What Is an ESG Index? 5 ESG Indexes to Know

What Is an ESG Index? 5 ESG Indexes to Know

An ESG index consists of companies that meet certain criteria for environmental, social, and governance performance. An ESG index can be used as a benchmark for companies in that industry, region, or sector, just as a large-cap equity index like the S&P 500 can be used as a benchmark for the performance of large-cap U.S. stocks.

The challenge in most aspects of ESG or sustainable investing, including the construction of different indexes, is that most ESG standards are voluntary and can be inconsistent in the criteria and metrics they use to evaluate companies’ progress toward ESG goals, or mitigate ESG risks.

Nonetheless, recent research suggests that ESG investing strategies perform similar to conventional strategies. By knowing some of the top ESG indexes, then, it’s possible to invest in funds that track the performance of that index, and put your money toward companies whose aim is to focus on positive environmental, social, and corporate governance outcomes.

Key Points

•   An ESG index consists of companies that meet criteria for environmental, social, and governance standards.

•   An ESG index may also exclude certain companies or sectors (e.g. fossil fuels, gambling, adult entertainment) or those with low ESG scores.

•   An ESG index can be used as a benchmark for securities in an industry, region, or sector.

•   There are some 50,000 sustainability-oriented indexes, according to Morningstar.

•   Owing to inconsistency around ESG criteria and metrics, it can be difficult to evaluate companies’ progress toward ESG goals, or compare one company to another.

What Are ESG Indexes?

An index is a selection of companies that reflect the performance of a certain industry, region, or sector. There are thousands of indexes, and they are constructed as benchmarks of the performance of that part of the market: e.g., large-cap companies, tech companies, pharmaceuticals, consumer goods, and so forth.

An ESG index focuses on companies that meet certain environmental, social, or governance standards. There are some 50,000 sustainability-oriented indexes, according to Morningstar. There are broad-based indexes as well as specific indices that focus on a certain industry, region, sector: e.g., renewable energy, water-treatment, carbon management, and so on.

Some ESG indexes may exclude companies that don’t match typical ESG criteria. For example, some ESG indexes exclude companies that manufacture certain types of weapons, are involved in gambling, or produce fossil fuels.

ESG indexes have become more common as investor interest in ESG investing strategies has grown.

Reason for ESG Indexes

Some investors believe in investing their money in the stocks of companies (or other securities) that reflect proactive values regarding the planet, society, and fair and ethical corporate structures. At the same time, adherence to ESG frameworks is considered by many stakeholders as a form of risk management.

For example, investors might choose to assess a company’s ESG scores or ratings to gauge its risk exposure (as well as possible future financial performance). Whether they invest online or using a brokerage, investors might want to know about a company’s environmental and social practices to inform their purchasing decisions.

While you cannot invest in an index, investors can gain exposure to ESG companies in an index by purchasing an index mutual fund or exchange-traded fund (ETF) that seeks to replicate the performance of that index (a.k.a., passive investing).

There are hundreds of ESG index mutual funds and ETFs that investors can access.

ESG Criteria Explained

Although there isn’t a single set of ESG criteria investors can use to measure where companies stand in light of ESG goals or risk factors, it’s useful to know what different ESG scores and metrics are referring to.

Environmental Factors

The environmental component of ESG includes factors that impact the natural environment. These can be general, or tailored to specific industries, and may include:

•   Water, air, and other pollutants (e.g., toxic waste)

•   Hazardous waste management

•   Carbon emissions and mitigation efforts

•   Water conservation

•   Renewable energy use (such as solar, wind, biofuels)

Social Factors

The social component evaluates a company’s relationships to employees, vendors, and the surrounding community. Factors may include:

•   Worker safety

•   Diverse hiring practices

•   Employee pay and equity

•   Corporate investment in the community

•   Relationships with vendors

•   Supply chain management (fair labor use, sustainable sourcing, etc.)

Governance Factors

Governance refers to ethics and transparency in how a company is managed. For example:

•   Selection of board of directors

•   Executive compensation

•   Transparency toward shareholders

•   Accounting practices

•   Data privacy

Recommended: How to Invest in ESG Stocks

Mixed Growth in the ESG Sector

The ESG sector is still seeing some growth, although not as robust as in recent years. According to Morningstar, global ESG fund assets rose to $3.3 trillion in Q3 of 2024, from $3.1 trillion in Q2 ‘24, and roughly $2.8 trillion YOY, as of September 2024.

Yet ESG fund outflows in 2024 were the highest they’d been since Morningstar Sustainalytics started tracking them in 2015, at $19.6 billion, topping 2023, which saw outflows of $13.3 billion.

Also, the number of new ESG funds that were launched in 2024 was around 10, compared with more than 100 in 2021 and 2022 566 in 2023.

ESG vs Socially Responsible Investing: What’s the Difference?

There are various terms for investing according to a certain set of values — including impact investing and socially responsible investing (SRI) — and not all of them refer to green investing strategies. Some terms may be used interchangeably, but there are some key differences to understand.

•   Impact investing is a broad term that encompasses investors who seek measurable outcomes. Impact investing may or may not have anything to do with environmental or social factors.

•   Socially responsible investing is also a broader label, typically used to reflect progressive values of protecting the planet and natural resources, treating people equitably, and emphasizing corporate responsibility.

•   Securities that embrace ESG principles, though, may be required to adhere to specific standards for protecting aspects of the environment (e.g. clean energy, water, and air); supporting social good (e.g. human rights, safe working conditions, equal opportunities); and corporate accountability (e.g. fighting corruption, balancing executive pay, and so on).

ESG Investing Standards

That said, there isn’t one universal set of criteria that define an ESG investment or an ESG index. Rather, each ESG index and corresponding index fund is typically based on proprietary metrics of qualitative and quantitative factors relating to environmental, social, and governance factors.

These metrics may be formulated internally by investment managers/research teams, based on metrics established by popularly accepted ESG frameworks, or a combination of both.

While it’s clear where the money’s been trending with regards to ESG investments, prudent investors should still remain selective when it comes to picking an ESG fund, as how these indexes are constructed can sometimes be based on opaque methodologies.

