Environmental, Social, and Governance (ESG) Investing
What is environmental, social, and corporate governance (ESG) investing?
ESG investing is an approach that considers factors beyond risk and return, like climate change, labor management, corporate governance, and many others.
There are many ways to apply ESG investing into your portfolio including individual stocks, exchange-traded funds (ETFs), mutual funds and separately managed accounts.
Performance of ESG funds has historically been similar to performance of non-ESG funds. ESG is often used interchangeably with Socially Responsible Investing (SRI), values-based investing, impact investing, and sustainable investing.
For more information on various ESG strategies, review our common questions.
ESG Performance
ESG is a widely accepted investment approach that may allow investors to align their investments with their values without sacrificing performance.
How Schwab helps
- A wide range of ESG options
Choose from over 500 mutual funds, over 200 ETFs, and a wide range of separately managed accounts as of 1/31/2024. - ESG Stock Ratings
Log in to your account to view 3rd party ESG stock ratings when researching investments for your portfolio. - Easy to use tools
Easily find and compare ESG funds using our proprietary screening and comparison tools - Expert guidance
Get educational resources from Schwab experts to help you build your own portfolio.
Consider investing your conscience with the Schwab Ariel ESG ETF.
Consider investing your conscience with the Schwab Ariel ESG ETF.
The Schwab Ariel ESG ETF invests primarily in exchange-traded equity securities of U.S. companies that have been evaluated based on specific environmental, social, and governance (ESG) criteria. The Schwab Ariel ESG ETF may serve as a building block for those seeking investments that combine the potential benefits of an ESG focused investment strategy with long-term investing.
The Schwab Ariel ESG ETF is different from traditional ETFs.
Traditional ETFs tell the public what assets they hold each day. This fund will not. This may create additional risks for your investment. For example:
- You may have to pay more money to trade the fund's shares. This fund will provide less information to traders, who tend to charge more for trades when they have less information.
- The price you pay to buy fund shares on an exchange may not match the value of the fund's portfolio. The same is true when you sell shares. These price differences may be greater for this fund compared to other ETFs because it provides less information to traders.
- These additional risks may be even greater in bad or uncertain market conditions.
- The ETF will publish on its website each day a "Proxy Portfolio" designed to help trading in shares of the ETF. While the Proxy Portfolio includes some of the ETF's holdings, it is not the ETF's actual portfolio.
The differences between this fund and other ETFs may also have advantages. By keeping certain information about the fund secret, this fund may face less risk that other traders can predict or copy its investment strategy. This may improve the fund's performance. If other traders are able to copy or predict the fund's investment strategy, however, this may hurt the fund's performance.
For additional information regarding the unique attributes and risks of the fund, see Proxy Portfolio Risk, Premium/Discount Risk, Trading Halt Risk, Authorized Participant Concentration Risk, Tracking Error Risk, and Shares of the Fund May Trade at Prices Other Than NAV in the Principal Risks and Proxy Portfolio and Proxy Overlap sections of the prospectus and/or the Statement of Additional Information.
Learn more about ESG options at Schwab
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Common questions
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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.
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From a risk and return perspective, ESG Investing is generally neutral for investors, neither helping nor harming returns significantly (though certainly some ESG funds will outperform and others will underperform their non-ESG counterparts in any given time period). However, an ESG approach that narrowly focuses on a subset of industries (by excluding others) may have higher volatility than a more broadly diversified approach.
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Schwab conducted tests based on data from Morningstar and found that as of 12/31/2022, ESG approaches, when compared to non-ESG approaches, had on average:
- Greater exposure to small companies
Less exposure to companies with high competitive advantages
Less exposure to volatile companies
Note that this is a point-in-time measure, and not necessarily reflective of how these funds may have been positioned in past years. In addition, this is based on Morningstar's specific factor exposure model, which may differ from other industry models such as those from Barra or Axioma.
- Greater exposure to small companies
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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
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The top five reasons why companies are excluded from ESG portfolios, based on data from US|SIF and data from Morningstar, are as follows.
US|SIF:
- Climate change / carbon
- Military/weapons
- Tobacco
- Fossil fuel divestment
- Anti-corruption
Morningstar:
- Tobacco
- Controversial weapons
- Small arms
- Gambling
- Alcohol
Source: US|SIF Foundation, Report on US Sustainable, Responsible, and Impact Investment Trends 2022; Morningstar Direct data on mutual funds and ETFs by assets as of 8/31/2023.
US|SIF and Morningstar have very different categorization approaches for exclusionary factors, which leads to the different lists seen above.
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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.
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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.
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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.