the social and environmental good. If you want to learn about ESG investing options and pick the best one for you, you’ve come to the right place.
SustainFi Updated July 19, 2021
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What is ESG investing?
ESG stands for environmental, social, and governance. ESG investing adds factors like greenhouse gas emissions to financial metrics such as revenues or profits. It is also called socially responsible investing (SRI), sustainable investing, and impact investing.
The explosion of interest in ESG dates back to the 2015 Paris Agreement. The Agreement’s signatories pledged to limit the increase in global temperature to under 2 degrees Celsius above pre-industrial levels.
With climate change increasingly in the mainstream, investors want to own fewer oil and gas stocks or to convince oil and gas companies to reduce emissions. Some are embracing ESG to reduce risk because they think fossil fuels will underperform in a world moving to renewables. Others take a moral view wanting their portfolios to reflect their values.
Types of ESG investing
Socially responsible investing (SRI): ESG investing evolved out of socially responsible investing (SRI), popular in the 1970s. Initially, SRI followed religious principles: SRI funds excluded tobacco, weapons, gambling, and alcohol companies. Some SRI funds divested from companies doing business in South Africa during the apartheid in the 1970s and 1980s.
ESG investing: The term ESG, introduced in 2005, is much broader than SRI. It involves excluding “bad” industries and owning more companies with superior ESG scores. At the same time, many ESG funds continue to ban tobacco, weapons, and gambling. Today the terms SRI and ESG are often used interchangeably.
Impact investing: Impact investing aims to generate measurable outcomes through direct investments. Impact investment firms, such as Al Gore’s Generation Investment Management or Bill Gates’s Breakthrough Energy Fund, buy into companies solving climate change. Impact capital primarily goes to early-stage businesses in unproven markets. It can be extremely risky. Only private equity funds and other professional investors can access most impact opportunities. However, even retail investors now have options like equity seed funding.
ESG investing surge
ESG investing has gone mainstream. More people want to support businesses with good climate, diversity, and governance track records. A 2019 Morgan Stanley study found that 85% of individual U.S. investors and 95% of millennials are interested in sustainable investing. In its 2020 World Wealth Report, Capgemini found that 49% of very high net worth investors under 40 were interested in investing sustainably. Unsurprisingly, BlackRock, the world’s largest investment manager, is putting sustainability at the center of its investment process.
According to Morningstar, in 2020, there were 392 U.S. ESG funds with over $236 billion in assets, up 72% over 2019. 71 ESG funds launched in 2020 alone.
ESG investing factors
So what are the environmental, social, and governance factors that go into ESG?
The E or environmental in ESG measures a company’s impact on the planet, for example, through carbon emissions. More and more businesses are setting emissions goals. Microsoft has pledged to be carbon-negative by 2030. Google plans to run all data centers on carbon-free power like wind or solar. Other environmental factors include pollution, energy efficiency, and sustainability initiatives like reducing plastic packaging.
The S or social in ESG refers to a company’s relationships with its employees, customers, suppliers, and local communities. ESG investors try to assess how well the company treats its workers and customers. Social issues received a lot of press coverage during the coronavirus pandemic. Amazon was criticized for running warehouses on a regular schedule at the height of Covid. However, it’s hard to quantify things like employee relations.
The G or governance in ESG measures corporate standards and shareholder rights. Unlike environmental and social metrics, governance has been on top of investors’ minds for a long time. Shareholders already vote on Board appointments and executive compensation each year.
In the U.S., companies do not legally have to report ESG metrics in their financials. Due to shareholder pressure, businesses are disclosing more data in their sustainability reports. But that reporting is voluntary, primarily descriptive, and often not backed up by hard data that would allow comparisons.
There are many competing ESG reporting frameworks including:
- Sustainability Accounting Standards Board (SASB)
- Task Force on Climate-related Financial Disclosures (TCFD)
- Global Reporting Initiative (GRI)
- CDP Global (formerly Carbon Disclosure Project)
Over two hundred rating agencies rate stocks and funds based on ESG criteria. Some of the best-known are Sustainalytics (owned by Morningstar), MSCI, FTSE, Bloomberg, Thomson Reuters, and Vigeo Eiris.
There is no standard way of calculating ESG scores. An MIT study found that the ESG rating correlation among different agencies was only about 60%, compared to 99% for corporate bonds. This happens because rating agencies weigh environmental, social, and governance factors differently. They also use different data sources.
For example, MSCI ranks Tesla as “average” among car manufacturers. Tesla ranks high in “opportunities in cleantech” but low in “labor management.” But another ESG rating agency, Sustainalytics, ranks Tesla in the bottom third of car manufacturers, worse than Daimler or Honda. Ironically, Sustainalytics gives a high risk score to both Tesla and Exxon. Tesla scores well on climate change but fares poorly on worker treatment and governance. Exxon is a polluting oil and gas company, but one with strong corporate governance standards, several women on the Board, and good employee relations.
As an investor, you need to decide if you care more about climate change, in which case Tesla is a good choice, or about social and governance metrics. There is no correct answer for everybody.
Why choose ESG investing?
1. You can reduce risk
Many investors choose ESG not for moral or environmental reasons but to reduce risk. Research shows that companies with high ESG scores are higher-quality companies. At the same time, ESG-related scandals lead to fines, environmental blow-ups, and lawsuits.
