ESG Environmental Social Governance

What is ESG Environmental, Social, Governance?

‍

Funds, like ETFs and mutual funds, may consider a wide range of factors that are consistent with their objectives and strategies when selecting investments. This can include ESG, which stands for environmental, social, and governance.

Fund managers focusing on ESG generally examine criteria within the environmental, social, and/or governance categories to analyze and select securities.

• The environmental component might focus on a company’s impact on the environment—for example, its energy use or pollution output. It also might focus on the risks and opportunities associated with the impacts of climate change on the company, its business and its industry.
• The social component might focus on the company’s relationship with people and society—for example, issues that impact diversity and inclusion, human rights, specific faith-based issues, the health and safety of employees, customers, and consumers locally and/or globally, or whether the company invests in its community, as well as how such issues are addressed by other companies in a supply chain.

The governance component might focus on issues such as how the company is run—for example, transparency and reporting, ethics, compliance, shareholder rights, and the composition and role of the board of directors.

‍

‍

Be sure to consider all of your goals when weighing any potential benefits and risks to making a particular investment.

‍

An ESG fund portfolio might include securities, investments or the like which are selected in each of the three categories—or in just one or two of the categories. A fund’s portfolio might also include securities that don’t fit any of the ESG categories, particularly if it is a fund that considers other investment methodologies consistent with the fund’s investment objectives.

ESG investing is not limited to ETFs and mutual funds. Other types of investment products, like exchange-traded products that are not registered under the Investment Company Act of 1940, might also consider ESG factors in selecting an investment portfolio.

What this may mean for you: ESG funds may perform differently than other funds without the ESG parameters.

• Certain industries may be excluded from some ESG Fund portfolios. However, some ESG Funds may still invest in “best in class” companies within commonly excluded industries. For example, an ESG Fund could invest in a certain company within an industry where companies commonly have a large carbon footprint because that company demonstrated a commitment to improving its policies and practices on environmental issues. Moreover, companies which may score poorly on one ESG factor (such as carbon footprint) could be selected because they score well on another ESG factor (strong governance) or because the fund manager has plans to engage with the companies to improve their performance on ESG issues.

What this may mean for you: One of the most important ways to reduce the overall risk of investing is to diversify your investments. You should read the fund’s disclosure documents closely to be sure you understand what the fund is—and is not—invested in, and how its ESG orientation may affect its risk.

• Some funds that consider ESG may have different expense ratios than other funds that do not consider ESG factors.