In order to promote more clarity in a fund’s ESG efforts and help ethical investors become more informed about their investments, the SEC has categorized ESG funds into three categories. Previously, investors could be easily misled into thinking the fund or strategy they were putting their money into had the same values as them when the fund’s ESG efforts were surface-level at best.
The three categories below should help investors easily deduce a fund’s ethical strategy by standardizing the measurement in which a fund focuses on ESG efforts.
In this article, we will examine the ESG integration definition, the ESG Focus, and the ESG Impact.
The 3 Categories Of ESG Strategies
ESG Integration
The first and least committed to ESG funds is ESG integration. The ESG integration definition can be tricky for new investors to understand. For a fund to be categorized into the ESG integration box, it must have at least one ESG variable that it factors into its investment strategy. However, that variable does not have to outweigh other non-ESG variables for the stock to be added to the investment fund. Meaning a stock or security that scores poorly on ESG factors may still be added to the fund.
ESG Focused
Unlike ESG integration, ESG Focused funds put significant weight into the ESG factors they value. They will exclude or include stocks that don’t meet their criteria, even at the expense of higher potential investment returns. In contrast, integration funds likely value returns at the same or higher importance to ESG factors.
ESG Impact
The final categorization is ESG impact funds, which can be considered an extension of the ESF-focused category. Similarly to ESG focussed, the impact fund must weigh one or more ESG factories as its primary investment strategy. But in addition, they must offer a clear goal in how their fund will create a positive ESG impact. This ESG impact goal must be clear and measurable.
Choosing an Ethical Fund To Invest In
Just because an ETF claims to be ethical and promotes its ESG strategy in its stock selection process doesn’t mean they are an ethical investment. As we can see with the SEC ESG integration definition, not all ESG strategies actually value their ESG factors over profits and returns and will still keep securities in the fund that can be directly opposed to your ethical values. That is why it is important to do your research when selecting ethical funds. With the new ESG categories proposed by the SEC, it should be easier than ever to choose an ethical fund to invest in.
Becoming An Ethical Investors Requires Research
The fact that the SEC had to create these categories proves how little transparency there is in ethical investing, and how many funds and businesses will tout their sustainability and ESG consideration while doing the bare minimum to be considered ethical. If you want to become an ethical investor, you will need to do the research when selecting the funds and stocks to invest in.
