Environmental, Social, and Governance (ESG) Investing

Common questions

How has ESG Investing evolved?

In the United States, the roots of ESG investing can be traced to the 18th century when religious groups began forbidding investments in companies with negative societal impacts, according to Investopedia. At the time, this meant avoiding investments in the slave trade, alcohol, gambling, and tobacco. However, in the 1970s and '80s, activists adopted the same practice to shun companies profiting from the Vietnam War and to protest South Africa's Apartheid. Today, the practice of removing a single industry or group of industries from a portfolio is known as "exclusionary screening".

However, ESG has come to mean more than simply removing certain types of businesses from a portfolio based on political or religious values. Today, Schwab's opinion is that ESG investing assesses portfolio companies' environmental, social, and governance risks and opportunities, and determines how well each company is addressing risks relevant to its business.
 

Are there different ESG strategies?

Yes, the approaches to ESG vary widely. Morningstar groups these approaches into the following groups. Investments may utilize one or more of these approaches in its process.

• Applying Exclusions—Investors who apply exclusions remove issuers from their portfolios based on certain products or services, an industry, or corporate behaviors, like major controversies.
• Limit ESG Risk—Investors who limit ESG risk use ratings to understand a company's exposure to certain material ESG issues.
• Seek ESG Opportunities—Investors who use ESG information to seek opportunities apply data to identify companies that are sustainability leaders.
• Practice Active Ownership—Investors who practice active ownership engage with companies to influence sustainability-related policy.
• Target Themes—Investors who target sustainability themes identify investments that stand to benefit from secular trends toward greater sustainability in the way we live and work. 
• Assess Impact—Investors who use security selection to make an impact on sustainability goals integrate impact assessments into portfolio construction.

Source: Morningstar ESG Investing Trends 2023

What is an ESG rating for stocks and how can investors use them?

An ESG rating measures a company's exposure to long-term environmental, social, and governance risks, but they are often not highlighted during traditional financial reviews. Investors can use ESG ratings to supplement financial analyses to gain a broader view of a company's long-term potential.

How can investors construct an ESG portfolio?

Investors have several options when it comes to constructing ESG portfolios:

• Choosing a collection of ESG mutual funds, ETFs, or separately managed accounts (SMAs) that align with the investor's aims
• Buying individual stocks and bonds based on the investor’s own research into those securities that best represent the investor's ESG goals
• Working with a financial advisor or consultant to construct a custom portfolio based on the investor's ESG goals, or who can recommend funds or SMAs aligned with those goals.

There’s no one "right" approach to ESG investing. Talk to your Schwab representative or your Financial Consultant if you want to learn more about what approach fits your needs.

What is Schwab's commitment to ESG?

Schwab is committed to ESG through sustainable real estate practices, responsible workflows, and investment stewardship. Schwab discloses key corporate sustainability metrics around carbon emissions, energy and water use, and volume of environmentally favorable purchases.