What is sustainable investing: an in-depth guide to ESG investing strategies

Although the performance of their portfolio is the primary focus for most investors, the appeal of responsible investing is steadily gaining ground over the world. If you care about issues like climate change, employee satisfaction and gender or racial diversity on the board, ESG investing might be just for you. Even if your key concern is boosting returns, you should still get familiar with ESG criteria. This could help you improve the long-term financial performance of your investment as you may spot emerging risks and threats earlier than those who ignore ESG considerations.

As awareness of environmental (E), social (S) and corporate governance (G) issues comes into focus, more and more investors integrate these factors into their investment decisions. In this article, we will explain what ESG investing means and show you ways and means to set up your own ESG strategy. We will also help you customize your investing strategy depending on your values and preferences. 

Based on our research, we recommend the best brokers and robo advisors in the ESG universe and we also advise you on how to build your portfolio.

ESG investing

ESG Investing Explained

What is ESG Investing? 

ESG investing is a strategy that incorporates environmental, social and governance factors besides traditional financial measures. This approach is not only for responsible investors, it can help anyone make better-informed choices as it goes far beyond the traditional risk and return concept. Integrating ESG factors may improve long-tail risk management and long-term financial performance.

The main ESG risk factors include climate change, labor-management and corporate governance standards. As new sustainability challenges are rising globally, investors are constantly screening emerging risks, such as demographic shifts, regulatory changes, extreme weather events and privacy issues.

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers Capital.com
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5

Source: MSCI


What is the difference among the different forms of conscious investing?

ESG investing is often used interchangeably with other similar approaches, such as socially responsible investing (SRI), value-based investing, sustainable investing, impact investing and ethical investing. While they all focus on sustainability, there are some subtle differences. 

Impact investing differs from ESG in that investors pick their assets with the intent of making a positive and measurable impact. They want to help a business or an organization tackle global problems, like rising inequality, racism or climate change. Impact investing strategies are typically implemented in the form of private equity or debt.  ESG, in turn, means investing in companies with good environmental, social and governance  practices. ESG investors are hoping to find opportunities or eliminate risks that cannot be identified through traditional financial and technical analysis. 

Socially responsible investing means selecting or avoiding investments that are in line with your values and principles. Investors apply both positive and negative screenings. For example, you want to avoid investing in ventures, which cause environmental damage (i.e. airlines or oil companies). Or you look to support firms, which use clean energy or have a diversified board. 

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers Capital.com
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5

Responsible investment is nothing new

Is ESG investing a brand new approach? No, it isn’t. The first socially responsible investing practices trace back to centuries, when certain investors started to avoid investing in so-called ‘sin stocks’, such as slave traders, tobacco and alcohol producers or gambling companies. Later, military contractors and firms that use sweatshops or child labor were added to the list of excluded companies. The catalogue of sin stocks has been continuously expanding and changing, the latest additions are pot and porn stocks. Pot stocks are the shares of companies with exposure to cannabis. 

The year 2004 marked an important milestone and laid the foundations of responsible investing as we know it today. That year, former United Nations Secretary-General Kofi Annan invited the world’s biggest institutional investors to work out the Principles for Responsible Investment. The fist result of the initiative was a report entitled ‘Who Cares Wins,’ which  introduced the term ESG and mapped out the key aspects of ESG investing. 

The six Principles for Responsible Investments, launched in 2006 on the New York Stock Exchange, aim to implement and promote ESG issues through the whole investment decision process. Since the launch, the number of signatories has grown from 100 to over 3,000. 

The Principles for Responsible Investment

The latest milestone was in January 2020 when BlackRock, the world’s largest money manager, said in a letter to clients that all active portfolios and advisory strategies will be fully ESG integrated by the end of the year. In the letter, BlackRock announced several initiatives including exiting investments that present a high sustainability-related risk (such as thermal coal producers), launching new investment products that screen fossil fuels and strengthening their commitment to sustainability.

  1. We will incorporate ESG issues into investment analysis and decision-making processes.

  2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

  3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.

