ESG investing is the practice of analysing and considering a company’s environmental, social, and governance (ESG) profile, as well as assessing its financial performance, to inform investors’ allocation of capital. Sustainability investments should be based on unbiased assessments that enable investors to evaluate a company’s performance and practices in relation to good governance, positive social impact, and environmental impacts. By considering ESG factors, asset managers are generally interested in a holistic view of the companies to which they allocate capital.

ESG funds are stock and bond portfolios that consider environmental, social, and governance concerns. This means that the stocks and bonds in the fund have passed some—preferably credible and stringent—evaluations of how businesses operate in relation to ESG standards. Sustainable investment funds enable institutional and individual investors to pursue their financial goals while supporting environmental and social causes. The three most common ESG funds are ESG mutual funds, ESG ETFs (exchange-traded funds), and ESG index funds.

Sustainable investing funds are designed to align with investors’ values and sustainability priorities. The number of thematic-ESG funds has been growing in recent years. Thematic funds are equity mutual funds that invest in stocks linked to an ESG theme. They could be linked to various sustainability issues, including renewable energy, sustainable health, smart mobility, etc.

As investors are increasingly looking for investment solutions that reflect their values and sustainability priorities, these thematic funds try to appeal to different investor personas. Similarly, some investors are sensitive to certain areas of investment they want to avoid – such as arms trade, tobacco, alcohol, and fossil fuels. Hence ESG funds often apply systematic exclusions to certain industries and sectors.

ESG portfolios are tilted towards companies that are greener and more socially responsible than their peers. Hence companies have the incentive to invest in their own sustainability to attract sustainable finance.