What is an ESG Fund? Your 2022 Guide

ESG investment
By the close of 2018, the total ESG investments stood at USD30.7 trillion.
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Published on
June 15, 2023

The amount of money flowing into socially responsible investing is growing at a very rapid rate. By the close of 2018, the total ESG investments stood at USD30.7 trillion. This figure is expected to shoot up further and reach USD50 trillion in the next 20 years. ESG investing funds are strong vehicles that help to target bonds and equities based on how the issuing firms work towards promoting sustainability. So, how well do you know ESG funds investing? 

Keep reading as we dig deeper to answer pertinent questions, including, “what is an ESG fund?” and “what are the best tips for selecting the right funds?” 

What is an ESG Fund

What is an ESG Fund?

ESG funds are bonds and equity portfolios that prioritize ESG factors in the investment methodologies. They pick on the securities that come with high sustainability scores while excluding those with rampant ESG issues, such as poor records on pollution and labor relations. 

Investors use ESG sustainability reports from the featured companies as part of doing due diligence on the companies of interest.

High ESG scores mean that the companies are not just focused on optimizing profits but also committed to helping the planet become a better place for all. 

What You Need to Know about ESG Sustainability

ESG, shortening for environmental, social and governance, is a set of criteria that help gauge an organization’s commitment to helping the globe address challenges facing it. They ensure that the organizations are responsible in their operations to reduce negative impacts on the environment, use ethical leadership, and uphold fairness/ integrity in governance. Here is a closer look at the three pillars of ESG and their application in investment funds: 

  • Environmental: This is the first ESG pillar and it targets to help investors identify investments that aim at improving the planet. Some of the core areas of focus are minimizing carbon footprint and cutting down wastes. 
  • Social: This pillar assesses how companies manage relationships with staff, partners, and communities. For example, are the employees in the targeted organizations remunerated well? Other social considerations might include supporting courses for social justice and improving the well-being of the community. 
  • Governance: Organizations that put focus on ESG value always prioritize the shareholders. Therefore, they always use transparent processes and offer updates that shareholders can use to make important decisions. They are also governed properly and comply with laws of the jurisdictions hosting them. 

The Best Investment Approaches 

The next thing after answering the question “what is an ESG fund?” is to identify the best investment approaches. Because ESG and ETF funds for investing can take different forms, from equities to bonds, there is no one-fits-all approach. So, here are some of the best approaches to consider: 

  • Restriction screening: ESG funds often opt out of organizations that are known to go against sustainability goals. So, you might want to check the fund with such screening for assurance against involvement in things like tobacco, firearms, and child labour.
  • ESG integration: This is a hybrid approach employed for financial analysis to assess bonds and equities. This approach encourages investors to strike a 50/50 balance in the focus on financial and sustainability outlook. The good thing about ESG is that the concept has become an important part of organization management, with most companies releasing regular ESG audits for review by investors. 
  • Thematic engagement:  This refers to an organization’s involvement in sectors that are dedicated to matters of ESG issues. 
  • Shareholder engagement: Involving shareholders directly can help to advance ESG investing. More companies are now roping them in to help craft ESG initiatives as a way of earning their trust and boosting revenue. 

Tips for Selecting the Best ESG Funds 

How do you identify the right ESG funds to invest in? It is important to have a good strategy for it, and the following four tips can help you narrow down to the best funds for better financial, environmental and social results. 

  • Set Out Clear Goals 

The first step is determining what you plan to achieve through ESG investing. Then, formalize them as the targeted investing goals. This can be very useful in defining the ESG investing strategy. 

  • Develop a Clear Plan to Achieve the Objectives 

Now, establish the amount of money that you want to use and the ESG factors of interest. Then, craft a plan to identify the environmental, social and governance (ESG) funds with assets that can align the capital at hand and companies that share your values. Therefore, it might be crucial to rethink what your priorities and targeted impact are. For example, what do you target with the etf funds? 

Should you focus on cutting down greenhouse gasses (GHG) as a method of addressing global warming or promoting biodiversity restoration? 

  • Diversify Your Investment

As an investor, one of the rules of thumb is that you should never put all eggs in one basket. Therefore, you should look for the ESG mutual funds that spread funds as a method of risk management. If the fund has been in operation for some time, consider reviewing its recent performance.

The insights can help to provide a clear idea of possible future sustainable performance of the selected companies in the months and years to come. 
  • Analyze Different Resources 

At this point, it is time to dive deeper into the selected ESG fund and the companies that support it. Here, you need to do a thorough analysis and identify the risks/ rewards of the fund. To avoid being biased, consider using multiple resources that provide info about the companies involved. Here are some of the main questions that you need to ask:

  1. What are the fees that should be paid for the fund? How do they compare to other funds? 
  2. What specific criterion is employed by the fund when defining the portfolio holding? 
  3. What areas do you desire the funds to be invested in? 
  4. How does the fund discuss the ESG practices?

Talk to an Expert for Help 

Even with the tips we have listed above, many are those who find identifying the right ESG fund challenging. In such a situation, consider working with an expert for assistance to identify the right funds. Professionals can help you to understand how ESG funds work and the best funds to target. At Diginex.com, we have ESG experts waiting to hold your hand and ensure the preset investment objectives are achieved. 

Talk to us today for all the assistance you want concerning ESG funds. 

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