  4. We will promote acceptance and implementation of the Principles within the investment industry.

  5. We will work together to enhance our effectiveness in implementing the Principles.

  6. We will each report on our activities and progress towards implementing the Principles.

Source: UN Principles for Responsible Investment (PRI)

“A pharmaceutical company that hikes prices ruthlessly, a mining company that shortchanges safety, a bank that fails to respect its clients – these companies may maximize returns in the short term. But, as we have seen again and again, these actions that damage society will catch up with a company and destroy shareholder value.”

BlackRock Chairman and CEO Larry Fink

ESG investing

How to get into ESG investing?

Define your investment style

As a first step, decide which investment style is right for you based on how much effort it requires. The easiest solution is to invest in a pre-built, professionally managed portfolio. But if you can’t find a fund, which is aligned with your values and goals, you can always build your own portfolio.

ESG investment styles based on the required effort by the investor from the most passive to the most active:

  • Robo-advisors represent the most passive style
  • ESG mutual funds
  • ESG exchange-traded funds (ETFs)
  • Building your own portfolio of individual stocks

With robo-advisors, everything is automated so it requires little effort on your end. You just need to enter your inputs and the robo-advisor recommends an investment portfolio. In this case, the only thing you need to do is select the option to make your portfolio compliant with ESG criteria. Once you do that, the robo-advisor will invest only in ESG ETFs.

Investing in ESG mutual funds is another option. While ETFs are usually passive investments, mutual funds are mostly actively managed and have higher costs. In addition, they are not traded on an exchange and normally have a higher minimum investment amount. 

ETFs that incorporate ESG criteria are the most popular way to invest in ESG strategies. While most sustainable funds are actively managed, the number and size of passive sustainable funds, like ETFs, is growing. ETFs are funds traded on a stock exchange. ESG ETF funds typically include equities and bonds. 

Building your own portfolio is the most active investment approach. The easiest way is to pick a broker with the necessary ESG research tools, which might help you find the right ESG stocks and ETFs. If you don’t want to change brokers or you can’t open an account at the recommended brokers, you may have to do your own research.

Best brokers to invest in ESG strategies

We have selected these five brokers based on the extent of their support for ESG investments and the quality of their overall service. Our research shows that brokers don’t offer a wide range of ESG services for the time being. Common tools brokers provide to identify the most suitable ESG investments include screeners and ESG scoring tables.At others, support is limited to articles on ESG investing or lists of  ESG-compliant products.

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers Capital.com
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5

Now let’s have a look at the brokers one-by-one


  • Fidelity provides advanced tools, which allow you to screen mutual funds, ETFs and stocks by different criteria.
  • In the case of ETFs and funds, you can shortlist the ESG ETFs and ESG funds. This tool allows you to make further comparisons by other criteria, such as expenses or performance.
  • You can screen stocks’ MSCI ESG ratings by their overall ESG score or one-by-one by their environmental, social or governance scores. Similarly to ESG ETFs and ESG funds, the tool allows you to make further comparisons by other criteria, such as company value, earnings, dividends, company growth, technicals, analyst opinion, etc.
  • There are several articles on ESG investing, which help customers make an informed investment decision. 



Merrill Edge

  • There are pre-determined categories, such as ‘carbon emissions’ or ‘climate change’. The tool will list the best companies in the given field. To be included as a so-called ‘Primer Pick’ in the results, the stock must be ranked as having a material impact on the relevant theme, must be covered by a BoFA Global Research fundamental analyst and have a Buy rating.
  • The platform is user friendly and has a great design.
  • The MSCI ESG ratings of the stocks are also provided.
  • There are several articles on ESG investing

Interactive Brokers

  • Reuters’ ESG values are integrated on the platform.
  • The combined ESG score of each stock as well as the individual environmental, social and governance scores are provided.
  • We recommend the mobile or web platforms as they are more user-friendly than the desktop platform.
  • Companies are scored along several sub-categories, such as ‘Reducing Emissions’ and ‘Human Rights’.
  • You can select business practices that you want to avoid and the companies that violate these rules will be flagged. These practices may include animal testing, political spending and lobbying as well as greenhouse emissions. 