For example, companies with high ESG scores are less likely to go bankrupt. In 2019, Bank of America’s study1 of S&P 500 companies found that a significant decrease in ESG scores often preceded bankruptcy. Investors who bought stocks with above-average ESG scores would have avoided 15 out of 17 bankruptcies since 2005.
ESG company earnings are less volatile. Bank of America also found that companies with the lowest environmental scores had significantly higher price volatility than their peers. Good ESG scores signaled lower earnings volatility, particularly for financials.
Unsurprisingly, ESG company stocks are less likely to collapse because of regulations or lawsuits. ESG businesses are less likely to incur penalties and more likely to receive subsidies and incentives.
ESG reduces environmental risks
Climate change is changing the world, and we need to change our investments. Environmental regulation is accelerating. Many countries and states are phasing out cars with internal combustion engines (ICEs) in favor of electric vehicles. Legacy auto manufacturers that don’t make electric cars will suffer.
Power generation is transitioning from fossil fuels to wind and solar. Coal producers release a lot of carbon emissions and therefore have low ESG scores. These businesses are at risk of more regulation and a secular shift away from coal. Oil and gas companies that haven’t invested in renewables are sitting on huge fossil fuel reserves. They won’t be able to develop these “stranded assets” as the transition to clean energy accelerates.
Californian utility PG&E became the world’s first climate change bankruptcy. Prolonged droughts in California increased wildfire risks. PG&E’s aging power lines eventually caused wildfires, and PG&E was faced with countless lawsuits and billions of dollars in liabilities. It filed for Chapter 11 bankruptcy protection, and shareholders lost their money.
ESG reduces social risks
Employee satisfaction correlates with better shareholder returns. For example, when Walmart raised entry-level wages, employee productivity increased, and turnover dropped. A study by Harvard Business School Professor George Serafeim and State Street showed that companies that treated their employees and supply chains well when coronavirus hit saw better returns than industry peers.
Further, customers increasingly care about company culture, sustainability, privacy, and human rights records. A McKinsey study found that over 70% of consumers will pay up to “go green.” Any discrimination against customers or employees can lead to bad publicity or high employee turnover.
ESG reduces governance risks
ESG companies have high governance scores, meaning that management teams are aligned with shareholders. Bloomberg Intelligence found that companies with the same chairman and CEO have nearly 1% lower return on assets. They also found that companies where the CEO sits on two or more external Boards underperform.
ESG businesses score higher on diversity, employee productivity, and talent pool access. We know that diverse perspectives add value. Greater Board diversity is linked to higher returns and lower share price volatility. The same goes for more diverse management. McKinsey found that diverse companies generate above-average returns. Less diverse Boards and management teams are more likely to be tone-deaf and miss critical cultural transitions.
2. You can invest in line with your values
Investing in line with your values is satisfying. If, as a consumer, you already choose sustainable products or own a Tesla, you can go further and make an impact with your money. Although investing in ESG companies won’t solve climate change or reduce inequality on its own, backing ESG companies is a start.
If you are primarily concerned with climate change, you can choose low-carbon investments or sell your oil and gas stocks and funds. If you want to see more women in top management, you can invest in companies that are better at promoting women. Money flows can incentivize companies to reduce carbon emissions or improve diversity.
3. You may be able to generate better returns
ESG investing was once thought to generate lower returns than conventional investing. Today we have more data showing that the opposite may be true.
- A June 2021 study by Pastor, Stambaugh, and Taylor found that stocks with high ESG ratings outperformed stocks with low ratings by 35% between 2012 and 2020. The authors believe that green stock outperformance was related to growing concern about the environment
- A 2020 report by the NYU Center for Sustainable Business analyzed over 1,000 studies on ESG and performance, finding a positive correlation
- Morningstar’s research from 2020 found that most ESG funds they tracked outperformed their conventional counterparts over ten years. They looked at 745 Europe-based funds over three, five, and ten years (ESG has been around in Europe longer than in the US)
- A 2019 report by the Morgan Stanley Institute for Sustainable Investing found that between 2004 and 2018 ESG funds had lower downside risk than traditional funds
- A 2018 study by the UN Principles of Responsible Investment found that ESG portfolios outperformed the MSCI index over ten years
- A Harvard Business School study from 2015 found that firms with good performance on material sustainability issues significantly outperform firms with poor records
- A 2015 Journal of Sustainable Finance and Investment analysis of over 2,200 studies on the impact of ESG on equity returns found that 63% had positive findings (ESG improved performance), and only 8% were negative
More assets flowing into ESG funds should help ESG stocks outperform
US investors put $51 billion into ESG funds in 2020, two times the total in 2019 and ten times the investment in 2018. Bank of America estimates that ESG fund assets will grow by over $20 trillion in the next two decades. As ESG funds grow, there will be more demand for stocks with high ESG scores helping their prices.
On the other hand, stocks of companies with poor ESG scores could suffer if funds that hold them get investor outflows or decide to divest. For example, BlackRock announced that its actively managed portfolios would exit certain coal stocks.
How do I get started with ESG investing?
There are many ways of investing sustainably and making an impact with your money. You can buy exchange-traded funds (ETFs), mutual funds, or stocks. You can go to robo-advisors or traditional financial advisors. You can even buy seed equity in green companies or support the local community.
The easiest way to get started is to look at your current investments and replace them with sustainable alternatives. If 60% of your assets are in U.S. stocks and 40% in bonds, you can replace them with ESG equity and bond funds. You can also look up the ESG scores of the stocks you own.
