ESG investing is when a fund considers sustainability (including environmental, social and governance factors) to inform their investment strategy.
ESG investing may be offered by investment funds, including through superannuation. Investors may also choose to invest directly in a company that is making ESG claims.
ESG investing, also known as responsible, sustainable (or sustainability-related), or ethical investing, can help investors to make decisions that match their goals and values.
What ESG means
The way ESG is defined may differ across funds and companies. It can cover a range of factors, such as:
- Environmental – air and water pollution, biodiversity, carbon emissions, clean technology, climate change, deforestation, energy efficiency, nuclear power, sustainable agriculture, waste management, water scarcity
- Social – alcohol and tobacco, animal cruelty and testing, child labour and labour standards, community relations, diversity and inclusion, religious standards, ethical product sourcing, gambling, human rights, Indigenous reconciliation and consultation, military contracting and controversial weapons
- Governance – board diversity, bribery and corruption, business ethics, corporate culture and conduct, unsatisfactory treatment of employees or customers, whistle-blower schemes
Match ESG investing with your goals
Before investing in an ESG fund or a company making ESG claims, consider your investing goals:
- What ESG factors matter most to you?
- How much weight will you give these factors?
- Does the fund. product or company's strategy align with your investment goals or the ESG issues you care about?
Not sure about how to choose investments to fit your goals? See choose your investments.
Investing in an ESG fund
An ESG fund aims to maximise financial returns for investors, while pursuing its ESG investment strategy. A fund’s ESG investment strategy may include one or more of the following investment approaches:
Screening investments
A fund may screen investments by:
- Negative screening: excludes investments that don’t meet certain ESG criteria. For example, one fund may reject all investments with exposure to gambling (‘absolute’ screen). Another may accept some exposure to gambling but reject companies which earn more than 20% of their total revenue from gambling (‘revenue’ threshold screen).
- Positive screening: seeks investments that satisfy certain ESG criteria. For example, a fund may give each potential investment a score. Then consider the score, along with other relevant ESG criteria, when choosing whether to include the investment.
ESG integration
A fund may consider ESG risks and opportunities, before including an investment. For example, a fund may consider the risks of climate change and the opportunities of transitioning to renewable energy across its investment strategy.
ESG impact investment
A fund may invest to achieve an ESG goal or outcome, such as affordable housing or clean energy sources. Or target themes, such as low carbon emissions or sustainable agriculture.
Corporate engagement (or stewardship)
A fund may select investments to influence a company’s conduct on ESG-related matters. For example, as a shareholder of the company, it may seek to bring about change by voting at meetings.
Greenwashing is when a fund says its product is more sustainable, environmentally friendly or ethical than it actually is. For example, a fund promotes itself as avoiding investment in tobacco products. But doesn’t publicise that it may invest in companies which earn up to 20% of their revenue from tobacco products.
Check that a fund is investing in the same way as described in their strategy. If you don't understand or need more information, ask the fund.
Before you invest in an ESG fund
Understand the fund’s ESG investment strategy, product labels, and fees. If there’s anything you’re not sure about, ask the fund.
Investment product labels
Look at how they describe the investment product and whether it matches your understanding.
Investment strategy
ESG strategies will differ across the market. Check the approach each fund takes in their investment strategy. For example:
Screening investments
- If they use negative screening, check for any stated exceptions.
- If it uses revenue thresholds, is ‘revenue’ defined and are the threshold levels clear?
- Are companies with indirect involvement allowed under the screen?
- If they use positive screening, does it clearly explain when an investment is included?
- If the fund discloses underlying investments, does this match how they say it screens? If not, this might be an indication of greenwashing.
ESG impact investment
- Is the impact investing strategy defined? Is it clear which sectors or themes are their focus?
- Do they explain their methodology for assessing impact?
Corporate engagement
- Do they report on the actual steps they have taken to influence change? Such as the number of engagements they have undertaken or how they have voted at shareholder meetings?
Management and fees
Some funds may charge you higher fees for an ESG investment, than for a non-ESG investment.
Check how the fund manages the investment and what it will cost:
- Is it actively managed? If so, the fund will have a process for assessing the relative merits of potential investments. This may cost you more.
- Or is it passively managed? For example, the product simply matches the holdings of a particular index or it invests wholly in another fund. This may cost you less.
To find out more about funds and fees, see choosing a managed fund.
Before you invest in a company making ESG claims
Before you invest in a company, make sure you understand any ESG claims being made and how their business strategy aligns with those claims.
Check the company’s reports, market announcements or on the company’s website.
Ask yourself these questions before you invest in a company making ESG claims.
- Do you understand any ESG or sustainability-related terms the company is using? For example, is it clear what a company means when they use the term ‘net zero’ or ‘zero emissions’.
- If the company has set an ESG or sustainability-related goal, do you have enough information to understand:
- how the company intends to achieve that goal?
- what assumptions the company has made when setting that goal?
- how the company will measure its progress in meeting that goal?
- any limitations or risks that may impact the company’s ability to meet that goal?
Cara suspects greenwashing
Cara wants to invest to support a healthier world.
She sees an ad for an investment called Zero Tobacco Fund, which says: “The Zero Tobacco Fund contributes towards achieving a healthier world for our investors and the global population. The fund avoids significant investments in tobacco companies.”
In the fine print on the fund’s website, it also says: “From time to time, the fund could invest in companies involved in the manufacture, sale and distribution of tobacco products that earn less than 50% of their total revenue from tobacco activities."
She asks the fund for more information to support these claims. She finds that the fund:
- doesn’t have a clear investment strategy to achieve its social impact goals
- doesn’t define what ‘a healthier world’, ‘significant investments’ or ‘total revenue’ means
- the use of ‘from time to time’, is vague about when it may invest in a tobacco company
Cara wonders if the fund is greenwashing by overstating the social impact of the investment. She decides this isn’t the right investment for her.