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5 Commonly Used ESG Indexes

Following is an overview of five ESG indexes commonly used as benchmarks for some of the largest ESG index mutual funds.

1. S&P 500 ESG Index

The S&P 500 ESG Index consists of 307 domestic investments across the broader market. All firms included in the index must meet ESG criteria specified by S&P Dow Jones Indices.

ESG Criteria: According to S&P, the index uses an exclusionary methodology to filter out firms within the S&P 500 that partake in undesirable business activities, defined as follows:

•   Firms operating within the thermo coal, tobacco, and controversial weapons industries.

•   Companies that score within the bottom 5% of the United Nations Global Compact (UNGC).

•   Companies that score within the bottom 25% of ESG scores within each global GICs industry group.

For more detailed information on the construction and constituents of this index, see the S&P 500 EDG methodology.

2. Nasdaq-100 ESG Index

The Nasdaq-100 ESG Index consists of securities from the Nasdaq 100 that meet ESG criteria established by Nasdaq and Morningstar Sustainalytics. The parent index includes 100 of the largest domestic and international non-financial firms that trade on the Nasdaq exchange.

ESG Criteria: Firms must meet a number of requirements to qualify under the index. These are determined by an exclusionary screening process by Nasdaq, that removes companies based on environmental, social, and good governance criteria.

The constituents of the Nasdaq-100 ESG Index are further refined by criteria developed by Morningstar Sustainalytics. These include a number of standards and metrics:

•   ESG risk ratings

•   Impact metrics

•   Global standards screening

•   Carbon emissions data

For details on all the criteria used to select companies in this index see the Nasdaq-100 ESG Index Methodology.

3. MSCI KLD 400 Social Index

Established in 1990, the MSCI KLD 400 Social Index is one of the oldest socially responsible investing (SRI) indexes, making it a popular standard for evaluating long-term ESG performance.

The KLD 400 Social index consists of 400 U.S. securities that meet the ESG standards set by the MSCI ESG Research team.

ESG Criteria: MSCI uses the following methodology to determine eligibility and inclusion within the index.

•   Companies involved in nuclear power, tobacco, alcohol, gambling, military weapons, civilian firearms, GMOs, and adult entertainment are excluded.

•   Must have an MSCI ESG rating above “BB.”

•   Must have an MSCI Controversies score above “2.”

For more detail on the criteria used to select companies in this index, see the MSCI KLD 400 Social Index methodology.

4. MSCI USA Extended ESG Focus Index

The MSCI USA Extended ESG Focus Index selects constituents from the MSCI USA parent index using an optimization process that targets companies with high ESG ratings in each sector.

Companies that meet “business involvement criteria” in sectors such as tobacco, controversial weapons, producers of or ties to civilian firearms, thermal coal (and other fossil fuel companies), are excluded from the index.

The MSCI USA Index has 589 constituents while the MSCI USA Extended ESG Focus Index has around 284, which means an exclusion of about 52%.

For more detail on the criteria used to select companies in this index, see the MSCI USA Extended ESG Focus Index methodology.

5. FTSE US All Cap Choice Index

The FTSE U.S. All Cap Choice Index is part of the FTSE Global Choice Index Series, which is market-cap weighted. The index uses a rules-based methodology to exclude companies based on their involvement in business areas that could have a negative impact on the environment and/or society.

•   Vice-related industries (e.g. alcohol, tobacco, gambling, adult entertainment)

•   Non-renewable energy (e.g. fossil fuels, nuclear power)

•   Weapons (conventional military weapons, controversial military weapons, civilian firearms)

•   Companies are also excluded based on controversial conduct and diversity practices

For more details, please see the FTSE Global Choice Index series methodology.

ESG Investing Risks

As with all investments, the risks of choosing ESG-focused investments is that they may not necessarily outperform over your desired timeframe. There are also unique ESG risk factors to consider.

Diversification Risk

The primary risk of using an ESG-based strategy is the risk of underperformance and the risk of reduced diversification relative to cheaper, broader-market index funds.

This isn’t a surprise, as many of the top ESG indexes are market-cap (“capitalization”) weighted, which means that the largest firms in the index bear the greatest responsibility for changes in index values.

Given that some of the most popular ESG funds also track the performance of the broader-market indexes, this may make these particular funds less attractive as part of a diversified strategy.

Higher Costs

Another issue of concern is that some ESG funds charge higher fees and expense ratios relative to conventional funds.

While these fees aren’t necessarily head and shoulders above broader-market index funds, they can get progressively more expensive depending on how nuanced the fund’s investing strategy is. This is because ESG is a factor-based investment strategy which entails more complexity than traditional broader-market indexing.

Typically, the longer the time frame for comparison, the greater the risk for underperformance becomes, net of fees.

Inconsistency of ESG Standards

Perhaps the biggest drawback of ESG investing is the inconsistency around reporting, and the desire for more uniformity among which ESG frameworks are applied.

In other words, the ESG criteria established at one institution for their index or funds has little or no bearing on the ESG criteria employed by another firm.

Because sustainable investing has grown over the past decade, there has been an industry-wide movement towards greater consistency in ESG criteria and reporting. The Securities and Exchange Commission (SEC) has even recently undertaken efforts to codify aspects of financial reporting when it comes to ESG-related investments.

Nevertheless, these efforts remain in their early stages, and investors should continue to be discerning when it comes to picking ESG-linked investments.

Relevance of ESG Criteria

Existing ESG frameworks run the gamut when it comes to which metrics they choose to apply. For example, metrics related to carbon emissions may be relevant to heavy industry, but how relevant would those metrics be to the financial or technology sectors?

To address the issue of relevance, individual investors would do well to identify and assess when these solutions are applied.

Finally, expect to encounter data consistency issues when trying to quantify information that is naturally qualitative, particularly when management at each firm has wide discretion over how they choose to represent those metrics.

Benefits of ESG Investing

Some investors may be drawn to the potential advantages of ESG investing.

Investing With Values in Mind

Although it’s unclear whether ESG strategies make a tangible difference in the health of the environment, the well-being of society, or whether these strategies improve the quality of corporate governance, many investors appreciate the ability to invest in companies that espouse these values.