Some caution is advised. There are no consistent standards among ESG funds or products, and many have been accused of “greenwashing” or slapping a green label on a conventional investment. Just because someone calls a fund “ESG” doesn’t mean that it doesn’t invest in oil and gas or aligns with your values.
ESG is hot, and some asset managers have been rebranding old funds as ESG. Morningstar found that in 2020 over 250 European funds reinvented themselves as “sustainable.” Many rebranded funds haven’t done much beyond selling a few controversial stocks. We recommend learning about each ESG fund you’re considering and not investing purely because it has ESG in its name.
We will now go through your sustainable investment options.
ESG ETFs and mutual funds
ETFs and index funds are collections of stocks that track a stock market index. They are cheaper than actively managed mutual funds. Actively managed funds try to beat the market, and you pay more fees for the portfolio manager to pick stocks. But you are also paying for more diligence and engagement with company management.
Passive ESG equity funds
The largest ESG ETFs and index funds try to mimic the market’s performance measured by benchmarks like the S&P500. They do this while also excluding companies with low ESG scores and buying more “best in class” companies in each industry. Some problematic sectors like tobacco and weapons are generally excluded.
The scoring methodology varies from one fund to another, but most ETFs rely on scores from index providers MSCI and FTSE. So if you buy most large ESG funds, you buy what MSCI or FTSE say is sustainable.
Passive, best-in-class ESG funds are the cheapest to own and trade. All U.S. funds listed below have over $2 billion in assets and expense ratios between 0.10% and 0.25%, similar to conventional ETFs and index funds. (An expense ratio is an annual fee the fund charges investors. For example, if you invest $10,000 in a fund with a 0.25% expense ratio, you pay $25 a year.) You can easily replace conventional ETFs or mutual funds in your portfolio with these ESG funds.
Most large passive ESG funds do not promise to exclude oil and gas. Their goal is to mirror the stock market, and market indices contain oil and gas. But they try to include energy companies that pollute less and exclude the worst ones. This is often misunderstood, and the media sometimes claims that ESG funds are tricking investors by buying dirty stocks.
Some of the most popular ETFs and index mutual funds are:
|Fund||Ticker||Expense Ratio||Assets ($bn)||2020 Performance|
|iShares ESG Aware MSCI USA ETF||ESGU||0.15%||18.4||22.5%|
|Vanguard FTSE Social Index Fund||VFTAX||0.14%||13.2||22.6%|
|Vanguard ESG US Stock ETF||ESGV||0.12%||4.8||25.7%|
|Xtrackers MSCI USA Leaders ETF||USSG||0.10%||3.7||18.8%|
|iShares ESG MSCI USA Leaders ETF||SUSL||0.10%||3.6||18.9%|
|iShares MSCI USA ESG Select ETF||SUSA||0.25%||3.3||24.7%|
|iShares MSCI KLD 400 Social ETF||DSI||0.25%||3.3||20.9%|
Data as of 6/30/2021
Several ESG funds invest in international and emerging market equities. Here are some of the most popular international funds:
|Fund||Ticker||Expense Ratio||Assets ($bn)||2020 Performance|
|iShares ESG MSCI EAFE ETF||ESGD||0.20%||6.0||12.3%|
|Vanguard ESG International Stock ETF||VSGX||0.17%||2.3||13.0%|
|Calvert International Responsible Index Fund||CDHAX||0.54%||0.6||15.0%|
|Fidelity International Sustainability Index||FNIDX||0.20%||0.4||13.0%|
|IQ Candriam ESG International Equity ETF||IQSI||0.15%||0.2||10.4%|
Data as of 6/30/2021
Below are the largest passive emerging market ESG funds:
|Fund||Ticker||Expense Ratio||Assets ($m)||2020 Performance|
|iShares ESG Aware MSCI EM ETF||ESGE||0.25%||7,990||18.6%|
|iShares ESG MSCI EM Leaders ETF||LDEM||0.16%||892||Launched Feb 2020|
|SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF||EEMX||0.30%||188||19.5%|
|Nuveen ESG Emerging Markets Equity ETF||NUEM||0.45%||103||24.1%|
|Xtrackers MSCI Emerging Markets ESG Leaders Equity ETF||EMSG||0.20%||18||19.8%|
Data as of 3/31/2021
Actively managed ESG funds
Although passive ESG ETFs and index funds have gained popularity, seventy percent of ESG funds are actively managed.
Actively managed funds try to beat a stock market index, though studies show that most mutual funds can’t consistently beat the market even though they cost more.
On the positive side, actively managed ESG funds employ teams of portfolio managers and analysts who can research stocks beyond the off-the-shelf ESG rating. They can also work with companies to improve climate disclosure or Board diversity. Although they charge lower fees, passive ESG ETFs and index funds do not pay professionals to work with companies on ESG issues.
Actively managed mutual funds are not the cheapest option, but they could work if you want someone to engage with company management. Some of the best known actively managed ESG mutual funds are:
|Fund||Ticker||Expense Ratio||Assets ($bn)||2020 Performance|
|Parnassus Core Equity Fund||PRBLX||0.86%||28.6||21.2%|
|Parnassus Mid-Cap Fund||PARMX||0.98%||8.0||14.9%|
|Putnam Sustainable Leaders Fund||PNOPX||1.03%||6.3||28.5%|
|Calvert Equity Fund||CSIEX||0.94%||5.9||24.2%|
|Brown Advisory Sustainable Growth Fund||BIAWX||0.86%||5.7||38.9%|
Data as of 6/30/2021
Low-carbon and fossil fuel free funds
Many ESG funds emphasize governance and social factors. These funds own a lot of big tech and even oil and gas companies that score high on governance or labor practices. If you mostly care about climate change risks, you can buy low-carbon funds or completely divest from fossil fuels.
