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Top 5 ESG investment strategies

If you want to get into ESG investing, there are different types of investment strategies you can follow. The ESG considerations will vary by investment strategy, industry, and client objectives. There are several tools out there that can help you pick and fine-tune your strategy. These include ESG ratings, ESG indexes and some other online ESG tools, like screeners. Before you start investing, make sure you're up-to-date on EU laws and US regulations. Note that several stock exchanges promote ESG investing, too. 

If you have doubts, read our ESG investing expert roundup for extra tips. 


A portfolio manager’s ESG practices may significantly influence performance. Because securities may be included or excluded based on ESG factors rather than other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices.

US Securities and Exhange Commission

To help you decide which strategy is right for you, we compiled a list of the top 5 ESG investment strategies. You can combine these strategies and use them across different asset classes.

Inclusionary screening

Screening is applying filters to potential investments to rule companies in or out based on an investor’s preferences and values.

Inclusionary screening means the inclusion of companies with higher ESG scores. This strategy may tilt the portfolio toward, for example, “Best in class'' firms, which are companies outperforming in ESG measures. Other fund managers may use a strategy targeting "ESG momentum," which includes companies improving ESG measures faster than peers.

Always check the ranking threshold of your chosen funds. Portfolios allowing the top performing 40% of the sector are a lot different from those allowing only the top 5%.

Exclusion 

This investment approach is based on the exclusion of companies, sectors and governments whose behaviors do not align with ESG principles. These can be weapon manufacturers, tobacco producers, gambling firms or sanctioned countries. 

If you want to invest in a fund that uses this strategy, don’t forget to check the tolerance level of the fund. Some portfolios may tolerate more than half of their revenues coming from excluded industries, countries or business practices! 

Thematic ESG investing

Thematic investing focuses on a particular theme within one of three main ESG areas, namely Environmental, Social or Governance. Funds put together on the basis of thematic investing include companies that aim to address specific themes like clean energy, climate risk, labor issues, data security, female leadership, and board diversity.

Impact investing

This strategy targets a measurable and positive social or environmental impact in addition to financial returns. 

Impact investing provides capital to address the world’s major challenges in sectors such as sustainable agriculture, renewable energy, healthcare and education. 

ESG integration

This strategy incorporates ESG data along traditional financial analysis into the securities selection process and investment decisions. Rather than simply applying exclusionary or inclusionary screening based on ESG information, investment decisions are made by taking financially material ESG information into account. Material ESG issues are those that are considered highly likely to affect corporate and investment performance:

The PRI defines ESG integration as “the explicit and systematic inclusion of ESG issues in investment analysis and investment decisions.” Put another way, ESG integration is the analysis of all material factors in investment analysis and investment decisions, including environmental, social, and governance (ESG) factors.

PRI (Principles for Responsible Investment)

What do the experts say?

We reached out to several experts asking them how retail investors can choose an investment strategy when they get into ESG investing.

Here is what they say:

Jim Dahle from whitecoatinvestor.com:

They should stick with low cost, broadly diversified, passively managed mutual funds. However, there is a school of thought that advocates for simply buying all the companies via an index fund and using your profits to support your favorite charities instead of trying to do good by picking companies that align with your values. Most who pick stocks and most active mutual fund managers underperform the markets, leaving you with lower returns and less money to do good with.

 

Julie Rains from investingtothrive.com:

Start by determining what's important to you in terms of ESG. Are you concerned mainly with climate change and water quality (environmental)? Are you also interested in how the company pays and treats its employees, its customers, suppliers, and members of the community (social)? Are you hoping to invest in companies that promote diversity and control executive compensations compared to average worker pay (governance)? Are you looking to avoid companies with certain practices or those who produce certain types of products, such as tobacco?

Next, figure out how much research you want to conduct to locate ESG candidates and monitor them. That is, would you like to invest broadly in ESG funds and forget it, trusting the portfolio manager to preserve the integrity of the fund? Or, are you seeking to invest in individual stocks of publicly held companies with a specific mission, say one developing alternative sources of energy -- and you're willing to research its products, practices, pay, etc. to make sure the company maintains the values that attracted you?

If you're mainly interested in buying funds or portfolios managed by others, look for ESG investments at your brokerage firm. Fidelity, Vanguard, Schwab, and others offer ESG mutual funds and ETFs. Robo-advisors offer ESG portfolios. You may also be able to locate financial advisors who either exclude certain types of companies or provide custom-built ESG portfolios.

If you're looking to choose individual stocks, take what you've identified as important to you and start researching candidates. You could do research independently or look at companies included in funds. You might read their annual reports; talk to their employees, customers, and suppliers; and develop knowledge of their industry.
 

Eric Rosenberg from personalprofitability.com

Investors have a few options to create an ESG portfolio. If you don't want to take the time to pick your own ESG stocks, you may like an ESG-focused investment fund. Some robo-advising services also offer ESG portfolios. Just keep in mind that you'll have to pay fees to fund managers or robo-advisors if you pay someone else to manage the portfolio for you. But you're also paying for their financial savvy and market expertise, which could be well worth the cost to many investors.

In my personal investments, ESG is an important secondary factor in picking stocks. While I don't regularly dive into the details of ESG scores, I'm very aware that companies with strong ESG policies tend to outperform the market as a whole. Using your brokerage or other investment data websites, it's easy to quickly sift through companies to find ones that are doing well from an ESG perspective and eliminate others.
 

If you would like to know more about ESG investing, check out these articles:

Author of this article

Gabi Lovas

Author of this article

Gabi is now a Financial Analyst at BrokerChooser after working as a Content Editor for a year. Previously, she was a European equity reporter at Bloomberg covering European health care and chemical stocks as well as US futures, until she relocated to Spain in 2019. Gabi has a Master's degree in Economics and she is a stock investor on her own account. She is also a member of an investment club in Barcelona.

Gabi Lovas

Broker Analyst

Gabi is now a Financial Analyst at BrokerChooser after working as a Content Editor for a year. Previously, she was a European equity reporter at Bloomberg covering European health care and chemical stocks as well as US futures, until she relocated to Spain in 2019. Gabi has a Master's degree in Economics and she is a stock investor on her own account. She is also a member of an investment club in Barcelona.

Everything you find on BrokerChooser is based on reliable data and unbiased information. We combine our 10+ years finance experience with readers feedback. Read more about our methodology

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