Note the following content is intended to be educational but it does contain promotional material for Kaldi.

There's been a lot of talk about ESG investing over the last decade.

Probably not a surprise given how every other headline seems to be about one of many important social causes, environmental activism and very public displays of frustration (we're name-checking you, Just Stop Oil). But what does this have to do with investing? Well, 'ESG' stands for Environmental, Social, and Governance – basically, it's about investing in companies that care about the planet, treat their people right, and run things squeaky clean. Think "win-win-win" for investing your money, the companies and the world.

This Kaldi guide is your cheat sheet for impressing your mates with your understanding of ESG investing. We'll breakdown the basics without bombarding you with jargon and provide a fair perspective—spoiler alert: it's not all hype and positive; there are somethings to watch out for, too.

Now, this is a bit deeper than our usual content, but hang in there. You might discover something about investing that resonates with you, that feels good while doing good.

What are the basics of ESG investing?

Let's get straight to the point – it's way more than just numbers and making money. Today's investors are looking beyond profits and instead focusing on companies that put the environment first, care about social responsibility and run their organisations for the good of everyone - that's ESG investing.

ESG is like a new stock market metric, showing how well a company is built to last. Think clean energy, fair treatment of employees, and smart leadership. And the money's also following with a whopping$8.4 trillion now invested in sustainable companies, which makes the previously impressive figure of $1.9 trillion back in 2019 look like pocket change (if you have massive pockets to flex). To put this huge number into context, it’s over seven times bigger than the UK’s entire £1.15 trillion fiscal budget (the big pot of money the government spends on all the things the country needs).

And to really make your head hurt with some more numbers… when you consider that globally, the total assets under management (AuM)—which is all the money overseen by financial firms for investment purposes—are estimated at $145.4 trillion, we've essentially gone from about2.7% of the world's investment being in sustainable companies to a very reassuring 12.2%. Why? Because according to EY “Investors increasingly believe companies that perform well on ESG are less risky, better positioned for the long term and better prepared for uncertainty."

It's fair to say that ESG investment is on the rise, so let’s learn what this powerful acronym really means. But before we get into it we think it’s important to be clear that a company doesn’t have to be hitting the E, S and G to be achieve a high ESG rating. Some might prioritise environmental sustainability efforts, while others could focus on socially responsible policies.

Environmental factors

The environmental element of ESG investing looks at how a company interacts with the environment, gauging its carbon emissions, waste management strategies, and initiatives in promoting renewable energy sources. The urgency of climate change has put a huge magnifying glass on companies, along with a growing market of ESG investors who are rightfully demanding more transparency and greater action.

Pollution is also under the microscope as investors evaluate the effectiveness of a company’s pollution control and waste handling. Renewable energy investments signal a company’s commitment to a sustainable future, a factor that's important to people looking to invest responsibly.

And the "E" in ESG is only getting more important, with a study by New Scientist and Kings College London revealing that 66% of Gen Z (12-27yo) and 57% of Millennials (28–43yo) agree that environmental concerns should take priority over economic growth. This means most of you reading this will probably care as much, if not more, about how committed a company is to the environment than just their profits and returns. Of course, profit is important too. Otherwise, you'd just be scrolling through Greta Thurnberg's Tweets (or X'es, if that's what we call them now) and not our guide on ESG investing. But hopefully, this helps highlight the shift that's happening.

Social factors

The ‘S’ in ESG represents ‘Social’, emphasising a company’s social responsibility - how it encourages diversity, equality and inclusion within its organisation. This factor looks at the company’s impact on society and how it manages its relationships with:

• employees
• suppliers
• customers
• communities

It’s a measure of their corporate social responsibility and its alignment with societal values.

Think of it like this: a company that's crushing the social game is like the person everyone wants to be around when they've had a bad day. They're all about diversity, equality, and making sure everyone feels included and uplifted, no matter who they are. If a company makes you feel like this, that pretty much means they've nailed the 'S' in ESG.

Governance factors

Governance, the 'G' in ESG, is all about checking how the top bosses are running the show. It’s like peeking behind the curtain to see if the company’s got its act together. This involves looking into the company’s leadership structure, evaluating the diversity of the board, what executives are paying themselves, and providing transparency into the operations of the company.

Over the last decade, we've seen how a good culture within company boards, often enhanced by diversity, leads to smarter decisions. ESG investors really appreciate this. They especially like it when the pay of top bosses reflects the long-term success of the company and keeps shareholders happy.

Essentially, solid governance means the company is open and honest about what's happening behind closed doors. They're not trying to pull a fast one on anyone; instead, they make decisions that benefit everyone, not just those at the top.

If you're nodding along while reading this, ESG investing might just resonate with your values. However, there's more to learn before diving in.

