you know that it refers to companies

that focus on environmental, social, and governance issues.

What we'll talk about today is how

it is fundamentally changing the investment landscape.

There are a variety of motivations

behind the ESG movement.

While some investors want their money to go towards companies

and projects that will change the world,

others simply want to minimise the harm that their investments

have on communities and ecosystems.

Then there is a third group who are looking

to use ESG principles to protect their own portfolio

from potentially negative impacts.

But no matter the motivation, all ESG investors

want to make a return on their money.

If it sounds straightforward, just know that this is much

harder in practise than in principle.

For example, how do you decide whether a company deserves

the halo of being classified as ESG-friendly?

Take Tesla.

The company makes electric cars which

are better for the environment than traditional ones.

So you would think this investment

would have a positive effect on the environment

- but not so fast.

Hey, everyone.

There are questions around the environmental impact

of mining nickel, which Tesla uses in its batteries

and is the electricity used to charge

a car coming from renewable or non-renewable sources.

Tesla has also announced that it made a $1.5bn investment

in Bitcoin.

And as has been pointed out by Bill Gates,

mining Bitcoin is an environmentally-damaging

activity because of the energy it requires.

So what do you do if you want to invest

in environmental progress?

Do you buy Tesla shares or not?

The answer is not so clear cut.

These days most people don't have to make that decision.

A rise in passive investing means

that most folks choose an index-tracking fund,

like an ETF or a mutual fund, which

puts their money into a basket of company stocks

that track an index.

To create an ESG-focused index simply

means that the companies in that basket

have met certain criteria that make them ESG-friendly.

But what does that mean in reality?

Well it's still up for debate.

Nonetheless, the sheer number of indices

that provide an ESG focus have exploded from 2019 to 2020,

increasing by 40 per cent, according to the Index Industry

Association survey.

The amount of money going into ESG assets has also exploded.

In the US in 2016 there was $8.1tn

in professionally-managed ESG assets,

according to the Forum for Sustainable and Responsible

Investment.

By 2020 that number grew to $17.1tn,

which is more than a 100 per cent increase in just four

years.

And as for figuring out which companies to put in those

indices we talked about, many index providers

rely on various metrics that score companies

based on their ESG impact.

Examples of metrics are things like exposure

to carbon-intensive operations, energy efficiency, human rights

concerns, et cetera.

However, there can be discrepancies

between the ratings agencies, even when they're

scoring the exact same company.

Often, index providers will have a committee

that helps make decisions on which companies to include

and which to exclude.

This is important because the company stocks they include

will benefit from more investor cash.

But the subjectivity of classification

has led to controversy over whether some funds are truly

investing in companies that fulfil the vision of ESG

or whether some index providers are merely

using it as a marketing term and putting the ESG label on funds

that don't really merit it.

This is why it's so important for investors

to carefully read the methodology and perspectives

behind an ESG index before they invest

to ensure that they are getting something that truly reflects

their goals.

So a question you may be asking right now

is whether the returns of those ESG funds

are better or worse than traditional investments.

In this chart showing the performance

of an ESG fund versus a standard fund,

you'll see that they perform pretty much in parallel

to one another.

This is just one example, of course.

Some ESG funds may do better than the benchmarks.

Others may do worse.

But the beauty of ESG is that, in general, investors

don't need to worry about sacrificing performance

for doing good.

Perhaps, that is why we see so much money

jumping on the ESG bandwagon.