Moreover, as ESG strategies continue to expand, investors may choose from an even wider range of sustainable options that may align with their values: e.g., companies that support women, people of color, that focus on specific types of bio-techology, and so on.

Comparable Performance

As noted above, ESG strategies have come a long way in terms of assuaging investors’ fears of underperformance, or missing out on market returns.

While any strategy is subject to market volatility, and there are no guarantees of future performance, recent industry research suggests that ESG strategies perform comparably to conventional strategies over time.

Risk Management

Owing to the rise of climate-related disasters, worldwide viruses, and similar shared risk factors, companies must take new steps to protect themselves from these risks. Today, many ESG metrics take risk mitigation efforts into account.

The Takeaway

There’s no doubt that enthusiasm for ESG investing has grown over the past decade, and continues to gain traction. Understanding ESG indexes and how they apply sustainability rules and criteria to the companies in the index can help investors understand the corresponding index mutual funds and ETFs they may want to invest in.
Due to the sheer number of ESG-centric investments available to date, it’s a good idea to be selective when reviewing the underlying strategy of each fund, and understanding the underlying methodology of how each index constructs its portfolio.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

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FAQ

What are the main components of ESG investments?

The main factors involved in ESG investing are how a company’s operations and products impact the environment (e.g., air, water, land, and other resources in the natural world); society (workers, community members, other stakeholders); and the overall governance of the company itself (e.g., its leadership, accounting practices, security measures).

How do ESG investments differ from traditional investments?

In order to be considered a type of ESG-focused investment, a company or security must meet certain standards in terms of the environment, society, and or its governance. These criteria are not generally applied to traditional or non-ESG securities.


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What Is a Good 401(k) Expense Ratio?

A 401(k) plan doesn’t have an expense ratio, per se, but the overall cost of the plan includes the expense ratios of the funds in an investor’s account, as well as other charges like plan administration fees and the like.

With that in mind, generally, the lower the fees for the plan the better, including the expense ratios of the investments in the account, because fees can lower portfolio growth substantially over time. While investors don’t have control over the basic costs of their 401(k) plan, they can opt to choose investments with lower expense ratios, e.g. under 0.50% if possible. On average, 401(k) participants were paying roughly 0.5% of plan assets as of 2021, according to some of the most recent available data as of early 2025.

Key Points

•   Understanding and managing 401(k) expense ratios is essential for enhancing retirement savings growth.

•   Actively managed funds have higher expense ratios, while passively managed funds have lower ratios.

•   Strategies to reduce 401(k) expenses include reading disclosures and evaluating fund options.

•   A good 401(k) expense ratio is generally under 0.50%, particularly for passive funds.

•   Consider a rollover IRA for potentially lower fees and a broader range of investment options.

What Are Reasonable Fees for a 401(k)?

In passively managed funds (where a portfolio mirrors a market index like the S&P 500), the expense ratio is typically lower as compared to actively managed funds, which might charge between 0.5% and 1.0% or more. Actively managed funds have a fund manager who employs different buying and selling strategies. Generally, this is because more work is being done on the manager’s part in an active strategy vs. a passive strategy.

As noted, 0.5% is more or less an average cost for many participants.

Note, too, that passive strategies generally have expense ratios under 0.50%. Exchange-traded funds (ETFs) usually follow a passive strategy and can have expense ratios under 0.25%.

Expense ratios can vary among plans for a variety of reasons, including how the 401(k) account is managed, the administrative fees, the record-keeping costs, and so on. While investors don’t have any say over the built-in costs of the 401(k) plan — that’s set by the plan administrator and/or your employer — investors can manage their own investment costs.

To determine the amount you’re paying for a 401(k) plan, divide the total plan cost (usually available on your 401(k) statement) by your total investment.

Note that active investing can refer to individual investors, but the philosophy of making trades with the objective of exceeding market returns also drives actively managed funds.

Why Fees Matter

Over time, just one or even half a percentage point could potentially make an impact on a retirement account. That impact could in turn mean the difference between retiring when planned, vs. working a few more years until the overall investment grows. A lower expense ratio could help an investor retain more of the value of their 401(k).

For example, a well-known Government Accountability Office analysis from 2006 found that someone who invests $20,000 every year for 20 years in a 401(k) plan that costs 1.5% per year to operate is likely to end up with 17% less than someone whose plan costs just 0.50%. The analysis concluded that after 20 years, that half a percentage point meant the difference of more than $10,000. Similar studies on the impact of fees have found similar results.

Until relatively recently 401(k) expense ratio information wasn’t public, and even now it can be somewhat difficult to locate.

How to Reduce Your Expense Ratio

Before an investor can attempt to reduce their expense ratio, they need to be familiar with what it is.

Until relatively recently 401(k) expense ratio information was not public, and even now it can be somewhat difficult to locate. In 2007, the Securities and Exchange Commission (SEC) approved an amendment requiring the disclosure of these fees and expenses in mutual fund performance and sales materials.

Today, there are a few ways to get the information — and take action:

•   Read the fine print. Look closely at 401(k) participant fee disclosure notices, which participants should receive at least annually with any plan. Or look for the current information in a funder’s prospectus on their website. Building on the 2007 amendment, the DOL introduced a rule in 2012 to improve transparency around the fees and expenses to workers in 401(k) retirement plans.

•   Ask outright. Investors seeking more information might also choose to call their fund’s client services number directly to get the most up-to-date information on plan costs. Investors who work with a financial advisor can also ask their advisor for this information, as well as their opinions on these expenses.

◦   Evaluate your funds. It can also be helpful to look at the funds being offered by an employer, provider, or broker to see if there is a similar fund that comes with lower expenses. Investors may be able to find the investments they want at a cheaper price, even within their current 401(k) plan.

For investors whose 401(k) plan is not through a current full-time employer — a common situation when people change jobs — they may want to consider a rollover IRA in order to pay lower fees and gain access to a wider array of investments.

The Takeaway

There’s no magic number that indicates a 401(k) expense ratio is too high or just right, and all plans are different. Under federal law, employers have a fiduciary duty to offer reasonably priced options and to monitor the quality of the 401(k) plan they offer. The more an investor knows about their current plan, the better equipped they are to make compelling arguments for how to improve their plan.

