ESG stands for Environmental, Social, and Governance. ESG investing is the act of investing based on a set of non-financial criteria used to evaluate companies and investments based on how responsibly they operate.
While ESG began as a niche interest among ethical investors, it has since evolved into a global movement backed by large institutions, regulators, and individual investors alike.
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Alcuni fatti potrebbero cambiare rispetto al momento della stesura del presente documento e nulla di quanto qui scritto rappresenta una consulenza finanziaria, legale, fiscale o di qualsiasi tipo, né una sollecitazione a investire.
This post will elaborate about what is ESG investing, which is especially relevant for expats.
With exposure to multiple countries, currencies, and regulatory systems, expats are uniquely positioned to witness the social and environmental challenges that ESG investment seeks to address.
Moreover, many expats seek to align their financial decisions with their values, especially when investing across borders where standards and risks vary widely.
What is ESG Investing?
ESG investing uses a framework of three core pillars: Environmental, Social, and Governance. These pillars are used to evaluate a company’s long-term sustainability and ethical impact.
These criteria do not replace financial analysis but complement it, offering a broader perspective on how a business operates in the real world.
Environmental (E)
The environmental dimension assesses how a company interacts with the natural world. It considers the firm’s environmental footprint, its exposure to climate-related risks, and its role in the global sustainability transition.
Key indicators include:
- Greenhouse gas emissions and carbon neutrality targets
- Renewable energy usage
- Water and resource efficiency
- Pollution and waste management
- Biodiversity conservation and deforestation risks
This pillar is particularly relevant in a world facing climate change, resource scarcity, and stricter environmental regulations.
For investors, it offers insight into a company’s operational resilience and its potential exposure to climate-related financial risk.
Social (S)
The social pillar evaluates how a company manages relationships with employees, suppliers, customers, and the communities in which it operates. It considers:
- Labor standards and employee treatment
- Diversity, equity, and inclusion (DEI) policies
- Product safety and consumer protection
- Community engagement and local impact
- Human rights in supply chains, especially in developing markets
Strong social performance can contribute to employee satisfaction, brand loyalty, and regulatory goodwill.
Conversely, social failures like discrimination lawsuits or labor abuses can lead to reputational damage and legal costs.
Governance (G)
Governance refers to how a company is managed, how decisions are made, and whether shareholders’ interests are protected. It includes:
- Board structure and independence
- Executive compensation alignment
- Anti-corruption practices
- Transparency and financial reporting standards
- Shareholder rights and ethical leadership
Good governance is often a marker of well-run organizations. Weak governance can lead to corporate scandals, fraud, or mismanagement, which directly impact investor returns and trust.
Difference Between Ethical and ESG Investing
It’s important to distinguish ESG investing from other value-based approaches:
- Ethical investing typically involves excluding companies that violate personal or religious principles (e.g., tobacco, weapons).
- Socially responsible investing (SRI) focuses on avoiding harmful industries but may not apply a systematic framework.
ESG investing does not mean sacrificing returns for virtue; rather, it seeks to balance both by recognizing that sustainability and governance affect long-term profitability and risk.
Difference Between ESG Investing and Impact Investing
While often discussed in the same context, ESG investing and impact investing are not the same thing. They differ in intent, strategy, and measurement.
ESG investing involves integrating environmental, social, and governance factors into traditional investment analysis. The main goal is to enhance long-term financial performance and manage risk by accounting for sustainability-related issues.
For example, an ESG investor may favor companies with lower carbon emissions or better labor practices, assuming these traits indicate better long-term resilience and risk control.
Impact investing, by contrast, prioritizes measurable positive social or environmental outcomes alongside financial return. It is more mission-driven and often involves investing in sectors like microfinance, clean water, education, or affordable housing.
Impact investors typically track performance using outcome-based metrics such as lives improved, emissions avoided, or communities reached.
In short, ESG asks, “How does this company’s behavior affect financial risk and return?” Meanwhile, impact investing asks, “How does my capital affect the world?”
Both approaches fall under the broader umbrella of responsible investing, but they represent different priorities.
ESG is generally used across public markets and institutional portfolios; impact investing is more common in private markets, development finance, and philanthropic-aligned capital.
ESG and Sustainable Finance: How They Fit Together
Sustainable finance refers to the broader movement of aligning financial systems with environmental and social goals. It encompasses not only ESG and impact investing, but also:
- Green bonds and climate-focused lending
- Sustainable banking practices
- Climate-related financial disclosures and regulations
- Central bank integration of climate risk in monetary policy
ESG investing is a tool within sustainable finance. It helps financial institutions and individuals assess sustainability risks and opportunities when making investment decisions.
Sustainable finance is the framework that seeks to redirect global capital flows toward sustainability objectives such as the Paris Agreement or the UN Sustainable Development Goals (SDGs).
Does ESG Investing Generate Higher Returns?
One of the most common concerns for investors considering ESG is whether it comes at the expense of financial performance.