Divestment is controversial. Divestment proponents include pension funds, university endowments, and even the Church of England. However, divestment opponents say that divestment doesn’t allow for management engagement. More recently, activist hedge fund Engine No. 1 won the fight to appoint three new members to the Board of ExxonMobil (XOM). They did so by owning Exxon shares and canvassing other large Exxon shareholders.
You may also choose to own fossil fuel company shares if you think that these businesses have a role to play in the transition to a green economy. After all, companies like BP have invested heavily in renewables. Many green funds own utilities like Iberdrola (IBE) or NextEra Energy (NEE) that are transitioning from fossil fuels to wind and solar.
Several funds target a lower carbon footprint without divesting from oil and gas. They can give you exposure to different industries without owning the worst polluting offenders. Low-carbon ETFs include CRBN and LOWC.
In April 2021, BlackRock launched the $1.25 billion BlackRock U.S. Carbon Transition Readiness ETF (LCTU). The fund aims to perform close to the broad market while owning more shares in companies best positioned for the clean energy transition and fewer polluting companies. (The fund still owns oil and gas stocks, including ExxonMobil (XOM) and Chevron (CVX).)
|Fund||Ticker||Expense Ratio||Assets ($m)||2020 Performance|
|BlackRock U.S. Carbon Transition Readiness ETF||LCTU||0.15%||1,390||-|
|iShares MSCI ACWI Low Carbon Target ETF||CRBN||0.20%||832||16.8%|
|SPDR MSCI ACWI Low Carbon Target ETF||LOWC||0.20%||114||17.2%|
Data as of 6/30/2021
🔔 Learn if low-carbon funds are right for you.
Maybe you don’t want to profit from carbon emissions at all or think that oil and gas companies will underperform by a lot. Businesses like Exxon (XOM), Shell (RDS.A), and BP (BP) sit on huge reserves of oil and gas but may not be able to develop these “stranded assets” as the world transitions to clean energy.
In that case, several popular funds exclude fossil fuel reserves:
|Fund||Ticker||Type||Expense Ratio||Assets ($m)||2020 Performance|
|Vanguard ESG U.S. Stock ETF||ESGV||U.S. Equities||0.12%||4,800||25.7%|
|SPDR S&P 500 Fossil Fuel Reserves Free ETF||SPYX||U.S. Equities||0.20%||1,150||19.9%|
|iShares ESG Advanced MSCI USA ETF||USXF||U.S. Equities||0.10%||281||Launched in 2020|
|Etho Climate Leadership US ETF||ETHO||U.S. Equities||0.45%||169||25.4%|
|Change Finance U.S. Large Cap Fossil Fuel Free ETF||CHGX||U.S. Equities||0.49%||74||24.1%|
|SPDR MSCI EAFE Fossil Fuel Reserves Free ETF||EFAX||Developed Markets||0.20%||233||9.6%|
|SPDR MSCI EAFE Fossil Fuel Reserves Free ETF||DMXF||Developed Markets||0.12%||182||Launched in 2020|
|SPDR MSCI Emerging Markets Fossil Fuel Reserves Free ETF||EEMX||Emerging Markets||0.30%||188||19.5%|
|iShares ESG Advanced MSCI EM ETF||EMXF||Emerging Markets||0.16%||18||Launched in 2020|
Data as of 6/30/2021
You can look up any fund’s fossil fuel holdings using the Fossil Free Funds screener. The definition of fossil fuel companies varies by fund. For example, the SPDR S&P 500 Fossil Fuel Reserves Free ETF (SPYX) excludes companies that sit on oil and gas reserves but not oilfield services. On the other hand, the Change Finance U.S. Large Cap Fossil Fuel Free ETF (CHGX) excludes anything related to fossil fuels.
If you want to learn more about fossil free funds, check out our review of the top ten fossil free funds.
Clean energy funds
Fossil free funds own a market index of their choice and exclude fossil fuel stocks from it. But most of the companies they own aren’t doing anything to fight climate change. The largest holdings of most fossil free ESG funds are Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Facebook (FB), and Google (GOOGL).
A word of caution: having done extremely well in 2020, green funds crashed in 2021 but are still trading at high valuations. Unlike a broad market fund, clean energy funds own few stocks, which is risky. Sectors like solar energy have also been exposed to competition and regulation. We don’t recommend putting more than 5% of your assets in clean energy funds.
Here are some of the best known clean energy ETFs:
|Fund||Ticker||Expense Ratio||Assets ($bn)||2020 Performance|
|iShares Global Clean Energy ETF||ICLN||0.46%||6.3||141.8%|
|Invesco Solar ETF||TAN||0.69%||3.6||233.9%|
|Invesco WilderHill Clean Energy ETF||PBW||0.70%||2.3||204.8%|
|First Trust NASDAQ Clean Edge Green Energy Index Fund||QCLN||0.60%||2.8||184.0%|
|ALPS Clean Energy ETF||ACES||0.55%||1.0||140.2%|
Data as of 6/30/2021
Socially conscious funds
If you mostly care about social factors (the S in ESG), look for socially conscious funds. These funds target socially responsible companies, gender and ethnic diversity.
