Learn how to invest in companies with social and environmental awareness

Climate changes. Inequality. Uninterrupted work. There is a lot to consider in today’s world and you may only want to invest in companies that aim to do business in an environmentally sustainable, socially fair and ethical way.

Or maybe you just want to invest in companies that are taking steps to protect bottom lines from the very real business risks caused by climate change or social inequalities.

Either way, you’re probably not looking forward to losing money. So you would like to make investments that provide a competitive return over time.

This is a balance that so-called “ESG mutual funds” are trying to strike.

The acronym ESG stands for environmental, social and governance issues – all of which are aimed at public companies and their stakeholderswhich include investors, customers, employees and the communities where a company operates.

Thanks to growing demand, there are many more ESG funds today than there were a decade ago. A recent survey by JUST Capital and partner organizations found that “Americans overwhelmingly support public disclosure about the human capital and environmental impact metrics of America’s largest companies and endorse federal action to demand standardized disclosure.”

Here’s what you need to know before investing:

What constitutes an ESG fund?

Rather than sorting individual companies’ commitments to ESG targets, most investors will outsource this task to an ESG mutual fund.

But ESG funds can differ in ways big and small. And not all of them will align with your biggest environmental, social or governance concerns.

“ESG means a lot of different things to a lot of different people,” said Alyssa Stankiewicz, sustainability analyst at Morningstar Research Services LLC.

So before investing in an ESG fund, at least read the main investment strategy page to see what your investment priorities are, recommends Stankiewicz.

Also know that there is no single set of ESG metrics against which each fund manager assesses a company – or which companies use to measure themselves when making ESG pledges. Furthermore, managers will not necessarily give equal weight to all three ESG components when deciding what to include in their portfolios.

Environmental concerns are likely to carry more weight than social concerns. There are more widely accepted metrics and better availability of data on environmental rather than social concerns, Stankiewicz said. “It has to do with different markets, cultures and regulatory environments.”

She further noted that of all the potential societal issues, board diversity is probably the most widely accepted metric, but even so, what defines diversity and goals can vary by market.

On March 21, the Securities and Exchange Commission is expected to propose rules that standardize climate change disclosures for US companies and establish responsibilities for those that fail to deliver on their climate change promises.

“We expect additional ESG proposals in the coming years that will address social justice and governance, as well as asset managers making ESG claims,” said Jaret Seiberg, managing director of the Cowen Washington Research Group, in a note.

“The idea is that standardized disclosure would benefit investors by allowing them to compare performance across public companies.”

Performance can be competitive

Just because a fund’s portfolio considers environmental, social and governance concerns doesn’t mean investors have to sacrifice profit.

“Most ESG funds are looking at data from the perspective of mitigating the impact of environmental and social risk on a company’s bottom line,” said Stankiewicz. In fact, many ESG funds have shown they can deliver competitive returns, with just over 50% ending up in the top half of their peer groups last year, according to Morningstar.

Ranking ESG funds from best to worst depends on what your most important metrics are. But being a top ESG fund by Morningstar’s standard means that ESG concerns play a central role in fund strategy and fund manager decisions.

In other words, ESG is not just a marketing slogan that you pay lip service to. And that means the prospectus is explicit about what the fund’s ESG objectives are.

Second, Morningstar also considers a fund’s performance and potential to outperform in its categories – such as large cap mix or taxable bonds, etc. The company’s most recent list identifies 17 funds that stand out for their levels of ESG commitment.

Of those, 12 delivered returns in the top half of their peer group last year. And four of them stood out for their ESG commitment at the strategy and management levels: Parnassus Core Equity (PRBLX), Calvert Equity (CSIEX), Pax Global Opportunities (POGOX) and TIAA-CREF Core Impact Bond (TSBIX).