  • You can find ESG compliant ETFs within the ‘Thematic investing’ category, such as ‘Energy powerhouse’, which are energy companies including alternative energy, oil and gas, exploration and pipeline, ‘Clean energy’ and ‘Clean water’. When you click on these topics, the tool will list all the related ETFs.
  • You can refine your search by other parameters, like expenses.
  • A screener focusing specifically on ESG funds, ETFs, stocks would be a great addition.

Charles Schwab

  • There are several articles on ESG investing, which help you dig deeper in the topic of socially conscious ETFs.
  • They provide a list of all available ESG funds and ESG ETFs in a PDF file.
  • An ESG screener where you can check MSCI or other ratings would be welcome.

Best robo-advisors in ESG investing

Robo-advisors invest in assets, mainly ETFs, using algorithms. With robo-advisors the only thing you need to do is select whether you would like your portfolio to be ESG compliant. If you do so, the robo will invest only in ESG ETFs.

We recommend the following robo-advisors for ESG investing. We have selected them considering two factors: support for ESG-investment, (i.e. customers have the option to invest in ESG products) and the quality of their overall service.

Broker Table
Saxo Bank Fusion Markets CMC Markets Interactive Brokers Capital.com
EURUSD spread 0.8 0.0 0.7 0.1 0.6
GBPUSD spread 1.3 0.2 0.9 0.3 1.3
AUDUSD spread 0.8 0.0 0.7 0.1 0.6
EURCHF spread 1.4 0.6 2.5 0.4 2.2
EURGBP spread 1.4 0.3 1.1 0.2 1.5


  • Betterment has been increasing the share of companies with no negative social impact since SRI portfolios were launched in 2017.
  • MSCI ESG scores are used to build SRI portfolios to standardize the process of assessing companies’ social responsibility practices.
  • If you already have a Betterment account, you can enable the SRI portfolio when adding a new goal or by updating your existing goal’s portfolio strategy via the “Portfolio Analysis” tab of your account.
  • Detailed analysis is provided on SRI investing as well as on how Betterment builds SRI portfolios


  • Wealthsimple will invest your money in stock or bond ETFs that are in compliance with SRI criteria based on your risk preference. They avoid problematic industries and eliminate the top 25% of carbon emitters in each sector. Every company in the fund has 25% or at least 3 women in their board.
  • There is a slider on the website to assess your risk level with three choices: Conservative, Balanced, High Growth. You can drag the button up and down the scale and watch how your portfolio is changing. With the conservative approach, you’ll have more bond ETFs. If your risk level is “High Growth’, the share of stock ETFs will be higher. 
  • Lots of educational articles on ESG investing are published on the website

How to build your own portfolio?

If you cannot find a fund that is aligned with your values and investment goals or you are trying to reach specific goals, like supporting certain sectors or companies, you may want to build your own portfolio. But you have to be willing to invest a lot of time and energy in research and digging deep into company reports and disclosures. 

First, you should decide what criteria and values are the most important for you. Then select the industries and companies you prefer and those you want to avoid. 

How can you make sure you’re investing in ESG companies? First, check the target companies’ websites and see what they are writing about themselves. In an ideal case, they publish annual sustainability and Corporate Social Responsibility (CSR) reports. While big, public companies have been reporting on their sustainability for decades, such information is less available at smaller firms. There is a chance you find something relevant in their quarterly and annual financial reports or annual general meeting results.

How legit are these sustainability reports and disclosures? Companies will certainly highlight the positive developments but some of them might hide things they are not proud of. Several firms use these reports as a marketing tool to make themselves more attractive to investors. It is strongly advised to check their progress in achieving their goals. Consult as many alternative sources as possible to identify opportunities and risks. These can be reliable news outlets, industry, government and NGO reports. You should also try to find lists of the best ESG companies, stocks of funds on trusted websites.

It is also worth checking the ESG risk ratings of the selected companies at the biggest rating providers, MSCI ESG Ratings and Sustainalytics. These ratings can be used for portfolio building and risk management at the same time. 

MSCI ESG Ratings rates companies on a ‘AAA’ to ‘CCC’ based on their exposure to ESG risks and how they manage them. They also rate mutual funds, ETFs and even countries. Based on the scores, they identify laggards (‘CCC’, ‘B’) and leaders (‘AA’, ‘AAA’). This may flag either favorable investment opportunities or risks that may not be evident in the traditional financial reports. 

