How Responsible Investing Works
Responsible investing can generally be thought of as using your investments to boost companies that make a positive impact on society and do not have negative business practices. In practice, you can use it to align your money with your values.
Plan For a Better Future
Responsible investing can generally be thought of as using your investments to boost companies that make a positive impact on society and do not have negative business practices. In practice, you can use it to align your money with your values.
The terms responsible investing and socially responsible investing are comparable to terms such as sustainable investing, values investing, and ESG investing, or investing that takes environment, social, and corporate governance (ESG) factors into account.
Responsible investing can generally be thought of as using your investments to boost companies that make a positive impact on society and do not have negative business practices.
ESG investing can be seen as more numbers oriented, using metrics such as risk analysis based on ESG factors, along with traditional measures such as financial performance, to inform investment decisions.
Understanding ESG Investing
Investing that considers environment, social, and corporate governance (ESG) factors can span a wide range of issues. Broadly speaking:
- Environmental factors look at how well a company manages its environmental impact and addresses environmental problems in areas such as air, water, climate, pollution, agriculture, water, and animal welfare.
- Social factors look at how well a company treats all its stakeholders, including its diversity and equity practices, workplace conditions, community relations, and human rights.
- Governance factors look at how corporate power is checked and shared through such venues as political contributions, executive compensation, board diversity, board independence, transparency and disclosure.
You can see examples of ESG criteria in this ESG wheel from the US Sustainable Investment Forum. This is not an exhaustive list, and there may be other issues of importance to you.
Source: US Sustainable Investment Forum
While a company may excel in some areas, it may lag in others. Few companies do well in all areas. Knowing which ESG issues are most important to you will help guide your investment decisions.
This questionnaire from US SIF can help you identify your investment priorities.
How is ESG Investing Practiced?
Although socially responsible investing began as a way to exclude certain companies or industries from your investment portfolio, it has grown to also include companies and industries with strong policies and practices on sustainability and equity. This is known as screening.
- You can screen out companies with poor ESG track records or whose business model does not align with your values. Examples include fossil fuel companies, weapons manufacturers, tobacco and alcohol, private prisons, or industrial agriculture.
- You can also screen in companies whose products, policies, or practices help build a more sustainable and equitable world. This can be done by using ESG factors to benchmark corporations and identify best in class, or by using ESG to evaluate risk and return.
Screening out and screening in are sometimes referred to as divest and invest -- moving your money away from doing harm and toward doing good.
Additional resources
- For more on sustainable investing, see US SIF’s Sustainable Investing Basics.
- For an in-depth view, check out US SIF's Online Course for Individual Investors.
Is responsible investing as good as regular investing? The answer is Yes! Learn more about responsible investing’s performance and popularity.
Green America is not an investment adviser, nor do we provide financial planning, legal, or tax advice. Nothing in our communications or materials shall constitute or be construed as an offering of financial instruments or as investment advice or investment recommendations.