The different types of ESG investments

The good news is that there are plenty of options for ESG investments. You can choose from index tracker funds, ETFs(these are like fancy stock bundles!), individual stocks with high ESG ratings, and mutual funds, which pool money from many investors. We'll break down each one in a bit more detail below – keeping this as jargon-free as possible. Promise!

Hands-on investments vs. Hands-off investments

No matter if you want a pro to pick your investments (actively managed) or prefer a more hands-off approach (passive),there are ESG options for you. You can even spread your investments across different regions and types of assets to keep things balanced.

👀 Shameless plug: Kaldi an support you with this. More on that at the end!

ESG index tracker funds

So, what are ESG index tracker funds? These, also known as ESG funds, put environmental, social, and governance at the heart of their investment decisions. An ESG fund is not just about the promise of financial returns; it's also about making a positive impact and empowering investors to support businesses that prioritise ESG principles.

Through a collective pool of such businesses, ESG index tracker funds offer investors a practical path to contributing to societal progress while also aiming for a healthy portfolio*.

*ESG index tracker funds have financial risks like any other investment.

ESG exchange-traded funds (ETFs)?

Great, another acronym – we hear you! Let's break it down:

Exchange-traded funds (ETFs) are basically a collection of investments (stocks, commodities, sectors, you name it) that you can buy and sell on the stock market just like individual stocks. ETFs give you the diversity of a mutual fund with the flexibility of stock trading, and there are tons of options to choose from based on what you're into. They're usually cheaper and more transparent than mutual funds, making them a solid choice forgetting started with investing. Just remember, they've got risks, too, but overall, ETFs are definitely worth looking into.

So what are ESG ETFs (we promise to go light on acronyms from here 😭)?

Environmental, Social, and Governance (ESG)Exchange-Traded Funds (ETFs), or ESG ETFS – rolls off the tongue - are much like traditional ETFs. However, they specifically focus on companies that stick to the ethical and responsible practices concerning environmental, social, and governance factors that we unpacked above.

Individual stocks with high ESG scores

For those who prefer a more hands-on approach, individual stocks with high ESG scores represent an opportunity to invest in companies that are leaders in sustainability, such as Microsoft, Applied Materials, and Woodward. These companies are seen as trailblazers whose strong ESG credentials have caught the eye of socially and environmentally conscious investors.

Measuring ESG performance

So a company claims to be nailing ESG factors. But it's fair to say that people all over the country are starting to question more and trust less of what they read and expect far greater transparency from big companies. ESG investing is not immune to that either! So, it's only natural for you to wonder how you measure ESG performance. The honest answer is that measuring ESG performance is tricky, especially if you're new to investing, and it is made even more confusing by the fact different agencies use different scoring systems. Fortunately there's a real push for standardised frameworks to make things clearer for investors, but heads up - this still has a way to go.

Agencies like MSCI and Sustainalytics use advanced data and human expertise to create ESG scores and risk ratings that help investors make responsible choices. However, with multiple agencies and scores, it's best not to get overly hung up on comparing exact scores across agencies—it’s best to use them as a general guide and conduct your own research.

Incorporating ESG into your investment strategy

While the term "investment strategy" might sound stuffy, you're reading this because something has grabbed your interest in the world of investing. You work hard for your money, so having a plan for investing is important. At Kaldi, we are your no-nonsense friend to help dilute the jargon and make finance and investing much clearer. So, think of this less of a strategy and more of a solid game plan.

If you really want to get stuck in with ESG investing, there are plenty of options to explore. While we do not recommend any specific company, to help kick start your research, some well-known examples include Vanguard, Fidelity and HSBC.

But if you're looking to protect your financial future and turn your savings into investments, why not join the Kaldi waitlist? We're launching an app to help you shop, save, and invest. Join thousands of other young investors already on the list and waiting for our big launch (sign up to be the first to know).

Does ESG investing align with your personal values?

Okay, so let's dive a bit deeper into this one. A really key first step in ESG investing is figuring out what matters most to you. Do you care most about clean energy, diversity, or good workforce practices? Making sure your investments align with your values helps you feelgood about where your money goes and ensures that your money goes to companies you feel are doing good things.

If none of this has resonated with you so far – ESG investing might not be the best option, and that's also ok. There are plenty of other investment options out there to explore.

ESG risks vs returns

You've heard that cringe-worthy saying: No risk, no reward? Well, how about smart risk, smart reward? Still giving you the ick?

Well, any investment poses a risk, and hopefully, that's not breaking news. However, ESG ratings can help you spotlight lower-risk companies that are set up for future challenges, namely drastic environmental and societal changes. That doesn't guarantee anything, though. These very same companies can also inflate market values, creating bubbles.

