Environmental, Social, and Governance (ESG) investing is a method of portfolio selection that applies non-financial factors as part of the analysis process to identify material risks and growth opportunities. These factors encompass a wide range of issues that are not traditionally part of financial analysis but have financial relevance:

Environmental considerations may include a company’s energy use, waste, pollution, natural resource conservation, and treatment of animals. The criteria can also help to evaluate any company’s environmental risks and how the company is managing those risks.

Social criteria examine how a company manages relationships with employees, suppliers, customers, and the communities where it operates.

Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Pros of ESG Investing:

1. Risk Management: ESG criteria can help investors avoid companies that might pose a greater financial risk due to their environmental or other practices.
2. Performance: There is a growing body of evidence suggesting that ESG principles, when integrated into investment analysis and portfolio construction, may offer investors potential long-term performance advantages.
3. Social Impact: ESG investing can lead to investments in companies that are considered to be positive forces in the world, which aligns with the personal values of many investors.

Cons of ESG Investing:

1. Measurement Difficulties: It can be challenging to measure how ESG factors can be monetarily valued and compared across companies and industries.
2. Inconsistency in ESG Reporting: There is no standardized method for reporting ESG criteria, which can lead to inconsistency and a lack of comparability.
3. Greenwashing: Some companies may engage in greenwashing, making it appear as though they are more environmentally friendly or socially responsible than they actually are.

The CFA Institute notes that ESG investing grew out of Socially Responsible Investing (SRI), but there are key differences. While SRI typically uses negative screening to exclude companies not aligning with certain values, ESG investing is about finding value in companies based on their ESG practices. The institute emphasizes the importance of a more thorough consideration of ESG factors by financial professionals, which can improve fundamental analysis and investment choices.

ESG investing is becoming increasingly popular as investors seek to align their portfolios with their values and as evidence mounts that ESG factors, when integrated into investment analysis, may improve long-term returns​​​​​​​​.