At Sustainalytics, ESG Risk Ratings measure a company’s exposure to industry-specific material ESG risks and how well a company is managing those risks. The ratings are categorized across five risk levels: negligible, low, medium, high and severe. The rating scale is from 0 to 100, with 100 being the most severe. The lower the score, the better the result. Negligible level means, for instance, that the enterprise value has a negligible risk of material financial impact driven by ESG factors. 

Case Study: Hennes & Mauritz AB

Let’s say that you, as a conscious investor, plan to add the shares of H&M Hennes & Mauritz, a Sweden-based multinational clothing retailer, to your portfolio. Your main concerns are climate change and racism, so you would like to avoid companies that cause environmental damage and follow discriminatory practices. 

First, you check out H&M’s rating at the two big research firms MSCI ESG Ratings and Sustainalytics. 

H&M has an ‘AA’ rating at MSCI that has been unchanged since April 2017. The company is a leader in chemical safety, product carbon footprint and raw material sourcing and is not a laggard on any of the key issues evaluated for the retail-consumer industry. 

At Sustainalytics, H&M’s ESG Risk Rating was at 17.4 as of October 2020 That is still within the low risk level range of 10-20. Companies are exposed to different ESG issues to a different extent, depending on the sub-industry and company-specific factors. The top material issues for H&M include corporate governance, human rights, the environmental and social impact of products and services as well as human capital. According to the report, social supply chain incidents may negatively impact H&M stakeholders, the environment, or its operations. Although it’s a red flag, H&M has pretty good ratings at both big research firms. 

Now you check the company’s website. H&M publishes lengthy sustainability and corporate governance reports. A photo on the website shows an all-white board with more women than men in it. H&M calls itself a ‘welcoming workplace’ and a ‘caring employer’ and says that it wants to become climate-positive and fully circular. The latter means that resources stay in use for as long as possible before being converted into new products and materials.

This all sounds great, but when you check the news, you immediately find some serious red flags. Reliable international news outlets, like Bloomberg and Forbes,  reported that H&M was burning clothing alongside recycled wood and trash at the Västerås power station, as part of the latter’s conversion to becoming a fossil-free facility by 2020. H&M argued they only destroy clothes that can not be sold, reused, or recycled and it happens in very rare instances. 

H&M got itself into trouble in 2018 after advertising a green hoodie with the phrase “Coolest monkey in the jungle” with a black child. The company later apologized for the mistake. 

Bottom line: While H&M has excellent ESG ratings at both providers, we learnt from news sources that it was recently involved in ESG controversies more than once. Reports on burning clothes would cause serious doubts to any environmentally conscious investor. As to the unfortunate ad, H&M surely didn’t intentionally want to cause offence, but it still was a serious mistake.

Investors flocking into ESG funds

There has been a steady increase in assets in sustainable funds over the past few years, research firm Morningstar said in its quarterly Global Sustainable Fund Flows report. These funds rebounded in the second quarter of 2020 after the market sell-off caused by the pandemic in the first quarter, with the value of global ESG fund assets reaching a record USD 1.1 trillion at the end of June. Europe alone accounted for over 86% of global sustainable fund assets mainly due to its favorable regulatory environment.

In addition to launching new sustainable funds, asset managers converted some of their existing funds to ESG funds. Sometimes they even change the name of their funds to make their sustainable nature clear to investors.

Do I have to give up returns in exchange for responsible investing?

Not necessarily. Just because you are not willing to invest in any company, you don’t have to sacrifice profitability. Make sure your investment is aligned not only with your values, but your financial goals, too. And always do your risk analysis. We will show you how, later. 

“The performance of sustainable funds relative to the fund universe is consistent with evidence from academic research, which suggests no systematic performance penalty associated with sustainable investing and possible avenues for outperformance through reduced risk or added alpha.” 

John Hale, Morningstar’s director of ESG research for the Americas 

Researchers at MSCI found that ESG has affected both the valuation and performance of companies. Strong ESG characteristics have led to positive stock performance, according to the research. Firms with high ESG ratings tend to be more competitive, are better at managing company-specific risks and have lower exposure to systematic risk factors. 

While ESG investors don’t have to give up returns, they have to accept that ESG investments, just like any other investment, can be volatile. 