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Are Robo-Advisors Worth It? Are They Safe?

Automated portfolios have become a common option offered by financial companies, providing many people with a cost-efficient way to invest for retirement and other goals — while helping to manage certain market and behavioral risks via automated features.

Because robo-advisors typically rely on sophisticated computer algorithms to help investors set up and manage a diversified portfolio, some have questioned whether technology alone can address the range of needs that investors may have — beyond basic portfolio management. Others note that the lower fees and lower minimum balance requirements typical of most robo-advisors, in addition to certain automated features, may provide a much-needed option for new investors.

Key Points

•   Robo-advisors offer cost efficiency and automation, reducing fees and providing features like automatic rebalancing and tax optimization.

•   Robo-advisors are well-suited for long-term goals like retirement, managing risks and maintaining diversified portfolios.

•   A key limitation may be limited investment options, sometimes restricted to pre-set portfolios of low-cost index ETFs.

•   Personal advice is generally limited, focusing on automated portfolio management based on initial client inputs.

•   The industry has grown rapidly, adding more sophisticated features and a broader range of investment options, appealing to a wider audience.

Is a Robo-Advisor Right for You?

Robo-advisors typically use artificial intelligence to generate retirement and financial planning solutions that are tailored to people’s individual needs. Here are some questions to ask yourself, when deciding whether a robo-advisor is right for you.

How Does a Robo-Advisor Pick Investments?

While the term robo-advisor can mean different things depending on the company that offers the service, investors usually fill out an online questionnaire about their financial goals, risk tolerance, and investment time frames. On the back end, a computer algorithm then suggests a portfolio of different securities based on those parameters.

For example one person may be investing for retirement, another saving for the purchase of a home. Depending on each person’s preferences, the robo-advisor generates an asset allocation that aligns with the person’s goals in the form of a pre-set portfolio.

A portfolio for someone nearing retirement age would typically have a different allocation versus a portfolio for someone in their 20s, for example. Depending on these details, the service might automatically rebalance the portfolio over time, execute trades, and may even conduct tax-loss harvesting. SoFi’s automated portfolio does offer automatic rebalancing, but not automatic tax-loss harvesting.

Can I Choose My Own Investments?

A robo-advisor typically has a range of investments they offer investors. Usually these are low-cost index exchange-traded funds (ETFs), but the offerings can vary from company to company. In most cases, though, your investment options are confined to those available through the robo-advisor, and typically you’re offered a selection of pre-set portfolios with limited or no ability to change the securities in that portfolio.

As the industry grows and becomes increasingly sophisticated, more companies are finding ways to offer investors new options like themed ETFs, stocks from different market sectors, socially responsible or ESG investing options, and more.

Who Manages the Portfolio?

Part of the appeal for some investors is that these portfolios are automated and thus require less hands-on involvement. This may be useful for people who are new to the process of setting up and managing a diversified portfolio, or who don’t feel comfortable doing so on their own.

In some cases, a robo-advisor service may also offer a consultation with a live human advisor. But again, in most cases the investor has limited control over the automated portfolio.

Recommended: Robo-Advisors vs. Financial Advisors

Are There Risks Involved in Using a Robo-Advisor?

Investment always involves some exposure to market risks. But robo-advisors may help manage behavioral risk. Many studies have shown that investors can be impulsive or emotional when making investment choices — often with less than optimal results.

By reducing the potential for human error through the use of automation, a robo-advisor may help limit potential losses.

What Do Robo-Advisors Cost?

While there are some robo-advisor services that have higher minimum balance requirements or investment fees, the majority of these services are cost efficient.

In some cases there are very low or no minimums required to set up a portfolio. And the management fees are typically lower than what you’d pay for a human advisor (although there are typically brokerage fees and expense ratios associated with the investments in the portfolio).

Pros and Cons of Robo-Advisors

Hopefully, the questions above have clarified the way a robo-advisor works and shed some light on whether a robo service would be right for you. In addition, there are some pros and cons to keep in mind.

Pros of Robo-Advisors

Saving for Retirement

It’s true that you can use a robo-advisor for almost any short- or long-term goal — you could use a robo-advisor to save for an emergency or another savings goal, for example. But in many ways these services are well-suited to a long-term goal like retirement. Indeed, most robo-services offer traditional retirement accounts like regular IRAs, Roth IRAs, SEP IRAs.

The reason a robo-advisor service can be useful for retirement is that the costs might be lower than some other investment options, which can help you keep more of your returns over time. And the automated features, like portfolio rebalancing and tax optimization (if available), can offer additional benefits over the years.

Typically, many robo-portfolios require you to set up automated deposits. This can also help your portfolio grow over time — and the effect of dollar-cost averaging may offer long-term benefits as well.

Diversification

Achieving a well-diversified portfolio can be challenging for some people, research has shown, particularly those who are new to investing. Robo-advisors take the mystery and hassle out of the picture because the algorithm is designed to create a diversified portfolio of assets from the outset; you don’t have to do anything.

In addition, the automatic rebalancing feature helps to maintain that diversification over time — which can be an important tool to help minimize risks. (That said, diversification itself is no guarantee that you can avoid potential risks completely.)

Automatic Rebalancing

Similarly, many investors (even those who are experienced) may find the task of rebalancing their portfolio somewhat challenging — or tedious. The automatic rebalancing feature of most robo-advisors takes that chore off your plate as well, so that your portfolio adheres to your desired allocation until you choose to change it.

Tax Optimization

Some robo-advisors offer tax-loss harvesting, where investment losses are applied to gains in order to minimize taxes. This is another investment task that can be difficult for even experienced investors, so having it taken care of automatically can be highly useful — especially when considering the potential cost of taxes over time.

That said, automatic tax-loss harvesting has its pros and cons as well, and it’s unclear whether the long-term benefits help make a portfolio more tax efficient.

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Cons of Robo-Advisors

Limited Investment Options

Most automated portfolios are similar to a prix fixe menu at a restaurant: With option A, you can get X, Y, Z investment choices. With option B, you can get a different selection, and so on. Typically, the securities available are low-cost index ETFs. It’s difficult to customize a robo account; even when there are other investments available through the financial company that offers the robo service, you wouldn’t have access to those.