The iShares MSCI Global Impact ETF (SDG) owns companies that address the United Nations Sustainable Development Goals.
|Fund||Ticker||Expense Ratio||Assets ($m)||2020 Performance||Type of Investment|
|iShares MSCI Global Impact ETF||SDG||0.49%||510||44.3%||Companies that advance Sustainable Development Goals|
|Global X Conscious Companies ETF||KRMA||0.43%||473||17.5%||Well-managed companies|
|SPDR SSGA Gender Diversity Index ETF||SHE||0.20%||244||17.9%||US companies with greater gender diversity|
|Goldman Sachs JUST US Large Cap Equity ETF||JUST||0.20%||242||19.6%||Companies with just business behavior|
|Impact Shares NAACP Minority Empowerment ETF||NACP||0.49%||32||26.4%||US companies with strong diversity policies|
Data as of 6/30/2021
ESG bond funds
Equities have historically generated higher returns than bonds. However, bonds are needed to balance out equity exposure. Bonds are less volatile and can protect your downside if the equity market drops. Making an ESG assessment is critical for bond investors who want to reduce risk.
There are more ESG equity funds than bond funds, though more bond fund launches are coming. Individual investors can’t buy bonds directly, but there are several ESG bond funds:
|Fund||Ticker||Expense Ratio||Assets ($bn)||2021 Performance|
|TIAA-CREF Core Impact Bond Fund||TSBRX||0.64%||7.1||-0.1%|
|Calvert Bond Fund||CSIBX||0.73%||2.4||1.1%|
|PIMCO Total Return ESG Fund||PTGAX||0.90%||2.4||-0.2%|
|iShares ESG US Aggregate Bond ETF||EAGG||0.10%||1.5||-0.7%|
|iShares ESG USD Corporate Bond ETF||SUSC||0.18%||0.8||0.0%|
Data as of 6/30/2021
Green bonds lend to particular environmental projects. Their issuance skyrocketed in 2020. Buying green bonds gives you more clarity on where money is invested. For example, Apple issued a green bond to improve product energy efficiency and cut suppliers’ emissions.
Some of the top green bond funds are:
|Fund||Ticker||Type||Expense Ratio||Assets ($m)||2020 Performance||SEC Yield|
|Calvert Green Bond Fund||CGAFX||Mutual fund||0.73%||891||7.0%||1.00%|
|iShares Global Green Bond ETF||BGRN||ETF||0.20%||211||6.9%||0.50%|
|VanEck Vectors Green Bond ETF||GRNB||ETF||0.20%||88||8.0%||1.75%|
|TIAA-CREF Green Bond Fund||TGROX||Mutual fund||0.80%||53||8.4%||1.78%|
|Mirova Global Green Bond Fund||MGGAX||Mutual fund||0.98%||43||7.6%||-0.03%|
Data as of 6/30/2021
Want to learn more about ESG ETFs or mutual funds?
- Check out our guide to ESG ETFs
- See comprehensive lists of ESG ETFs and mutual funds
- Learn more about ESG mutual funds
Managing your investments, especially from an ESG angle, can be hard work. Thankfully, now you can outsource some of that work to robo-advisors.
Robo-advisors are online financial advisors that build and maintain your investment portfolio based on how much risk you’re willing to take, what level of returns you want and how soon you need the money. Advanced features like portfolio rebalancing and tax-loss harvesting are also offered.
Robo-advisors are a great option if you want:
- A professional to manage your money
- A cheaper alternative to a human advisor
- A diversified portfolio that automatically rebalances
- More free time to live your life
Robo-advisors cost 0.25%-0.50% each year ($25-50 for each $10,000 invested) on top of the cost of the funds in the portfolio. The total is still much cheaper than going to a human financial advisor.
Although the ESG field is new, there are several sustainable robo-advisor options. Most of the big robo-advisors have introduced cheap sustainable offerings.
$0 ($125 for M1 Plus)
No management fee
Socailly Responsible Investing Pies
0.49% - 0.89%
Access to personal advisors
Socially Responsible Personal Strategy
0.25% - 0.40%
Choice of impact portfolios
Broad, Climate, and Social Impact Portfolios
Beginners and investors who struggle to save
Acorns Sustainable Portfolio
One-stop-shop including banking
Socially Responsible Portfolio
$5 to start investing
|ESG option||Sustainable Portfolio|
|Best for||Beginners and those struggling to save|
Acorns is a personal finance app that lets you invest spare change from everyday purchases in diversified portfolios made up of ETFs. The app was launched in 2012 to make investing seamless for everybody and has since expanded to retirement and checking accounts. In 2020, Acorns grew to over 9 million sign-ups and $3 billion in assets under management.
Acorns recently started offering Sustainable Portfolios that invest in ESG funds. They are offered in partnership with iShares, the largest provider of low-cost, sustainable ETFs. These portfolios are designed to perform in line with conventional, Core Portfolios.
The funds in the ESG portfolio cost between 0.05% and 0.25%. The cost of the Moderately Aggressive Portfolio, a mid-risk option, is 0.16%, which is on the less expensive side. 87% of the Moderately Aggressive Portfolio is invested in various ESG funds, and only a few non-ESG bond funds are included. We think this is a good outcome.
We note that the Sustainable Portfolio is not fossil fuel free, so you will still have some oil and gas stock exposure. However, it does own fewer fossil fuel stocks than the conventional option.
