Table of Contents
What Is ESG?
ESG investing is an investment strategy that’s based on companies’ commitment to three pillars of sustainability: environmental, social, and governance factors. ESG investing means that investors are looking for positive outcomes in one or more of these areas.
In addition, many investors are concerned about companies’ ability to manage ESG risk factors, and a commitment to environmental, social, and governance issues may benefit long-term performance.
For these reasons, ESG strategies continue to appeal to some investors. The total assets of sustainability-focused exchange-traded funds and mutual funds that invest according to ESG criteria increased to $674.43 billion in May 2026, up by $26.55 billion, according to the Investment Company Institute.
One challenge for even committed ESG investors: There isn’t a mandatory ESG framework used 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 commitment to positive environmental, social, and governance outcomes.
• Many mutual funds and ETFs that embrace ESG strategies are seeing inflows as of Q2 2026.
• Tracking a company’s adherence to ESG standards may also demonstrate 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, even voluntary ones, investors can assess 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 traditional brokerage) in ESG funds, ETFs, or other assets.
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)
• Sustainable supply chain management
• Risk mitigation in light of climate change, extreme weather events, and protecting business operations from these risks.
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 investors’ decisions about trading stocks of specific corporations.
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 about accountability and transparency in corporate governance.
Some additional governance factors that investors may evaluate:
• Executive compensation, bonuses, and perks
• Diversity of the board of directors and management team
• Transparency in communications with shareholders
• Transparency in accounting practices
• Rights and roles guaranteed to shareholders
Understanding ESG Investment Strategies
At one point, ESG strategies were primarily guidelines for self-directed investing according to certain values. But in the last couple of decades, it’s become clear that environmental, social, and governance factors can also impact a company’s bottom line. For instance, there may be potential risks to company performance that require a company to engage in ESG risk mitigation efforts.
Unfortunately, there is no universal set of standards for measuring a company’s progress in these 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 ESG 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, for example, 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 an 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.
Identifying ESG Companies
What is the best way to find an ESG company? Hundreds of third-party agencies now gather ESG data from companies in order to 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, that might 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 may support the popularity of ESG investing. Global inflows into sustainable funds showed a net positive change of $3.5 billion in Q1 of 2026.
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. Indeed, a 2025 Stanford Business School survey found that the majority of investors in the U.S. seem more concerned with investment growth than ESG outcomes.
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, or adding ESG investments to your current holdings, you can consider 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 portfolio risk and improve returns.
ESG Investing Strategies
ESG investing can look different depending on your values and financial goals. Investors who are interested in sustainable energy use may focus more on companies with a strong commitment to environmental outcomes, for example, while investors who want to see more diversity in corporate boards may focus on governance criteria.
It’s also important 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. investors have expressed more interest in long-term financial performance and portfolio growth.
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.
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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, environmentally supportive technologies (e.g., renewable energy, pollution reduction), and companies that support social issues and responsible corporate governance.
What is the difference between ESG and sustainability?
Sustainability is a broader term. Environmental, social, and governance (ESG) factors specifically refer to those three aspects of sustainability: e.g., by limiting air or water pollution, by supporting fair labor practices, by requiring transparency in corporate governance.
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