Given the growing interest in sustainability and responsible investing, you may wonder how ESG investing differs from a sustainable portfolio. Both strategies are designed to capture opportunities that other investors may miss, but they have different objectives and risks. Both sub-sectors are growing rapidly, but they aren’t always considered interchangeable.
Fortunately, there’s more that unites these two approaches than divides them. Both sectors share the same goal; invest in companies with positive environmental or social impacts while simultaneously avoiding companies that are harmful to people or the planet. Finding an investment strategy that fits your risk tolerance and financial goals is key.
Keep reading for an explanation of both ESG and sustainable investing and their similarities and key differences you should know about before choosing one over the other.
What Is An ESG Investment Portfolio?
An ESG investment portfolio is an investment portfolio that incorporates environmental, social, and governance criteria when selecting investments. This type of portfolio can also be referred to as a sustainable or socially responsible investment (SRI) portfolio.
A typical ESG investment portfolio might include oil and gas stocks that are more environmentally friendly in terms of their extraction methods and carbon emissions, for instance.
What Is A Sustainable Portfolio?
Sustainable portfolios promote a sustainable world by investing in companies that align with your values and goals for the future rather than just making money. Some people might think that ESG investments and sustainable portfolios are the same, but there is a difference between these two terms.
While ESG investments consider environmental, social, and corporate governance factors when making decisions about investments, sustainable portfolios take it a step further by considering environmental impacts on natural resources and human rights considerations.
The Difference Between an ESG Investment Portfolio and a Sustainable Portfolio
A sustainable portfolio is a portfolio that manages risk and maximizes return by investing in more sustainable companies for the environment, society, and economy. These portfolios may include ESG investments and other assets, such as clean technologies or green bonds.
An ESG investment portfolio is a subset of sustainable portfolios, which invests in companies screened to exclude those with environmental, social, or governance risks. For example, an ESG portfolio might exclude companies that manufacture cigarettes or alcohol because these products cause health problems. But it could still invest in a company like Tesla Motors, which has manufacturing processes that are less polluting than competitors’.
Thus, when someone talks about sustainable investing, they usually refer to an investment strategy (including ESG and other types of investments). In contrast, an ESG investment is made based on certain factors like corporate responsibility.
The Bottom Line: Which One Should You Choose?
The truth is that ESG and sustainable investing are very different terms with different definitions in the financial world.
An ESG investment portfolio usually consists of investments like stocks, bonds, or exchange-traded funds (ETFs). These portfolios will include companies committed to protecting the environment and reducing their social and economic impact.
On the other hand, a sustainable portfolio is often more specific in which stocks are selected and may consist of companies involved in renewable energy sources such as solar power.
Understanding the difference is important before deciding how to invest your money because each investment strategy has risks and benefits.