A well-thought-out ESG investment strategy (more affectionately known as a solid game plan) may help diversify your investment portfolio and manage some risks. However, it's essential to remember that ESG investing, like any other form of investing, carries risks. It does not guarantee improved performance or eliminate the potential for losses.

Top tip: As with any investment decision, it's crucial to thoroughly research and understand the risks involved before committing your hard earned money. You can't just rely on past performance to predict future results. If unsure, you should always check with a qualified financial advisor if ESG investing aligns with your personal financial goals and how much risk you want to take.

ESG vs other ethical investing

(Not just a simple Good vs. Bad scenario)

Let’s talk about the "Brown vs. Green" investing debate. Brown companies are typically those that rely heavily on fossil fuels or engage in practices that can harm the environment, whereas green companies are seen as environmentally friendly. Some people argue that by putting your money into green companies, you not only drive positive change but might also see a nice bump in profits. But, here’s the twist: completely pulling funding from brown companies might actually make it tougher for them to afford greener practices.

It’s also worth noting that a lot of top-rated ESG companies are in the digital sector, which naturally fits better with ESG goals compared to a company like FedEx. FedEx, despite its high emissions, is in a tough spot because its whole business model revolves around activities that are hard to make emission-free. So, is it really fair to compare these two types of companies?

This leads us to a big question: could the best way to fight climate change be to help the biggest polluters clean up their act? The discussion is still wide open and opinions vary—what’s your take on this?

Don't confuse it with Impact Investing or Socially Responsible Investing (SRI)

ESG investing is different from Socially Responsible Investing (SRI) and Impact Investing. SRI often excludes entire industries like tobacco, whilst an ESG looks for positive changes within companies, even in traditionally excluded sectors. Impact Investing focuses on creating measurable social or environmental impact - even if it means lower financial returns - whereas ESG investing's primary focus remains on financial performance.

Getting started with ESG investing

Hang in there. We're almost done. This has been heavy but hopefully very helpful.

Now, to answer the big question in your mind, how do you get started with ESG investing?

There are many ways, but we've simplified it with three. You can rely on professionals who manage investment portfolios based on ESG principles, like robo-advisors and financial planners. You can adopt a DIY approach, creating a portfolio that reflects your individuality. Or you can discover an exciting new way. Let's take a look at all three.

1. Robo-advisors and financial planners (£££)

Whilst this is the most expensive path out of the three we’re discussing, there are platforms that have democratised accessto ESG investing, like InvestEngine and Moneyfarm, providing:

• Diversified portfolios that align with investor values and financial goals
• Robo-advisors, which is a paid-for financial adviser that provides financial advice and investment management online with less human intervention, making it more cost-effective over traditional financial advisors, but still comes with costs. The upside is these robo-advisors streamline the journey into ESG investing.

If old school is your vibe, there's nothing wrong with financial advisors – that's how our parents did it. Just be aware this is going to cost more but offers 1-1 personal guidance in return.

2. DIY (££)

Of course, you can take the DIY approach. It’s cheaper, but requires a lot more work from you. Be sure to set clear goals, know your limits, use rating frameworks to check ESG scores, and put the time in needed to check out these companies. Digging deeper into a company's values, practices and positive impact should be easy, if they are truly ESG compliant –as transparency is key. If you can't find any info, that should be your first red flag.

3. Exciting new way (£)

We mentioned a third way, and full disclosure...we're a bit biased, but we love this one. Read on 👇🏻

Build your investment portfolio with Kaldi

At Kaldi, our goal is to have an open and honest conversation about money. This guide was crafted by our team to provide helpful information about the basics of ESG investing in a clear, simple, and jargon-free way (despite all those acronyms).

We understand the importance of not just investing responsibly but also aligning with diverse financial practices and beliefs. That's why Kaldi will be offering both ESG funds and Sharia-compliant funds, help people invest in their financial futures without compromising on important cultural and religious beliefs.

We're excited about how Kaldi is opening up new pathways to ESG investing and general investment opportunities through features like investing your cashback and round-ups. When we launch, we’ll be providing access to the HSBC Sharia-compliant fund without the usual $5K minimum requirement and offer a wide selection of index funds at market-beating prices—matching Vanguard's account fees. Our approach levels the playing field for investing far beyond what typical robo-investors offer, making it easier and more accessible for everyone to invest in a better, more sustainable society.

If you liked this, you'll love our latest blog on busting common money myths and sharing 3 personal finance hacks.

And if you want to start investing, that's where we can help.

Each time you shop with Kaldi, you earn cashback and round-ups which support your savings; investing these savings with the Kaldi app can create a portfolio of life-changing assets to secure your future.

Join our waitlist now.

Investing carries risk - the value of your investments can go down as well as up, and you may get back less than you put in. This article is for informational purposes only and does not constitute financial advice. Always do your own research and consider seeking independent financial advice before making any financial decisions.