0% if 30% of the portfolio is in cash
|ESG option||Socially Responsible Managed Portfolio|
|Best for||One-stop shop for robo-advisor, trading, and banking|
Ally is a financial services company offering bank accounts, loans, and an online brokerage. They offer both self-directed investing through the brokerage and a robo-advisor, Ally Invest Managed Portfolios.
Ally Invest offers the Socially Responsible Managed Portfolio as the ESG option. The portfolio invests in low-cost iShares ETFs for the stock component. The bond allocation comes from traditional, non-ESG funds from iShares and Vanguard.
Ally Invest doesn’t charge a management fee if you leave 30% of your portfolio in cash, which is the default option. If you reduce the cash allocation, Ally will charge a 0.30% management fee. The cost is the same for Core and Socially Responsible options. The ESG funds used in the socially responsible portfolio are relatively cheap, costing between 0.15% and 0.25%.
|Annual fee||0.25% (0.40% for the premium plan)|
|ESG option||Three impact portfolio options (Broad Impact, Climate Impact, and Social Impact)|
|Best for||Low-cost selection of ESG portfolios|
Betterment is the first and best-known robo-advisor. They just introduced three ESG options.
- Broad Impact: Betterment’s general ESG option has ESG funds for U.S. stocks, emerging markets stocks, developed markets stocks, and U.S. high-quality bonds. The rest of the portfolio draws on conventional ETFs because of fees or trading cost limitations
- Climate Impact: The Climate Impact Portfolio targets the environmental factors with ESG. According to Betterment, carbon emissions per dollar of revenue for the 100% stock Climate Impact portfolio are half of those of the conventional portfolio. The portfolio even adds green bonds through a green bond ETF
- Social Impact: The Social Impact Portfolio is like the Broad Impact Portfolio plus two impact funds. SPDR SSGA Gender Diversity Index ETF (SHE) targets gender diversity. Impact Shares NAACP Minority Empowerment ETF (NACP) targets racial inclusion. These two funds each replace 10% of total U.S. market exposure
Betterment charges a 0.25% management fee for both conventional and ESG portfolios. The cost of the funds in the ESG portfolio is slightly higher. For example, the Broad Impact Portfolio costs 0.13%-0.18% annually vs. 0.05%-0.16% for the conventional portfolio. Still, 0.13%-0.18% is relatively cheap, even if you aren’t an ESG-focused investor.
|ESG option||Ellevest Impact Portfolio|
|Best for||Women investors|
Ellevest is a women-owned robo-advisor that targets women investors. The founder, Sallie Krawcheck, is a Wall Street veteran who wants to reduce the investing gap between women and men. Women live longer than men but earn less, requiring a different asset allocation. Ellevest uses women-specific salary curves and life expectancy data. (They also accept male clients.)
The Impact Portfolio invests up to 53% of assets in popular ESG funds, such as SUSA. Ellevest also buys a gender diversity fund, the Pax-Ellevate Global Women’s Leadership Fund (PXWIX). Fund fees across Ellevest Impact Portfolios range from 0.13% to 0.19% vs. 0.05% to 0.10% for the conventional portfolio.
Ellevest is more than a robo-advisor. They also offer online banking, financial planning, and career coaching.
|ESG option||Two ESG portfolios (Responsible Investing and International Responsible Investing), but you can add any ESG ETFs or stocks|
|Best for||Customizable portfolios for sophisticated investors, no management fee|
M1 Finance is an easy-to-use app that allows you to build customizable portfolios (called “pies”). M1 Finance is not a typical robo-advisor; it’s a cross between an online brokerage and a robo-advisor.
M1’s pie portfolio model allows you to easily add stocks or ETFs as a piece of the pie. (They don’t allow mutual funds). You choose what percentage to invest in each asset class.
The app offers two premade socially responsible pies, the Responsible Investing Pie and the International Responsible Investing Pie. Both draw on Nuveen ETFs, but you can add any ESG ETFs or stocks to your pie.
|ESG option||Goldman Sachs Impact Portfolio|
|Best for||A comprehensive banking and robo offering including savings accounts, personal loans, and budgeting software|
Goldman Sachs launched Marcus Invest in early 2021. Although Marcus Invest is new, Goldman has already offered multiple banking services through the platform. Marcus is a one-stop shop offering high-yield savings accounts and personal loans.
The Impact Portfolio buys low-cost ESG ETFs in addition to traditional ETFs. Nearly all equities in the portfolio come from ESG funds, except international equities. All bond funds are conventional. For a 70% equity / 30% bond portfolio, almost 70% of assets are in ESG funds.
|Annual fee||0.89% on balances up to $1 million|
|ESG option||The Socially Responsible Personal Strategy has ESG options for U.S. and international equities|
|Best for||Higher net worth investors|
Personal Capital is a hybrid financial advisor: it combines a robo-advisor with human professionals. They offer an ESG product through a partnership with Sustainalytics, a leading ESG data provider.
The Socially Responsible Personal Strategy replaces U.S. and international stocks with ESG options. For U.S. equities, the strategy buys individual, ESG-optimized stocks, excluding sectors like energy and tobacco. The international equity allocation draws on an ESG ETF. Personal Capital relies on conventional funds for asset classes such as bonds.
🔔 Learn more about ESG robo-advisors.
Sustainable 401(k) investing
Roughly a third of US household wealth is held in retirement accounts. They are also the biggest pool of investable assets for millennials. If you want to align your savings with your values, consider moving your retirement money to ESG funds.