Traditionally, socially conscious investing was perceived as a trade-off—doing good meant earning less. However, growing evidence suggests this assumption no longer holds.
Numerous academic studies and institutional reports have shown that ESG-integrated portfolios can match or even outperform conventional portfolios over the long term. Key reasons include:
- Stronger risk management: Companies with better governance and sustainability policies often face fewer legal, regulatory, and reputational risks.
- Operational efficiency: Firms that prioritize resource efficiency and employee well-being may have lower costs and higher productivity.
- Market relevance: As global economies transition to lower-carbon and more equitable systems, ESG-aligned businesses are better positioned for growth.
For example, during the COVID-19 market downturn, many ESG funds experienced shallower losses and faster recovery than non-ESG peers, attributed to their overweight in quality firms and underweight in volatile sectors like oil and gas.
ESG is not necessarily a return-maximization strategy, but it is often a risk-adjusted return optimization strategy.
By filtering out companies with poor environmental practices, weak governance, or social controversies, ESG funds aim to reduce downside exposure.
This approach is particularly relevant to long-term investors, such as retirement savers, pension funds, or expats investing over decades, who prioritize capital preservation as much as growth.
Sector Bias and Benchmarking
It’s important to note that ESG funds can have structural biases:
- Overweighting tech and underweighting energy or materials due to exclusion of fossil fuels.
- Regional differences in ESG performance: European firms typically score higher on ESG metrics than emerging market counterparts.
This can cause ESG portfolios to behave differently from traditional benchmarks like the S&P 500 or MSCI World, and may lead to tracking error or style concentration.
ESG Investment Options: How to Invest in ESG Funds
Investors interested in ESG can choose from a growing menu of products and strategies across asset classes and geographies. These range from accessible retail funds to advanced institutional vehicles.
ESG Mutual Funds and ETFs
One of the simplest entry points into ESG investing is through exchange-traded funds (ETFs) and fondi comuni di investimento that track ESG-screened indices or actively manage ESG-aligned portfolios.
These products differ in methodology. Some exclude controversial industries, while others tilt exposure based on ESG scores.
Green Bonds and Social Bonds
Fixed-income investors can access ESG markets through:
- Green bonds: Proceeds are earmarked for environmentally beneficial projects (e.g., solar energy, clean transport).
- Social bonds: Fund projects with positive social outcomes (e.g., affordable housing, pandemic response).
Governments, development banks, and corporations all issue these instruments. They offer stable returns with measurable impact.
ESG Index Funds
For passive investors, ESG index funds provide diversified exposure to companies with strong ESG metrics. Notable indexes include:
- MSCI ESG Leaders Index
- FTSE4Good Index Series
- Dow Jones Sustainability Index (DJSI)
Index methodologies vary, so it’s important to assess how companies are selected, what’s excluded, and how the index rebalances over time.
Private Equity and Venture Capital
For accredited or high-net-worth investors, ESG exposure is available in private markets:
- Impact funds targeting clean energy, sustainable agriculture, or healthcare access
- Green tech startups focused on carbon reduction or climate resilience
- Blended finance models co-funded by public and private institutions in emerging markets
These options typically offer higher potential returns but come with greater risk and lower liquidity.
Is ESG Investing Good?
The question “Is ESG investing good?” cannot be answered with a simple yes or no. It depends on what you’re measuring: returns, ethics, impact, or alignment with global trends.
But we can address this question in different ways:
Financially, ESG Is Competitive
From a purely financial perspective, ESG investing is no longer considered a handicap.
When implemented thoughtfully, ESG integration can improve risk-adjusted returns, reduce exposure to long-tail risks, and align investments with long-term megatrends like decarbonization and inclusive growth.
ESG funds may not always outperform in bull markets, but they often hold up better in volatility and offer resilience over time.
Strategically, ESG Reflects a Changing World
ESG is not just a moral stance, but a strategic one. Environmental risk is now financial risk. Social inequality is now business risk.
Governance failures can wipe out decades of shareholder value. As the global economy shifts toward sustainability and regulation tightens, investors who ignore ESG factors may fall behind.
For expats and international investors, ESG can also serve as a geopolitical and cultural filter, helping you avoid companies that violate human rights, pollute sensitive ecosystems, or engage in opaque practices in countries with weak rule of law.
Personally, ESG Aligns Capital With Values
Finally, many investors want their money to reflect their personal beliefs. ESG offers a practical, structured way to do this without sacrificing profitability. It’s not about perfection or purity; it’s about direction and intentionality.
That said, ESG is not a guarantee of ethics or returns. Investors must still conduct due diligence, stay alert to greenwashing, and understand what they’re buying. ESG is a tool, not a magic formula.
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Adam è un autore riconosciuto a livello internazionale in materia finanziaria con oltre 830 milioni di visualizzazioni di risposte su Quora, un libro molto venduto su Amazon e un contributo su Forbes.
