Don’t worry if you don’t know what ESG means. Odds are high that this acronym will become part of your vocabulary — and part of your portfolio — in the near future. “Environmental, social and governance” funds focus on sustainable, socially conscious investing. Such investing, “has gained considerable traction and continues to be an important focus not just for institutional investors, but individual investors as well,” says mutual fund researcher Morningstar

The funds factor in a wide array of issues such as carbon emissions, working conditions, diversity efforts and executive pay.  Assets under management in portfolios that use various approaches to sustainable investing have grown to an estimated $23 trillion globally, an increase of more than 600% over the past decade, according to Morningstar.  And this trend is likely to continue. Financial planners say they will increase use of ESG funds with their clients by 20% in 2018, according to a recent Financial Planning Association report.

There are about 275 ESG open-end mutual funds and ETFs available to U.S. investors, says Jon Hale, Morningstar’s Director of Sustainability Research.  Morningstar, gives sustainability ratings, researches fund prospectus as well as evaluates equity funds based on the ESG profiles of the companies in a portfolios. Most ESG-focused funds do well on this measure, Hale says, adding that “it is also possible for a conventional fund to get a good sustainability rating.”  Here’s what you need to know about them.

ESGs aren’t new

ESG funds have been around for decades, and have evolved.  “Many people still see ESG investing as a strategy that excludes certain industries such as alcohol, tobacco or weapons,” says Jonathan Kvasnik, a financial adviser with Cherokee Investments. “In truth, ESG has shifted to an inclusive strategy.”

An ESG fund will include companies that have favorably addressed environmental, social and governance issues. “These factors can have an impact on the company’s bottom line and contribute to its success,” says Kvasnik. According to Kvasnik, a firm decides to deem its fund an ESG “when the fund incorporates a higher or above-average level of high-rated/scored ESG holdings.”

This, he says, is based on research and ratings by firms such as Morningstar. Companies such as Morningstar also decide whether to categorize a fund as an ESG fund based its criteria as well.

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