401(k) plans offer a selection of funds, generally mutual funds that invest in stocks, bonds, and money markets. According to a 2019 Morgan Stanley study, 88% of respondents with 401(k) plans were interested in sustainable options. Unfortunately, only 3% of 401(k) funds have an ESG option, and only 0.1% of 401(k) assets are held in ESG funds.
Most 401(k) money goes to target-date funds and other mutual funds. Target-date funds invest in equities and bonds in a ratio targeting your retirement age. Up until recently, there haven’t been any ESG target-date funds. Nearly all conventional target-date funds invest in oil and gas extraction or other controversial industries. As a result, you probably support bad actors with your biggest pool of wealth.
Inconsistent government policy hasn’t helped ESG adoption by pension plans either. The Trump administration has tried to curb the role of ESG in pension plans, though the Biden administration is reversing that.
What can you do to invest your 401(k) sustainably?
First, check if your 401(k) plan has ESG options. You can ask your employer, your plan provider (such as Vanguard), or search for any fund with “ESG” or “Sustainable” in its name. Fund managers like Calvert and Parnassus only offer ESG funds. You can also run the funds in your plan, usually 20-30 of them, through a screening tool from As You Sow.
If you do find an ESG option, you’re in luck.
More likely than not, your plan doesn’t have an ESG option. In that case, check if your employer offers a “brokerage window.” The window allows you to pick a “self-directed option” and use a separate broker to invest how you like.
If the brokerage window isn’t available, you can ask your employer to include sustainable funds in the 401(k). Employers have someone working with the plan sponsor to pick mutual funds in the line-up. You could reach out to HR and petition the right people. Green America offers a guide describing how to ask your employer to add green 401(k) options.
Finally, if you change employers, you can convert your 401(k) to an IRA by calling your broker. With an IRA, you can invest in sustainable ETFs or mutual funds. You can do it yourself or through robo-advisors, most of which support IRA plans.
If you are a sophisticated investor, you can set up a self-directed IRA or a solo 401(k) and invest in alternatives, like clean energy startups or businesses led by women. Companies like Rocket Dollar can help you set this up.
🔔 Read more about ESG retirement investing.
ESG financial advisors
Financial advisors can help you invest, save, and plan for retirement.
Do you need a traditional financial advisor?
Mastering personal finance requires a lot of time and effort. If you are an experienced investor, you may be fine building your own portfolio. If you’re less experienced and don’t have a complex financial life, a robo-advisor should do just fine. Robo-advisors are cheaper than human advisers, and many offer human advisors a la carte for an extra fee. Popular robo-advisors charge 0.25%-0.50% of your assets annually, compared to, on average, 1% for human advisors.
However, working with a traditional financial advisor is a better option if you’re looking for advice on taxes or estate planning. You may need a human advisor if your financial situation is more complex, for example, if you run a business or own stock options.
How do you find an ESG financial advisor?
Most financial advisors don’t know much about ESG, though that’s changing due to client demand. If you’re looking for an ESG specialist, you can search for advisors with the Chartered SRI Counselor (CSRIC) designation. It’s a socially responsible investing designation designed by Kaplan and the Forum for Sustainable and Responsible Investment.
You can also search Google for ESG or sustainable financial advisors in your area. Financial advisors who are serious about ESG make it clear on their sites.
When looking for a sustainable financial advisor, ask them about:
- Their experience with ESG investing
- If they offer model ESG portfolios
- Membership in organizations such as the Forum for Sustainable and Responsible Investment (US SIF)
What else should you look for in a financial advisor?
You should make sure the advisor is a fiduciary at all times, meaning that they promise to always act in your best interest.
A survey by Personal Capital found that nearly half of the respondents believed that financial advisors were fiduciaries. That is not the case. Not all financial advisors are legally required to recommend the best options for you. Some can take advantage of you by pushing financial products that pay them the highest commission. Be sure to verify that they are a fiduciary with respect to all your investments. You can even ask them to sign a fiduciary pledge.
You also want a fee-only advisor who doesn’t take commissions for selling you various products. The commission structure may create an implicit conflict of interest. Fee-only advisors get paid only by you. They can charge a flat fee (such as $2,500 for putting together a financial plan), a percentage of assets (1% on average), or by the hour ($250 on average per hour). Fee-only advisors charge more because you are the only one paying them, but conflicted advice may end up costing you more in the long run.
You should always check their qualifications (such as the Certified Financial Planner (CFP) designation) and their registration with the state or the SEC. BrokerCheck shows if the advisor has any penalties or disciplinary history. If the advisor is a CFP, there is a separate search tool to verify their background.
Finally, don’t forget that you should like your advisor.
🔔 Learn how to find a socially responsible financial advisor or see the list of the top 50 ESG advisors.
Personal finance experts don’t recommend putting a big chunk of your net worth in individual stocks. They suggest diversified ESG ETFs and index funds. But stock picking can be exciting and a great way to support businesses you believe in.
How can you find ESG stocks?
Sustainable company lists
Publications like Barron’s publish rankings of sustainable companies each year. Here are some of these lists:
- Free investing app Public provides a list of sustainable stocks and funds grouped into themes like “Green Power” and “Women in Charge.” You can learn more here or sign up directly
- Barron’s and ESG mutual fund manager Calvert rank the 100 most sustainable U.S. companies every year using 230 indicators. You can see the complete list here (requires subscription)
- Just Capital ranks America’s largest publicly traded companies on just business behavior
- The Wall Street Journal publishes a list of the world’s most sustainably managed companies
- The CDP (formerly Carbon Disclosure Project) publishes a list of the world’s most energy-efficient companies here
- Canadian research firm Corporate Knights has a list of the world’s most sustainable companies
You can check the ESG scores of the companies in your portfolio or the ones you are curious about. Several rating agencies, including MSCI, FTSE, and Sustainalytics, provide these scores.
