If you want to invest in companies that share your values, consider environmental, social, and governance (ESG) funds. They aim to invest in companies that are overall environmentally friendly, socially responsible, and ethically governed. That sounds great – but before you jump into investing in ESG funds, you’ll need to confront some key risks.
Not all ESGs are alike
Some companies may not be living up to their stated ESG principles. One analysis by the climate-change think tank InfluenceMap found that 71% of ESG equity funds invest in companies that fall short ofwhen it comes to aligning with The Paris Agreement, a legally -binding UN treaty which calls on countries to reduce greenhouse gas emissions.
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But that’s not to say there aren’t a few gems in the mix. The InfluenceMap study found that the funds it analyzed have Portfolio Paris Alignment scores ranging from -42% to +90%.
ESG funds may also fail to truly align with your values. Some highly rated ESG funds may invest in fossil fuel companies. Others’ component stocks may have strong environmental records, but lack adequate safety policies in place for their workers.
You need to scrutinize ESG funds to ensure that they hold companies that reflect your principles. Here are some sources you can use to evaluate ESG funds and the companies they track:
- MSCI ESG Ratings & Climate Search Tool and the Sustainalytics Company ESG Risk Ratings tool: There is no universally recognized ESG rating criteria, but these are two of the most popular ESG rating tools. You can use these to look up companies and examine their ESG track records.
- Ethical Consumer: Established in 1989, this organization provides free sustainability reports covering more than 40,000 companies, shedding light on controversial or environmentally hazardous business practices.
- The SEC EDGAR website: Here, you can search for the filing type DEF 14A for different companies to access proxy statements. The SEC requires companies to file these documents, which present key points to be discussed in special stockholder meetings. These can give you a glimpse into changes to boards of directors, salaries of directors, and other governance information.
- Company websites: Explore press releases and investor relations pages to see whether companies can back their ESG claims with sound evidence.
- Fund prospectus: Beyond providing crucial information about a fund’s holdings and past performance, you can also use this document to find information about the fund’s objectives and its management team.