Consider a fund’s objectives and strategies

If you’re thinking of investing in an ESG-related fund, consider its objectives and strategies. ESG-focused mutual funds and ETFs may have a range of objectives, in addition to financial performance.

Keep in mind, one single fund may not be able to address all the ESG issues that are important to you. You might include ESG mutual funds or exchange-traded funds (ETFs) in your portfolioPortfolio All the different investments that an individual or organization holds. May include stocks, bonds and…+ read full definition because you see the value of considering ESG factors in your investing decisions. Or you may include ESG funds because you want your investments to match your values. Or you may want to do both. 

Some funds are focused on a specific area of ESG, rather than all ESG issues. For example, a fund might focus on governance, such as promoting board diversity, while not having any focus on environmental problems. Some funds have a broader ESG focus that covers more than one ESG focus. For example, a fund may be focused on both governance and the reduction of carbon emissions. 

ESG funds use different strategies to achieve their ESG objectives. A fund may also use more than one strategy. 

Keep in mind, many ESG funds include terms like sustainable, socially responsible, ethical or green in their name. However, there’s no standard definition of these terms. That means the fund’s name alone may not give you enough information to help you understand the focus of the fund.

What are common ESG fund strategies?

A firm may use more than one ESG strategy. Common ESG fund strategies include:

• Negative screening – The fund excludes certain securities or companies from its portfolio according to their ESG-related standards. For example, some funds exclude companies involved in the fossil fuel industry. 
• Positive or best-in-class screening  – The fund invests in companies that perform well or better than their peers based on ESG-related performance metrics. 
• ESG integration – The fund considers ESG-related factors that are material to the investment’s risk and return, alongside traditional financial factors, when making investment decisions. 
• Thematic investing – The fund invests in assets to access certain ESG-related trends, such as those linked to climate change. 
• Impact investing – The fund aims to generate positive, measurable social or environmental impact alongside financial returns, with the goal of contributing to or catalyzing environmental or social improvements. 
• Stewardship or active ownership – The fund uses its rights and position as a shareholderShareholder A person or organization that owns shares in a corporation. May also be called a…+ read full definition of companies that it invests in, including proxy voting, to influence the ESG-related activity of those companies. Some fund managers may engage with the management of these companies through meetings and written dialogue to influence their ESG-related practices. 

Why does fund strategy matter?

How a fund selects its investments impacts the overall portfolio, risk levels and its ability to achieve its ESG objectives. 

The investments in a fund’s portfolio may vary based on the ESG strategies the fund uses to achieve its objectives, even for funds that have the same objectives. For example, a fund aiming to promote environmental sustainability may choose a best-in-class strategy to identify and investInvest To use money for the purpose of making more money by making an investment. Often…+ read full definition in leading environmental companies. Another fund, with the same objective, may invest in companies with less favourable environmental records and use a stewardship strategy to improve the companies’ environmental practices. 

Before you buy or sell an investment, assess whether ESG factors are already considered in your portfolio and if so, what those factors are. 

You may not think of yourself as an ESG investor. But it’s a good idea to be aware of ESG factors and strategies. A fund may be considering ESG factors or using an ESG strategy even though it isn’t marketed as an ESG-related fund. 

How do you assess risk and suitability?

The risk disclosure in a fund’s prospectusProspectus A legal document that sets out the full, true and plain facts you need to…+ read full definition outlines risks associated with investing in it. This may include risks arising from the fund’s ESG focus and its use of ESG strategies. This information can help you make an informed decision about risks. 

A fund’s suitability statement, which is included in its fund factsFund Facts A user-friendly guide that provides key information about a mutual fund including fees and performance.…+ read full definition or ETF facts, can help you understand how an ESG fund aligns with investment goals. The suitability statement outlines the type of investor who may consider the fund to be an appropriate investment. 

ESG investing can sometimes be considered as a potential risk management strategy. ESG risks can affect a company’s long-termTerm The period of time that a contract covers. Also, the period of time that an…+ read full definition value for some investors:

• Strong corporate governance, with clear accountability and long-term goals, is better for shareholder’s interests. Weak governance can lead to a lack appropriate risk oversight. Knowing a company has strong governance, with detailed long-term planning, can increase your confidence when considering investing in it.
• Social risks include a range of potential issues such as product safety and how workers are treated and paid. Companies that take care of their human capitalHuman capital Human capital is someone’s ability to generate income from work.+ read full definition can attract and retain talent better. This can lead to higher productivity which contributes to a healthier bottom line and a better return on your investment.
• Environmental risks can impact insurance costs as warmer oceans increase the intensity of storms and the chances of property damage. Increasing climate change awareness has led more companies to move away from fossil fuels to manage risk exposure. There are mutual funds or exchange-traded funds (ETFs) investors can explore that screen out carbon intensive companies from their portfolios.

What steps can you take if you are interested in ESG investing?

If you are thinking about ESG investing, you may want to consider these steps:

1. Identify your investment goals and values — then assess which ESG funds match. When looking for investments that reflect your own financial priorities and values, consider what’s most important to you — for example, low carbon footprint, ethical labour practices, or equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you…+ read full definition, diversity and inclusion practices.
2. Search for investment objectives and strategies that align with your goals. When considering investing in a fund that identifies itself as focused on ESG, read the fund’s prospectus and Fund Facts or ETF Facts. In it, you will find information about the fund’s ESG-related investment objectives and strategies, such as whether the fund intends to cover all aspects of ESG or is focused on a single ESG aspect. For example, the fund may focus only on one ESG target, such as how much of it is invested in industries that rely on fossil fuels.
3. Know your risk tolerance and time horizonTime horizon The length of time that you plan to hold an investment before you sell it.…+ read full definition. Research shows investors may be willing to accept more risk when choosing ESG-focused investments. It’s true that every type of investment comes with risk, and ESG investing is no different. Before you invest, reflect on your risk tolerance level and your time horizon.
4. Assess what ESG factors are already considered and which ESG strategies are already used in your portfolio. And consider how ESG investments might affect your portfolio’s diversification.
5. Watch for Greenwashing — a term that refers to the misleading (either intentionally or unintentionally) labelling of products or investments. This can happen with investing, as well as any industry that markets its products as ESG-friendly or sustainable. Despite the name, greenwashing is not just used for misrepresenting environmental impacts and risks. Greenwashing also applies to funds that mislead investors about social and governance ESG targets.
6. Talk to your financial advisor about next steps if your current investments don’t meet your ESG objectives.  

Understanding the types of ESG funds is important, whether you are a do-it-yourself investor, use a robo-advisorRobo-advisor A business that offers professional money management services to investors over the internet. See also,…+ read full definition or work with a financial advisor. Knowing a fund’s ESG focus and ESG strategies will help you make more informed decisions.