In some cases, investors with higher balances may have access to a greater range of securities and are able to make their portfolios more personalized.

Little or No Personal Advice

The term “robo-advisor” can be misleading, as many have noted: These services generally don’t involve advice-giving robots. And while some services may allow you to speak to a live professional, they aren’t there to help you make a detailed financial plan, or to answer complex personal questions or dilemmas.

Again, for investors with higher balances, more options may be available. But for the most part robo-advisors only cover the basics of portfolio management. It’s up to each individual to monitor their personal situation and make financial decisions accordingly.

Performance

Robo-advisors have become commonplace, and they are considered reliable methods of investing, but that doesn’t mean they guarantee positive returns.

Robo-Advisor Industry

Robo-advisors have grown quickly since the first companies launched in 2008-09, during and after the financial crisis. Prior to that, financial advisors and investment firms made use of similar technology to generate investment options for private clients, but independent robo advisor platforms made these automated portfolios widely available to retail investors.

The idea was to democratize the wealth-management industry by creating a cost-efficient investing alternative to the accounts and products offered by traditional firms.

Assets under management in the U.S. robo-advisor market amount to hundreds of billions of dollars, with the expectation that that will grow in the years ahead. While this market is small compared to the $100 trillion in the global asset-management industry, robo-advisors are seen as potential game-changers that could revolutionize the world of financial advice.

While this market is small compared to the $100 trillion in the global asset-management industry, robo-advisors are seen as potential game-changers that could revolutionize the world of financial advice.

Because they are direct-to-consumer and digital only, robo-advisors are available around the clock, making them more accessible. Their online presence has meant that the clientele of robo-advisors has tended to skew younger.

Also, traditional asset management firms often have large minimum balance requirements. At the high end, private wealth managers could require minimums of $5 million or more.

The cost of having a human financial advisor can also drive up fees north of 1% annually, versus the 0.25% of assets that robo-advisors typically charge (depending on assets on deposit). Note that this 0.25% is an annual management fee, and does not include the expense ratios of the underlying securities, which can add on another 5 or even 50 basis points, depending on the company and the portfolio.

Recommended: How to Track Robo-Advisor Returns

The Takeaway

Despite being relative newcomers in finance, robo-advisors have become an established part of the asset management industry. These automated investment portfolios offer a reliable, cost-efficient investment option for investors.

Robo advisors don’t take the place of human financial advisors, but they can automate certain tasks such as selecting a diversified group of investments that align with an individual’s goals; automatically rebalancing the portfolio over time; using tax-optimization strategies that may help reduce portfolio costs.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

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SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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What Is Automated Investing?

What Is Automated Investing?

Automated investing is a type of investing that uses computer algorithms to recommend investment portfolios to an individual based on their goals, time horizon, and risk profile. Automated investing platforms, also known as robo-advisors, tend to feature lower fees, lower minimum balances, digital applications, and a more hands-off approach to investing.

Because automated investing can be done with little or no direct human effort, it can be an ideal option for investors just starting their wealth-building journey. Automated investing may reduce the learning curve for some investors entering the financial markets, helping them start building and managing a portfolio to achieve their financial goals.

Key Points

•   Automated investing uses algorithms to provide tailored financial planning and retirement advice.

•   Lower fees and minimum balances make automated investing accessible for beginners.

•   Platforms collect data on financial situations, risk tolerance, and goals to manage a diversified portfolio.

•   Automated platforms handle tasks like portfolio rebalancing and tax-loss harvesting.

•   Drawbacks include limited human interaction and potential exposure to market volatility.

Automated Investing: A Primer

There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.

Automated investing uses computer algorithms to select and trade stocks, exchange-traded funds (ETFs), or other assets without the need for oversight by a human financial advisor.

Automated investing has changed the financial advisory game in fundamental ways. Like so much else that has happened during the digital revolution, automated investing has eliminated the middle man and is delivering a service directly to the client – you, the investor.

Investors who sign up for an automated investing platform usually start by filling out a questionnaire, which collects information about the investor’s financial situation, risk tolerance, and goals. The automated investing advisor then uses this data to recommend investments to the client that may help them meet their financial goals. Based on the investor’s input, the automated investing platform will recommend and manage a pre-determined portfolio for the investor using computer algorithms and other data.

Automated investing advisors may also handle portfolio rebalancing and tax-loss harvesting if the client chooses these services. (SoFi’s automated portfolio includes the above features, but not automated tax-loss harvesting.)

Most automated advisors use Modern Portfolio Theory (MPT) to create and manage a portfolio’s asset allocation. The idea is to decrease risk by diversifying a portfolio into many assets and not “put all your eggs in one basket.”

Automated Investing vs Robo Advisors

Automated investing tools are sometimes referred to as robo advisors. Investors may see the terms automated investing and robo-advisors used interchangeably to describe digital tools that use computer algorithms to manage a financial portfolio.

In reality, though, automated investing is a broader term that can refer to several aspects of today’s financial products and features.

•   Using automatic transfers and contributions to investment portfolios and retirement plans is a form of automated investing.

•   Target date funds, a type of mutual fund that rebalances over time to become less conservatively invested, uses a form of automated investing known as a glide path.

Recommended: Robo-Advisor vs. Financial Advisor: Which Should You Choose?

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Why People Choose an Automated Investing Strategy

There are several reasons why investors choose automated investing tools to help them manage an investment portfolio.

Low-Cost Process

Automated investing advising generally costs less than traditional financial advisors. The reason the cost of automated advising is lower is because it relies on an algorithm, while the guidance of a live person can cost more. In other words: A human touch comes with a premium price.

Automated investment fees are usually a percentage of the assets under management (AUM). Typical fees are less than 0.5% of AUM annually. So if an investor puts $10,000 into an automated investing service, they generally pay less than $50 per year.

By comparison, a reasonable rate for a human financial advisor would be a 1% investment fee. On a $ 10,000 investment, that’s $100 per year just for the advisory fee. Investors may also have to pay fees on their investments and commissions for products the financial advisor sells.

However, automated investing services have additional fees as well. Robo-advisors charge a brokerage fee, and the ETFs themselves typically generate management fees, taxes, and other costs for which the consumer is responsible.