MSCI’s ratings for over 2,800 companies are available for free on their site.
Sustainalytics ratings are also freely available, both through their site and Yahoo Finance (check the Sustainability tab on the right). The Yahoo portal provides more free Sustainalytics data than the Sustainalytics site.
Now is the time to decide what’s most important to you. According to Sustainalytics, Tesla’s overall risk score is pretty high (which is bad) due to weak social and governance ratings. But, as an electric car maker, Tesla is one of the best climate change stocks out there. If you compare its score versus peers, you can see that Tesla has the lowest risk in the environmental bucket. If climate change is more important to you than other metrics, Tesla is a good ESG stock. But not so if you care more about social or governance scores.
🔔 Read our in-depth guide to ESG stocks.
As an individual investor, you can’t access climate tech private equity or venture funds like Generation directly. But if you want to make an impact and are willing to take a lot of risk with spare money, seed funding can be a fun way to get involved.
You can search for sustainable start-ups through WeFunder, SeedInvest, Republic, or StartEngine. Unlike crowdfunding sites such as Kickstarter, these sites let you buy a small equity stake in a start-up rather than a product. StartEngine allows search by industry, including Clean Technology. They let you invest in startups like StorEn Technologies, a maker of solar storage.
Launched in mid-2020, Raise Green offers crowdfunded investments in green projects. They have recently offered investments in Ola Filter Corporation, a company that creates water filters for developing countries, and BlocPower, a company electrifying buildings.
🔔 Explore green equity crowdfunding options.
Are you interested in ESG because you want to help underserved communities? You can direct your money to support small businesses and affordable housing.
One strategy is to invest in Community Development Financial Institutions (CDFIs). CDFIs lend to small businesses and provide housing loans to those who can’t get traditional loans. They are deeply embedded in their communities.
The Opportunity Finance Network, the CDFI member organization, estimates that 85% of CDFI clients are low-income, and 48% are women. More recently, CDFIs have been the go-to lenders to small businesses that couldn’t get federal aid during the pandemic.
You can invest in CDFIs in several ways.
|Calvert Impact Capital Community Investment Note||0.4%-2.5%||$20||1 to 10-year terms. No sales charges or fees. You can target a specific impact sector.|
|CNote Flagship Fund||2.5%||$1||Quarterly withdrawals of up to $20,000 or 10% of investment. No additional fees.|
|CCM Community Impact Bond Fund (CRATX)||0.99% (30-day yield)||$2,500||0.81% annual fee. CRATX is a mutual fund you can buy through a broker.|
Data as of 6/30/2021
Calvert Impact Capital Community Investment Note
The Calvert Impact Capital Community Investment Note allows you to invest in communities with as little as $20. The Note offers a 0.4%-2.5% return for a term of one to ten years. There are no charges or hidden fees though you can’t get your money back until the Note matures. You can buy the Note online or through a brokerage account. You can also invest through an IRA.
Calvert will lend your money to CDFIs that lend to small businesses or affordable housing projects. The Note targets nine impact sectors, including affordable housing, community development, environmental sustainability, small businesses, microfinance, health, renewable energy, education, and sustainable agriculture. You can designate a specific sector.
Calvert Impact Capital has invested over $2 billion over 25 years and repaid 100% of the principal with interest to its investors. Today the fund has half a billion invested worldwide in over 100 institutions.
CNote Flagship Fund
CNote is a women-led impact investment platform that lends your money to CDFIs which fund small businesses and help build affordable housing.
CNote’s Flagship Fund currently pays 2.5% annually without charging any fees. The fund publishes quarterly impact metrics, like the number of jobs they help create. You can withdraw cash every quarter for up to 10% of your investment or $20,000, whichever is greater.
You can start investing in the Flagship Fund with as little as $1. CNote also runs funds with higher minimums for accredited investors (who meet minimum income or net worth requirements.)
CCM Community Impact Bond Fund
Community Capital Management offers a fixed income mutual fund, CCM Community Impact Bond Fund (CRATX). The fund was launched in 1999 to invest in underserved communities.
Community Capital invests in 18 impact themes, including affordable housing and minority advancement. The portfolio includes over 1,500 fossil fuel free investments, mainly in high-quality bonds. In 2020, Community Capital launched its Minority Cares initiative to benefit minority businesses, education, and affordable housing.
The downside is that CRATX charges 0.81% annually, and you need at least $2,500 to start investing. CRATX returned 4.1% in 2020. The fund is available through online brokerages and financial advisors.
🔔 Read the complete guide to community investing.
ESG investing could be perfect for you if you want to reduce risk, align your investments with your values, and generate better returns.
Interested in learning more?
- Learn how to invest in ESG ETFs
- Learn how to invest in ESG mutual funds
- Learn about the best ESG robo-advisors
1Subramanian, Savita, James Yo, Jill Carey Hall, Toby Wade Alex Makedon, Oshung Kwon, and Jimmy Bonilla. 2019. ESG Matters – US: 10 Reasons You Should Care About ESG. Bank of America Merrill Lynch