ESG Investing: Profits Without Sacrifice?

ESG Investing

In the contemporary world of finance, Environmental, Social, and Governance (ESG) investing stands as a beacon of responsible investing. Its importance is gaining momentum, and its adoption is spreading far and wide. So, let’s get into the intricacies of ESG investing and explore its potential impact it can have on your portfolio as well a putting goodness out into the world.

As a bonus, we will even compare the returns of a popular ESG ETF with a popular retirement ETF favorited by those pursuing financial independence to determine if our lighter conscience comes at a cost. I was surprised to see that we may be able to see similar profits without sacrificing our conscience.

Exploring the Concept of ESG Investing

ESG stands for Environmental, Social, and Governance. In the realm of investing, ESG reflects a strategy that integrates these three key factors into the investment decision-making process.

ESG investing is a unique approach that allows investors to choose investments that are not only financially viable but also contribute positively to society and the environment. ESG investing stands as a testament to the growing realization that monetary returns and sustainable practices can, and indeed should, go hand-in-hand.

What are ESG Funds?

ESG funds are a subset of ESG investing, offering investors an effective vehicle to put their capital into businesses and organizations that align with their values and principles. These are typically Mutual funds or ETFs (Exchange Traded Funds) that prioritize investments in entities demonstrating strong ESG performance.

These funds offer an efficient and straightforward way for investors to delve into ESG investing. By pooling resources from various investors, ESG funds can diversify their portfolio across different ESG-focused entities, thereby distributing the risk and potentially maximizing the impact.

A Deep Dive into the ESG Components

Environmental Factors

This includes how a company’s operations and products affect the natural world. It covers a broad range of concerns such as energy use, pollution, waste management, water conservation, and how they are managing risks related to climate change.

Social Factors

Social criteria assess a company’s relationships with its employees, suppliers, customers, and the communities where it operates. This might involve evaluating the company’s commitment to diversity, inclusion, human rights, consumer protection, and community development.

Governance Factors

Governance refers to a set of rules, practices, and processes by which a company is directed and controlled. It involves balancing the interests of a company’s many stakeholders. Factors considered include corporate structure, executive compensation, employee relations, shareholder rights, transparency, and more.

Is It Good to Invest in ESG Funds?

Investing in ESG funds can be an effective way to achieve financial returns while making a positive societal impact. However, like any other investment, it’s essential to understand the ESG investing pros and cons before committing your capital.


  • Long-term sustainability: ESG-focused companies are more likely to thrive in the long run as they are often more adaptive to changing market dynamics and regulatory landscapes.
  • Risk management: Companies that prioritize ESG issues tend to have more robust risk management practices in place, reducing exposure to regulatory, reputational, and operational risks.
  • Investor appeal: ESG funds often appeal to a growing demographic of socially conscious investors, thereby garnering more market attention and potentially higher capital inflows.


  • Limited industries: Certain industries may be excluded from some ESG fund portfolios due to their high environmental impact.
  • Varying standards: There are no universally agreed-upon standards for what constitutes a strong ESG performer, and definitions can vary widely.
  • Potential for greenwashing: Some organizations may overstate their ESG credentials, making it crucial for investors to thoroughly investigate a fund’s ESG practices.

The ESG investing returns depend on several factors, including the fund’s investment strategy, the particular ESG criteria it focuses on, and broader market conditions.

Implementing an ESG Investing Strategy

An ESG investing strategy involves aligning your investment decisions with your ESG priorities. This requires a clear understanding of your objectives and a comprehensive evaluation of potential investments.

There are several ways to implement an ESG investing strategy:

  • Positive/Best-in-class Screening: Investing in sectors, companies, or projects selected for positive ESG performance relative to industry peers.
  • Norms-based Screening: Screening based on compliance with international norms and standards.
  • Exclusionary/Negative Screening: Excluding sectors, companies, or countries due to their involvement in undesirable activities or industries.

ESG Investing Performance and Impact Investing Jobs

While ESG investing’s primary goal is to achieve a sustainable impact, it has also shown its potential to deliver strong financial performance. A growing body of evidence suggests that companies with robust ESG practices may yield higher profitability and are less risky.

Moreover, the growth of ESG investing has given rise to a multitude of impact investing jobs. These roles, ranging from fund managers to sustainability analysts, focus on combining financial returns with sustainable impact.

ESG Investing Examples and Stocks

ESG investing can be applied to virtually any asset class, including stocks. For example, a company with high energy efficiency, excellent labor practices, and a diverse board would score well on ESG parameters and could be a suitable pick for an ESG investor.

However, ESG investing isn’t limited to individual stocks. ETFs and mutual funds that apply ESG principles provide diversified exposure, spreading the risk across multiple investments.

The major Fund Companies like Vanguard and Fidelity give investors the option to invest in ESG mutual funds. But….

How does ESG Investing Returns Compare to Broader Market Index Fund Investing?

In the process of drafting this article, I was under the impression that ESG mutual funds might not match the performance of broad market index funds. This perception might have stemmed from my inclination towards low-cost, broad-market, passive index fund investing for the bulk of my retirement savings.

However, my assumptions were challenged when I compared ESGV, a Vanguard ETF mirroring the FTSE US All Cap Choice Index, with VTI, another Vanguard ETF that follows the CRSP US Total Market Index. Both ETFs are passively managed with low costs, with ESGV having an expense ratio of 0.09 and VTI standing at 0.03.

Interestingly, over the past decade, as indicated by the data below from Portfolioslab, ESGV has outperformed VTI. Moreover, it also seemed to exhibit less volatility compared to VTI. Historical performance indicates that ESG investors could potentially match or even surpass the returns of broader market investors.

This finding certainly offers some food for thought for my future investment strategies.

Portfolioslab ESGV vs VTI
Portfolioslab ESGV vs VTI

A Note on Due Diligence

Investing in ESG funds requires a level of due diligence. It’s crucial to understand the fund’s specific ESG practices, the factors it prioritizes, and its approach to managing ESG risks. Fund prospectuses, shareholder reports, and third-party ESG ratings can provide valuable insights.

ESG Investing Screener

If you would like to explore these types of investments further, Morningstar’s ESG Screener is a dedicated tool that provides investors with the ability to assess the environmental, social, and governance (ESG) metrics of various investment options. It offers a streamlined approach to find and compare investment opportunities based on their ESG scores. The screener allows you to sift through numerous funds, equities, and ETFs to identify those that align with your ESG investing goals. Whether you’re new to ESG investing or an experienced investor, Morningstar’s ESG Screener is a potent resource for responsible investing.


Environmental, Social, and Governance investing presents an exciting opportunity for investors to align their financial goals with their values. However, it requires a keen understanding of ESG factors, careful evaluation of ESG funds, and an informed investment strategy. As responsible investing becomes mainstream, ESG investing holds the promise of a sustainable financial future.

David Baughier

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