Like many investment costs, however, these fees can be hard to track as they may simply be deducted from investor returns. That’s why it’s important to look beneath the hood, so to say, of any investment product to learn the exact costs.

Recommended: How Much Does a Financial Advisor Cost?

More Affordable Initial Investment

Many automated investing platforms have low minimum account requirements. And some platforms have no minimum initial investment requirements.

In contrast, some human financial advisors won’t take on a client unless they have more than $100,000. At the high end, private wealth managers could require minimums of $5 million.

Because of the lower initial investment required, younger consumers have turned to automated investing in planning for their financial future. Previously, high minimum balances had been headwinds to younger investors, preventing them from getting financial advice.

As younger investors, like Generation Z and millennials, start hitting life milestones like getting married and saving for a house, automated investing may be a good option for them to begin building wealth.

Efficient & Convenient Access

With traditional financial advisors, clients had limited access and had to work around the human advisor’s schedule. Automated advisors use digital platforms. This allows clients to ask questions and access help 24 hours, seven days a week, if needed.

Need to make a trade or a change? There is no need to call to schedule an appointment, fill out a physical form, meet with an advisor in person, or wait for office hours. Usually, a few button pushes can do the trick.

Lower fees and minimum balances have attracted younger investors to the automated investing industry. But the digital and mobile platforms these services offer have also made younger users turn to such automated services more.

Concerns About Automated Investing Services

Robo advisors do come with some downsides, however.

Limited Human Interaction

While some automated services may offer investors the ability to contact a live advisor or representative, not all of them do. And even when that’s available, your access may depend on how much money you have invested.

In any case, if you have pressing questions or an investing dilemma, it’s likely it will be up to you to figure out the right steps to take.

Not Fully Customizable

It’s true that a robo-advisor is designed to offer a range of pre-set portfolios, one of which will hopefully meet an investor’s needs. But automated platforms don’t have the flexibility to offer each person a fully customizable portfolio — for that they would need to craft their own or work with a professional.

By the same token, if your personal circumstances changed in such a way that your investment strategy also shifted, it’s unlikely that you’d be able to adjust an automated portfolio except in terms of its basic asset allocation.

Risks and Costs of ETFs

Most robo advisors use a mix of ETFs and low-cost index funds. ETFs hold a basket of stocks or bonds and the vast majority of these funds are passively managed, i.e. they are built to mirror an index, such as the S&P 500. ETFs differ from index mutual funds in that they are traded throughout the day on an exchange, similar to stocks.

ETFs come with certain risk factors. Because ETF shares are traded throughout the day, they’re bought and sold at the market price, which may or may not reflect the fund’s net asset value or NAV. Thus, an ETF’s performance is subject to market volatility. In addition there can be tax consequences, owing to the trading of shares.

What to Look for in an Automated Investment Platform

If you’re interested in opening an automated investing account, there are several factors you may want to consider before deciding if automating investing is right for you.

Automated Investing Fees

As mentioned above, automated investing fees are generally lower than traditional financial advisors. However, you still want to compare the fees of the various automated investing platforms on the market.

Some platforms charge a flat fee, while others charge a percentage of your assets under management. In addition, some platforms charge fees for specific services, such as tax preparation or additional investment advice.

Affordability

Some automated investment platforms require a minimum investment to open an account. You’ll want to understand any minimum investment requirements before opening an account. For example, some automated investing platforms may offer a $0 account minimum, but that might not include certain robo-advisory services you’re looking for.

Investment Options

The investment options offered by automated investment platforms vary. Some platforms offer a limited selection of investment options, while others offer a wide range of investments. You want to ensure the automated investing platform you choose offers investment options that meet your needs.

Usually, robo-advisors only invest in ETFs and mutual funds, so you’ll want to see if the services offer a range of funds, from international equities to domestic corporate bonds. Knowing what investment options a robo-advisor provides may help you ensure that you may end up with a diversified portfolio that aligns with your goals.

Investment Rebalancing

Generally, a robo-advisor will make automated investments based on your risk tolerance and financial goals. These services will create a portfolio of a certain percentage of stock ETFs and bonds ETFs based on risk tolerance. But you want to check that the automated investing services will rebalance your portfolio to maintain that percentage of stocks and bonds.

For example, an investor with a more aggressive risk tolerance may have a portfolio with an asset allocation of 80% stocks and 20% bonds. With time, the portfolio may change and knock that ratio off balance — too much of one and not enough of the other. An automated investor can automatically rebalance your account to its original 80/20 ratio. No human interaction is needed; the rebalance happens through the automated investing algorithm.

Human Interaction

Some automated investing services may give investors access to human financial professionals, which can be helpful for investors who need to ask questions, discuss goals, and plan for the future. Automated investing services might charge for this service, but it could be helpful to have this option.

Who Might Want to Consider Auto Investing?

Automated investing may be a good option for people who want to invest for the long term but do not want to manage their own portfolios or pay high fees for a traditional financial advisor. It can also be a good option for people who want to invest in various asset classes, but don’t have the time or expertise to do so themselves.

That doesn’t mean auto investing is right for everyone. For those who aren’t particularly tech savvy or comfortable with automated platforms, using a robo-advisor might not make sense. Again, it’s important to be comfortable with the investments offered in these pre-determined portfolios, as well as the risks and costs associated with these products.

As noted above, many younger investors have begun using robo-advisors to create portfolios and make automated investment decisions. This may allow younger investors to build up experience in the financial markets while using a pre-set portfolio. As they build wealth and expertise, younger investors may decide to make investment decisions on their own or hire a traditional financial advisor to help manage their financial goals.

The Takeaway

An automated investing platform can be ideal for many investors, particularly regarding affordability, convenience, and avoiding potential human errors. This investment tool allows investors to use a hands-off approach, which many people may prefer over the time-consuming research and management required for picking and choosing stocks, bonds, and other assets to build and manage a portfolio.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Open an automated investing account and start investing for your future with as little as $1.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Claw Promotion: Customer must fund their Active Invest account with at least $50 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.

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Guide to Environmental, Social, and Governance (ESG) Investing

What Is ESG?

