Mature female volunteer coordinator gestures as she gives instructions to a large group of volunteers. The people are preparing to cleanup their community park.

From hashtag campaigns to petitions to GoFundMe links, it only takes the click of a button to support countless social, environmental and political causes these days. But for many, these alternatives might not feel like enough to enact long-term, sustainable changes. That’s where ESG — environmental, social and corporate governance — investing can play a role.

While some believe you have to forgo returns to invest in issues you believe in, this is far from the truth. In fact, the top five biggest ESG mutual funds rose an average of 38.5% last year, more than double the S&P 500. So it’s no surprise ESG investing has grown to a $35 trillion space, or about 36% of all professionally managed money. In this time, I’ve heard a lot of questions from curious investors who want to learn more about this approach — from its ability to make an impact in the world, to its impact on your portfolio.

What has caused the recent interest in ESG investing?

Investing in causes, organizations, and missions people care about has been a trend for a long time, but it’s recently become much easier to invest in companies and funds that focus on these initiatives. Its growth will likely continue as more pressure comes from shareholders and the government for companies to disclose various metrics that give more transparency into a company’s stance on social issues.

Has the way people approach ESG investing changed over time?

Just like the causes people support and the circumstances of our society have evolved over the years, so has ESG investing. In the beginning, it began with a focus on excluding “sin stocks,” or those companies that produce or promote tobacco, gambling, or alcohol, from portfolios. After a while, ESG investors began to avoid companies with governance issues — i.e. those with voting or board structures that benefitted management over shareholders. And in the 90s, climate change rose to the forefront of ESG investors’ minds.

Today, investors look to be inclusionary, rather than exclusionary. People want to invest in companies that are doing right by their shareholders, employees, communities, and the environment.

How does ESG investing make an impact?

By investing in companies that concentrate on one or more of these criteria, you offer support to businesses that make an effort to focus on more than just profitability. They seek to drive positive impacts in their communities, their countries, and internally with employees to help better position themselves for the future.

Research also shows that ESG investing may reduce portfolio risk, generate competitive investment returns, and help you as an investor feel good about the investments you own. It’s no wonder 85% of investors and 95% of Millennial investors were interested in sustainable investing in 2019.

How can someone become an ESG investor?

Starting to invest in ESG as a self-directed trader is just like getting started with any other type of investment you want to make — you have to research your choices. Many brokers help simplify your search by offering tools that help you screen for individual companies, ETFs, or mutual funds with a general ESG focus, as well as help you get more specific about qualities in companies you most care about. For example, you can zone in on funds solely dedicated to, say, clean energy or gender diversification.

When doing research, you can also use tools to analyze historical performance, expense ratios, tenure, and the size of a fund — metrics that allow you to determine how these investments stack up in a more traditional way.

Picking individual stocks can be a little more subjective, and the process of elimination can help you find what you’re looking for. First eliminate the industries you want to avoid (tobacco, gun manufacturers, etc.). Then think about what you believe in (recycling or giving back to your community) and look for companies that fit the bill. You can also reference several reputable publications that offer suggestions for companies considered ESG-friendly, including CNBC, Barron’s, and The Motley Fool. Finally, analyze the stocks using traditional metrics that you like to normally use.

If you prefer to take a more hands-off approach to investing, you can still make an ESG focus part of your portfolio. Many robo-advisors, including ours at Ally Invest, offer ESG portfolio options.

Will companies need to implement more sustainable and ethical practices as younger and more socially conscious generations become active in the market?

Yes — and this trend is already underway. The pandemic and recent spotlight on social movements have helped accelerate pressure for corporations to spend more time addressing issues that both younger and older generations care about.

In the future, it wouldn’t be surprising to see increased legislation from Washington that mandates corporations provide more transparency on many key ESG issues. And that should help make investing in this trend easier — the more information available to you, the better.

Are there any sectors or industries that are already particularly aligned with this type of investing?

Investing in ESG companies is as much an art as it is a science. Without a standard set of metrics on which to base ESG investments, it makes it more difficult to say a specific sector is a 100% fit for ESG investors.

That being said, if you look into ESG funds, you’ll often find high exposure to the information technology sector. Why? Its perceived climate friendliness and high levels of productivity. This is despite privacy, diversity and business ethics concerns for many tech companies. Remember when I said investing in ESG can be subjective? Other sectors often highly ranked in the largest ESG funds include healthcare, consumer discretionary, and communication services.

Oftentimes, many companies that employ ESG strategies tend to be longer-term thinkers — a positive characteristic that may lead to higher quality businesses, better positioned to face the potential challenges of the future. Because of this, ESG investing could actually help mitigate risk (on the downside), reduce volatility, and achieve sustainable returns. — all while aligning your money with your values.

Interested in ESG? We offer ESG opportunities for both Robo Portfolios and Self-Directed traders.

Check out Our ESG Offerings

Speech bubble icon next to text "Expert Take"

Headshot of Lindsey BellLindsey Bell, Ally’s chief markets & money strategist, is an award-winning investment professional with a passion for personal finance and more than 17 years of Wall Street experience. Bell’s unique ability to connect the dots between data and real life and craft bite-sized money ideas that people can use and apply stems from her deep background as an analyst, researcher and portfolio manager at organizations including J.P. Morgan and Deutsche Bank. She is known for demonstrating why and how an understanding of all things money improves a person’s finances and overall wellbeing. An ongoing CNBC contributor, Bell empowers consumers and investors across all walks of life and frequently shares her insights with the Wall Street Journal, Barron’s, Kiplinger’s, Forbes and Business Insider. She also serves on the board of Better Investing, a non-profit focused on investment education.

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