How to decide whether sustainable investing is right for you

Investors have long had the option of channeling their money toward a purpose beyond just financial performance — even before the temperance movement called on Americans to shun so-called sin stocks such as alcohol, gambling or tobacco.

Sometimes called responsible, ethical or sustainable investing, this approach is now often known by the more politically loaded term “ESG,” shorthand for environmental, social and governance principles.

As ESG investing has grown more popular, Republican lawmakers have ratcheted up pressure on fund managers and shareholders to disinvest. Clean energy (the “E”) has been among their top targets, with President-elect Donald Trump pledging to ramp up fossil-fuel production and scrap the climate provisions of President Joe Biden’s signature Inflation Reduction Act.

While the fate of Trump’s agenda remains to be seen, most financial advisers say options for ESG investing remain plentiful for people looking to align their money with those principles, especially on climate. That’s reflected in the growth in sustainable investing assets in the United States, which amounted in 2021 to $8.4 trillion — more than 12% of total assets — according to the United States Social Investment Forum.

If you’re thinking of trying out ethical investing, here’s what you need to know.

How do ESG funds compare with other funds’ performance?

Opponents of ESG investing frequently argue that the rate of return isn’t as robust as it is with conventional options. In recent years, however, these funds have surged — outperforming conventional-fund returns every year since 2019, except in 2022, the Institute for Energy Economics and Financial Analysis reported. And in 2023, they beat traditional funds across all major asset classes and regions, according to the Morgan Stanley Institute for Sustainable Investing, posting a median return of 12.6%, compared with 8.6% for traditional funds.

One reason these funds do well is that they account for long-term risks in a way that more generalized investment does not, said Bruce Herbert, chief executive of Newground Social Investment.

In the long run, “what’s most profitable is also often most sustainable,” he said, noting that many investment professionals consider it a “best practice” to take ESG factors into account.

How do I find ESG funds that reflect my values?

Michael Kramer, manager and trust steward of Natural Investments, helps his clients prioritize the issues they care about, and weed out the ones that don’t match those values, as he builds their portfolios. Some investors also supplement those choices with a more affirmative “impact-investment” approach, supporting sectors such as green tech, organic food, sustainable forestry or recyclable and biodegradable products.

As his clients make their decisions, Kramer watches out for the buzzwords and overly vague language that indicate “greenwashing,” where a company makes misleading statements about its sustainability practices to attract environmentally or socially conscious customers. For this reason, he and many financial advisers urge would-be investors to read the prospectus of each fund carefully.

You can also check a company’s sustainability reports, known as Form NP-X, which are filed with the Securities and Exchange Commission and provide context about a company’s behavior and history of voting on shareholder proposals, Herbert notes.

In addition, there are free online tools such as As You Sow’s Invest Your Values tool, the multidimensional ESG rating systems maintained by Natural Investments, and those offered by US/SIF.

If you’re confused by the array of ESG-fund offerings and can afford an adviser, a professional can help explain the options and provide additional services, including accessing proprietary databases of company climate data such as Morningstar, Bloomberg and MSCI, which provide insight not available to most consumers. As institutional investors, they also have the clout to ask for key company information through questionnaires and interviews.

If you’re on your own, the universal advice for investing also applies to ESG funds: Make sure to diversify to protect against market bumps. That means prioritizing options such as ESG-oriented mutual funds or exchange-traded funds to manage risk, Herbert says. He also recommends considering a community-focused approach, such as supporting microcredit lending, credit unions or loan funds in under-resourced areas or buying bonds that back hospitals, schools and public transit.

Why is ESG investing controversial?

ESG funds have become a political flash point in recent years, with many Republican lawmakers blasting their criteria as a breach of fiduciary responsibility. Much of the pushback has been in the courts: When the SEC adopted rules in March requiring public companies to disclose climate-related losses, expenditures on climate-related goals, and other provisions to combat greenwashing, the move drew a raft of lawsuits — including one filed by 10 Republican attorneys general and a challenge led by the U.S. Chamber of Commerce. The rules, which were paused by the SEC after the fierce blowback, are expected to be abandoned once Trump takes office.

Another change at the federal level could be a reinstatement of a Labor Department rule, enacted during Trump’s first term and reversed under Biden, that makes it more complicated for employers to add ESG funds to the menu of retirement-plan offerings, including as the default investment for undecided participants.

Meanwhile, some Republican-governed states have passed legislation limiting or outlawing the use of public money, such as pension funds, in ESG investments. And some companies — such as investment giant BlackRock — have moved away from using the label after formerly embracing it. (BlackRock continues to manage more than $800 billion in assets that fall under the category, however.)

While these possible changes loom, the underlying consumer preference for ESG remains strong, according to a recent report from the market intelligence company Diligent. Its survey of 801 board members in companies across the United States and Europe, representing 14 industries, found that two-thirds plan to stay the course on ESG commitments despite the recent backlash, while 17% plan to communicate differently; only 7% said they will dial back.

Meanwhile, Democratic-governed states may follow the example of New York’s pension funds, which just joined a climate-finance group, the Net-Zero Asset Owner Alliance, to underscore their commitment to fighting climate change.

To Kramer, the trend in appetite is clear. “The old way of ‘Just make money, who cares how you make it’ is over,” he said.