ESG investing can be considered a form of sustainable or impact investing, but the term itself emphasizes that companies must focus on positive results in light of environmental, social, and governance factors.

ESG investing strategies are still popular, with global mutual funds and exchange-traded funds (ETFs) that embrace ESG-focused strategies seeing a high of $480 billion in assets under management, as of November 2023, up from $391 billion in 2021.

But ESG strategies have waxed and waned over the last few years, particularly in the U.S. Domestic ETFs and open-end funds saw outflows of about $19.6 billion in 2024, the largest amount since Morningstar began tracking sustainable fund flows in 2015.

Unfortunately, there has yet to be a single ESG framework used by all investors or financial firms to evaluate a company’s progress toward ESG goals. Rather, there are a number of ESG standards worldwide, most of them voluntary, and investors must learn which ones a certain fund or stock adheres to before choosing to invest.

Key Points

•   ESG refers to non-financial criteria that can help investors assess a company’s performance in terms of environmental, social, and governance factors.

•   ESG strategies are seeing an increase in investor interest, with global ESG-specific funds reaching $480 billion in AUM in 2023. But U.S. open-end funds and ETFs had another year of outflows in 2024.

•   Tracking a company’s adherence to ESG standards can also reveal its ability to manage certain ESG risks.

•   Currently, ESG standards are largely voluntary, although some ESG frameworks are more widely used than others.

•   It’s possible to invest in ESG-focused stocks, bonds, mutual funds, and exchange-traded funds (ETFs).

What Is ESG Investing?

ESG refers to environmental, social, and governance factors that underlie certain investment strategies. By using ESG standards, investors can evaluate how well companies meet relevant criteria and manage risks.

Following are some of the factors that investors can consider when evaluating the three pillars of ESG, and deciding whether to invest online or through a brokerage in ESG funds, ETFs, or other options.

Environmental

The environmental component of ESG criteria might include metrics on a company’s energy emissions, waste, and water usage. Investors may also focus on the risks and opportunities associated with the impacts of climate change on the company and its industry.

Some company information that environmentally conscious investors may evaluate include:

•   Pollution and carbon footprint

•   Water usage and conservation

•   Renewable energy integration (such as solar and wind)

•   Climate change policies

Recommended: Beginner’s Guide to Sustainable Living

Social

The social component of ESG generally describes the impact of a company’s relationships with people and society. Factors as varied as corporate culture, commitment to diversity, and how much a company invests in local organizations or communities can impact socially conscious investors’ decisions on buying into a specific corporation.

Some other social factors can include:

•   Employee pay, benefits, and perks

•   Diversity, equity, and inclusion

•   Commitment to social justice causes

•   Ethical supply chains (e.g., no sweatshops, conflict-free minerals, etc.)

Governance

The governance component of ESG generally focuses on how the company is run. Investors want to know how the board of directors, company, and shareholders relate to one another.

Some additional governance factors that investors evaluate include:

•   Executive compensation, bonuses, and perks

•   Diversity of the board of directors and management team

•   Transparency in communications with shareholders

•   Rights and roles guaranteed to shareholders

Understanding ESG Investment Strategies

At one point, ESG strategies were primarily guidelines for investing according to certain values. But in the last couple of decades, it’s become clear that ESG factors can also impact a company’s bottom line. For instance, there may be potential risks to company performance that require a company to follow ESG risk mitigation efforts.

Unfortunately, there is no universal set of standards for measuring a company’s progress in these three areas. That said, many companies have embraced global ESG frameworks, which are largely voluntary.

Additionally, third-party organizations have stepped in to create ESG scores for companies and funds based on their adherence to various ESG factors.

How ESG Scores Work

ESG scores — sometimes called ESG ratings — are designed to measure a company’s performance based on specific environmental, social, and governance criteria. Investors can use them to assess a company’s success, risks, and opportunities concerning these three areas.

Where ESG Scores Come From

Due to the growing need for ESG information and metrics, third-party data providers have become a part of the industry.

That’s because ESG guidelines are still very much a work in progress. Some are mandatory, some are not. In some cases, companies have developed proprietary systems to assess and report their own performance or risk mitigation efforts.

In short, investors can’t rely on just one ESG score, but must become familiar with how different ESG scores work and how they’re applied.

ESG Scoring Systems

An ESG score is typically calculated by analyzing a company’s available data on environmental, social, and governance policies and practices using various sources, like SEC filings, government databases, and media reports.

A high ESG score typically means a company is reaching certain targets, or manages ESG risks better than its peers, while a low ESG score means the company is not reaching its ESG goals, or it has more unmanaged ESG risks. Evaluating a company’s ESG score, along with financial analysis, can give investors a better idea of the company’s long-term prospects.

Some of the most prominent ESG score providers are MSCI, Morningstar Sustainalytics, and S&P Global. But some financial firms conduct their own ESG evaluations and provide proprietary scores. Transparency into how the scores are calculated can vary.

ESG vs SRI vs Impact Investing

ESG investing is sometimes called sustainable investing, impact investing, or socially responsible investing (SRI). But these terms are not interchangeable. Impact investing and SRI are broader terms. ESG could be seen as a type of impact or socially responsible investing.

What Is SRI?

Socially responsible investing selects or excludes investments according to specific ethical guidelines. Investors utilizing an SRI strategy may avoid investing in companies related to gambling and other sin stocks, or they may avoid companies that cause damage to the natural environment — or they may choose companies with a track record of green initiatives or policies that support a diverse workforce.

What Is Impact Investing?

Impact investing strategies are designed to have a measurable impact on certain industries, sectors, or even companies directly.

Impact investing is generally employed by institutional investors and foundations. The aim of impact investing is often to generate positive social or environmental impact, but it can refer to any agenda that involves using capital to push for a certain outcome or result.

Impact investing is a broad category that can include a range of strategies, including ESG (environmental, social, and governance) and SRI (socially responsible investing), as well as others.

Other Types of Impact Investing

In addition there are a couple of other designations investors may want to know:

•   Green investing refers to strategies that aim to benefit the physical environment. Investors may put money into organizations that support renewable energy, low carbon, pollution mitigation, and more.

