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Yahoo U: What is ESG investing?

2 min read

There’s a green investing trend on Wall Street. ESG investing, which stands for environmental, social and governance, is already a more than $30 trillion market and it is only expected to keep growing.

Environmental covers corporate initiatives on issues like climate change, carbon emissions, and pollution.

Social covers the company's treatment of key stakeholders, ranging from employees to consumers.

Governance covers managerial aspects like board diversity, executive pay, and accounting.

Investors have zoned in on companies that prioritize some or all of the issues above in their business models and operating standards. In addition to investing in individual stocks, investors have a number of other avenues to make ESG plays.

financial money saving concept. business hand put green plant growing coin stack.
Source: Getty Images

Investors can buy corporate bonds issued by companies for specific projects. A “green bond,” for example, may cover a company's specific efforts to reduce their use of plastics and packaging. A “blue bond” can refer to company-issued debt to finance ocean-related initiatives.

Mutual funds and ETFs (exchange-traded funds) offer popular ways of buying baskets of ESG-focused companies.

ESG investing at large has exploded in popularity; the single month of October last year saw record inflows of over $15 billion. ETFs made up a large chunk of that volume.

The Institute of International Finance noted that ESG investing saw a record inflow of over $15 billion in October. At the time, net flows into ESG-dedicated ETFs topped $40 billion year-to-date. Source: Bloomberg, IIF
The Institute of International Finance noted that ESG investing saw a record inflow of over $15 billion in October. At the time, net flows into ESG-dedicated ETFs topped $40 billion year-to-date. Source: Bloomberg, IIF

But the world of ESG ETFs is no monolith. With ESG covering such a wide range of socially responsible causes, there are ESG-focused ETFs covering everything from female empowerment to veganism.

As ESG investing continues to grow, regulators are ramping up scrutiny. The United Nations has already created a Principles for Responsible Investment (PRI) establishing an international standard for defining ESG investments. Those signing onto this initiative publicly commit themselves to upholding strong ESG initiatives.

In December of last year, the Securities and Exchange Commission said it would be investigating criteria by which investment funds actually truly abide by the UN PRI, worrying that not all ESG-labeled products may not be truly supporting sustainable companies.

Brian Cheung is a reporter at Yahoo Finance. Valentina Caval is a producer.

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