Creating your own ESG fund: A practical guide for investors

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All investing is personal. You’re setting aside money for something that matters to you, whether it’s a trip, a house, college, or retirement. Environmental, social, and governance investing (ESG), goes a step further. You’re not just investing for a goal. You also care about where your money goes and what it supports.

For many, buying an ESG mutual fund or exchange-traded fund (ETF) is an easy way to get started. But sometimes those funds hold shares in companies you’d rather skip, such as fossil fuel producers. The good news: You don’t have to wait for the perfect product. You can build your own ESG strategy.

Before you buy a single investment, figure out what ESG means to you. Then you can create your personalized ESG investing plan. No single company or fund will check every box.

Start by identifying which ESG issues matter most to you. Each pillar focuses on different topics you might choose to prioritize:

ESG pillars sometimes overlap. For instance, when a telecommunications company helps close the digital divide by expanding broadband access in underserved areas, it can lead to the creation of more small businesses. A company with strong business ethics may prioritize workplace safety as part of a long-term growth strategy.

For investors, ESG is about taking the long view—finding and holding shares in companies that meet real needs, aim to do the right thing, and still make a profit.

There are many ways to approach ESG investing. You can build a portfolio of individual stocks or choose from a wide range of mutual funds and ETFs.

ESG investing has changed a lot since the first funds were launched in the early 1970s. Those early funds were known as socially responsible investing (SRI) and focused mainly on excluding certain industries such as tobacco, alcohol, weapons, or gambling. Although that approach still exists, the segment has grown to include funds that take a thematic approach, like those focused on renewable energy, clean water, or affordable housing. Others use a best-in-class strategy, selecting companies with relatively strong ESG scores within each sector. The number and variety of ESG funds may evolve, especially as the approach draws both interest and scrutiny.

Once you’ve identified the ESG issues that matter most to you, the next step is choosing investments that reflect those priorities. If you haven’t already opened and funded a brokerage account, you’ll need to do that before you can start buying funds or individual stocks.

To research ESG investments, you can start with sites like Morningstar, which analyzes mutual funds, or As You Sow, a nonprofit focused on shareholder advocacy—using investor power to push companies to improve their practices. Morningstar also offers a stewardship rating that evaluates fund companies’ commitment to sustainability, and its Sustainalytics division rates individual stocks. Other sources, such as S&P Global, publish ESG scores as well. Because each group uses different criteria, it’s worth comparing more than one before deciding what to invest in.

ESG scores are a starting point, but if you’re going to build your own ESG portfolio, you’ll want to do due diligence—the research needed to understand what you’re investing in and the risks that might come with it.

For mutual funds and ETFs, read the prospectus to understand each fund’s mission, the method used to select investments, and how it practices ESG and sustainability. Some actively managed funds, especially those with a long history in sustainable investing, use their shareholder status to influence how companies operate.

This kind of shareholder advocacy is common among hedge funds, private equity firms, and other money managers ​​who publish impact reports describing the changes they’re pushing for. These reports are worth reviewing if you want to understand how a firm or fund approaches engagement.

For individual companies, read their annual corporate social responsibility reports to see how they practice sustainability. Keep an eye out for potential greenwashing, where a company overstates its environmental or social credentials. Some companies may also engage in “greenhushing,” or downplaying their ESG efforts, sometimes in response to political scrutiny.

Look for specifics, not just promises. Policies, data (such as emissions or diversity figures), or achievements reveal more than slogans.

A well-diversified ESG portfolio should reflect your values and help you manage risk. Meeting that goal means looking beyond what a company does to how your investments work together.

Although ESG investing is often associated with big ideas such as solar energy and wind power, many companies tackle sustainability in more focused ways: improving indoor air quality through better heating and cooling systems, developing more efficient irrigation technologies, or supporting biodiversity in agriculture. These are just a few ways to shape an ESG portfolio with your priorities in mind.