•   Last, corporate social responsibility initiatives, or CSR refers to programs that companies may establish on their own. Often, these business initiatives support socially responsible movements, like environmental sustainability, ethical labor practices, and social justice initiatives.

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Types of ESG Investments

Investors can make ESG investments in the stocks and bonds of companies that adhere to ESG criteria or have high ESG scores. Other potential investment vehicles are mutual funds and ETFs with an ESG strategy.

Stocks

Buying stocks of companies with environmental, social, and governance commitments can be one way to start ESG investing. However, investors will often need to research companies that have ESG credibility, or rely on third-party agencies that release ESG scores.

Bonds

The bonds of corporations involved in ESG-friendly business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund green energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

Recommended: How to Buy Bonds: A Guide for Beginners

Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to hundreds of ESG companies and investments.

A growing number of index funds invest in a basket of sustainable stocks and bonds. These allow investors to diversify their holdings by buying shares of a single fund.
However, not all ESG funds follow the same criteria, and each fund can focus on different aspects of environmental, social, and governance issues. Interested investors would do well to look under the hood of specific funds to evaluate their holdings and other criteria.

Recommended: A Beginner’s Guide to Investing in Index Funds

Identifying ESG Companies

What is the best way to find an ESG company? Some 600 third-party agencies now gather ESG data from companies and conduct their own analysis and scoring.

Commonly used rating agencies include:

•   Bloomberg ESG Data Services

•   Dow Jones Sustainability Index

•   MSCI ESG Research

•   Morningstar Sustainalytics

•   S&P Global, ISS ESG

•   Moody’s Investors Service

•   Thomson Reuters ESG Research Data.

Benefits of ESG Investing

ESG investing has several potential benefits, including:

•   Improving long-term financial performance: A growing body of evidence suggests that companies with solid ESG ratings may be good investments. They tend to outperform those with weaker ratings, both in share price performance and earnings growth.

•   Mitigating risk: ESG factors can help identify companies with poor governance practices or exposure to environmental and social risks, leading to financial losses.

•   Creating social and environmental impact: By investing in companies that are leading the way on environmental, social, and governance issues, investors can help drive positive change and make a positive impact on society.

These potential benefits are increasing the popularity of ESG investing. According to Bloomberg, all global ESG assets reached $30 trillion by the end of 2022, and are projected to reach $40 trillion by 2030, up from $22.8 trillion in 2016.

Risks of ESG Investing

The main disadvantage of ESG strategies is that they limit the number of investments that people can consider. Thus, in some cases investors could end up trading potential returns for the ability to invest according to their values.

In addition, ESG investments can sometimes come with higher costs, for example an ESG fund may have a higher expense ratio vs. a traditional counterpart.

While there is a growing body of data regarding the performance of ESG indices and securities, it’s still a relatively new sector relative to more traditional investments, and again many standards and disclosures are still not mandatory.

How to Invest in ESG

If you’re interested in creating an ESG portfolio, you can start by contacting a financial advisor who can help you shape your investment strategy.

However, if you are ready to start investing and want to build a portfolio on your own, you can follow these steps:

1. Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you will be able to buy and sell stocks, mutual funds, and other securities.

2. Pick your assets

Decide what type of investment you want to make, whether in a stock of a company, an ESG-focused ETF or mutual fund, or bonds.

3. Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

4. Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and improve your returns.

ESG Investing Strategies

ESG investing can be different based on values and financial goals. It’s therefore essential to start with your investment goals and objectives when crafting an ESG investing strategy. Consider how ESG factors may help you reach these goals.

It’s also crucial to understand the data and information available on ESG factors; this will vary by company and industry. When researching potential ESG investments, you want to make sure a company has a clear and publicly available ESG policy and regularly discloses its ESG performance. Additionally, it can be helpful to look at third-party scores to determine a company’s ESG performance.

Why Is ESG Investing Important?

ESG investing offers investors a way to invest their money with the hope of having a genuine impact in terms of environmental, social, and governance factors.

In addition, companies today face a number of ESG risk factors. Adhering to certain ESG principles may help manage ESG risks.

Whether or not companies or funds that embrace ESG strategies deliver on the promised goals is a matter for investors to decide via due diligence. As noted above, without a commonly agreed-upon set of standards and some form of accountability, it’s difficult to ascertain which companies are truly having an impact.

Are ESG Strategies Profitable?

Investors have continued to be interested in ESG strategies over time. As noted above, global ESG-focused assets under management have continued to grow, although U.S. sustainable open-end fund and ETF outflows increased for the second year in a row, according to a 2024 report from Morningstar.

According to the report: “Sustainable funds faced many headwinds in 2024. They continued to lag conventional peers, with only 42% of sustainable funds landing in the top half of their respective Morningstar Categories.”

The Takeaway

In recent years, investor interest in sustainable investing strategies like ESG has grown. In addition, there is some data that suggests that ESG strategies may be just as effective as traditional strategies in terms of performance.

This is despite the fact that ESG criteria are inconsistent throughout the industry. There are a myriad different ways that companies can provide ESG-centered investments, but there aren’t industry-wide benchmarks for different criteria or success metrics.

Ready to start investing for your goals, but want some help? You might want to consider opening an automated investing account with SoFi. With SoFi Invest® automated investing, we provide a short questionnaire to learn about your goals and risk tolerance. Based on your replies, we then suggest a couple of portfolio options with a different mix of ETFs that might suit you.

Open an automated investing account and start investing for your future with as little as $1.

FAQ

What are the three pillars of ESG?

ESG stands for three areas that some companies strive to embrace by being proactive about the environment, supportive of social structures, and transparent and ethical in corporate leadership.

What are some examples of ESG investing?

There are many ways to add ESG strategies to your portfolio: You can consider investing in green bonds, in companies that focus on environmentally supportive technologies, in funds that invest in renewable energy companies, clean water initiatives, carbon sequestration, and more.

What is the difference between ESG and sustainability?

Sustainability is a broader term. Environmental, social, and governance (ESG) factors may support sustainability in different ways: by limiting air or water pollution, by supporting fair labor practices, by requiring transparency in corporate governance.


SoFi Invest®

INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE

SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at https://sofi.app.link/investchat. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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