What you need to know about environmental, social, and governance investing
Are you interested in investing based on your personal principles? If so, you might want to consider sustainable investing.
This investing philosophy has attracted some big name investors in recent years. For example, Bill and Melinda Gates—and a consortium of other well-known investors—recently launched the $2 billion green energy Breakthrough Energy Ventures fund, whose goal is to invest in technologies to reduce greenhouse gas emissions by at least half a gigaton.
In the past, some investors have avoided sustainable investing strategies for fear of sacrificing performance. Yet numerous studies have found that incorporating sustainable investing factors generally does not have a negative impact on performance, and may have a positive effect. Of course, you should always consider your goals, risk tolerance and time horizon, and research any particular investment idea carefully. You can search for sustainable investments on Fidelity.com using our stock, ETF, and mutual fund screeners, based on environmental, social, and governance (ESG) characteristics (watch the video).
Here is a closer look at what this investment philosophy entails, along with a few opportunities to consider.
What is sustainable investing?
Sustainable investing is referred to by many names. Among them: socially responsible, ESG, ethical, and principles-based investing. While such an approach isn’t new, its definition and objectives have evolved over the years—from avoiding certain investments (so-called “sin stocks,” including tobacco, firearms, alcohol, and casinos) to a more inclusionary approach, based on ESG factors, which include:
Environmental impact
An environmentally friendly investing objective can include companies that produce renewable and sustainable energy (see graphic below), enhance energy efficiency, source raw materials using eco-safe methods, use little or no hazardous chemicals in their production process, limit waste, and prioritize recycling. There are many examples of these types of investments. For example, the largest green-energy ETFs, by net asset value, are the Guggenheim Solar ETF, PowerShares WilderHill Clean Energy Portfolio, and PowerShares Cleantech Portfolio ETF. The largest green-energy mutual funds by net asset value are Pax World Global Environmental Markets, Green Century Balanced, and New Alternatives Portfolio.
Social issues
Positive social investing objectives focus on companies that consider the impact upon all stakeholders, such as seeking gender equality, providing healthy working conditions and lifestyles, addressing wealth inequality, and showing a commitment to charitable endeavors, among other factors. The largest fund by net assets that focuses on gender diversity is the SPDR SSGA Gender Diversity Index ETF.
Governance quality
Strong corporate governance systems entail having policies and principles that address potential conflicts of interest among stakeholders (i.e., managers implementing policies that benefit themselves, rather than shareholders), including an independent board and audit committee that seeks to protect shareholders rather than management.
Read the full version of this article on Fidelity Viewpoints, which includes more information on sustainable investing.
This article was produced by Fidelity and not by the Quartz editorial staff.
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