“Some investors believe ESG investing means sacrificing returns. Keep in mind that as with any investment strategy that pursues objectives beyond tracking a broad market benchmark, investors should expect periods when screened ESG investments underperform or outperform the market. “


Always do your due diligence – ESG research and ratings

As an investor, you should be able to identify and manage non-financial risks to make more informed investment decisions. But that is easier said than done. Although there is an increasing demand for businesses to provide information on their ESG risks, these company disclosures can be misleading or even unreliable. Some firms make big promises in their sustainability reports to look more attractive to ESG investors, but they don’t always follow through on these promises. Others try to intentionally hide potentially damaging information. Think Volkswagen and the diesel gate! 

Learn why investing in ESG has a lot of skepticism among investors and what the experts say. 

ESG risk ratings and analysis by independent research firms can help investors better understand the ESG risks of both their securities and their portfolios. MSCI ESG Research, the world’s largest ESG research provider, publishes ratings and research on over 14,000 equity and fixed income issuers. 

Another leading provider is Sustainalytics, a Morningstar subsidiary. It offers data on 40,000 companies worldwide and ratings on 20,000 companies and 172 countries.

If you want to dig deeper, here is our article about the top ESG rating providers. You can also check out ESG indexes that are designed to help investors benchmark ESG performance. The largest index providers include MSCI, FTSE Russell, Bloomberg, S&P Dow Jones and Thomson Reuters. Note that many rating agencies are also index providers. Besides rating agencies and index providers, several brokers, financial technology companies and other organizations offer various ESG research tools.

ESG investing trends to watch In 2021

ESG investing is here to stay. With the COVID-19 pandemic and the protests for racial justice in the US, it has been garnering even more attention in 2020. On one hand, these crises highlight the importance of making business models sustainable and more resilient. On the other, investors increasingly see ESG strategies as an opportunity to anticipate negative developments and unexpected setbacks. Here is the list of the most popular ESG investing strategies. 

With assets pouring into sustainable funds globally, the number of both actively managed and passive sustainable funds have been increasing to keep up with the rising demand. The choices available to investors are expected to expand further. 

“This asset growth reflects a growing recognition that ESG factors can be material to long-term financial performance, as companies face greater scrutiny from customers, regulators and employees alike over their ESG practices.” 

Morningstar report 

Additionally, there is growing pressure on regulators and issuers to standardize ESG disclosure rules to ensure investors can better measure and compare ESG investments. One stakeholders’ most common complaint is that company ESG data is currently incomparable. 

The European Union has also been working on how to integrate sustainability considerations into its financial framework. Now there are several EU initiatives to support ESG investing. Compared to the EU, US financial regulators have been slow to address ESG issues partly due to the stance of the Trump administration on climate change. The new administration is widely expected to speed up the regulatory process. 

Stock exchanges all over the world are also trying to advance ESG investing. They aim to incorporate ESG considerations into listing rules, indexes and regulatory frameworks. 

ESG investing

Bottom line

ESG investing is about selecting companies and funds based on environmental, social and governance issues. This strategy has gone mainstream driven by increasing demand for sustainable investment options and it is expected to gain further momentum in the coming years. 

Who is ESG investing for? 

ESG investing is primarily for those, who want to incorporate environmental, social and governance factors into their investment decisions and still receive the highest possible return.

Having said that, every investor should look at ESG factors before making an investment decision in order to better understand long-tail risks and opportunities not captured by traditional financial analysis. 

What are the main ESG criteria?

There are no standardized definition or rules, yet as ESG investing is still a fairly new concept. The main factors to consider include environmental protection practices, relationship with clients, employees and supplier and corporate leadership.  

Do I have to sacrifice return for my values?

No, you don’t but you have to do your thorough risk and return analysis just like you would in case of any other investment strategy. Several organizations provide research on ESG investing besides the two big ESG rating providers MSCI ESG Ratings and Sustainalyticis.

How do I get into ESG investing?

It’s getting easier than ever. There are now several affordable and easily accessible ESG ETFs and ESG mutual funds. They are available through online brokers and robo-advisors, too. You can also build your own portfolio, but this requires a lot more time and effort. 

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