You may have heard the terms ESG, SRI and impact investing, but they can sound intimidating to the uninitiated investor.
Putting money into investments that do good is growing in popularity. The number of sustainable funds has climbed to 351 in 2018, while the assets in those strategies reached $161 billion, according to investment research firm Morningstar.
That means that, if you want your investments to focus on everything from including companies that are doing good for the planet or promote women and minorities, to excluding those involved in areas such as weapons or tobacco, there is a strategy for you.
Here is a list of questions you will want to think about before delving into those investments, whether you research on your own or enlist the help of a professional financial advisor.
The terms ESG, SRI and impact investing are not interchangeable, though they may sound similar.
ESG stands for environmental, social and governance. An ESG-integrated fund will focus on companies that are paying attention to those areas, according to Judy Cotte, CEO of ESG Global Advisors, a consulting company focused on ESG-related issues.
SRI, or socially responsible investing, allows investors to align their investments with their values. This often means excluding certain areas, such as tobacco, weapons or pornography.
Impact investing also puts money behind certain values. But, unlike SRI strategies, that means putting money behind companies that are doing something positive to solve the world's environmental or social challenges.
"It's really important for individuals to understand the difference, but maybe more importantly make sure their advisor understands the difference," Cotte said.
It is also important to note how a particular fund is structured.
An index fund, for example, may weight companies differently based on ESG or other criteria. But that does not necessarily mean any companies are excluded, Cotte said.
"A client [or investor] might be surprised at what's included in an ESG fund," Cotte said. "They might assume that controversial companies are excluded, unless they really look at how that index is constructed."
If the fund is an active strategy, with a manager in charge of selecting companies, investors would still be wise to consider the nuances of the different investment strategies.
That is because there are shades of gray, Cotte said. For example, if a company has one division that focuses on doing something positive for the environment, but two divisions that do not, does it still get included in the fund?
Another area that investors want to pay close attention to: whether a fund manager has a strategy to engage companies to improve their practices.
"A lot of people might assume that an ESG integrated fund is doing that, but I think that's not an accurate assumption," Cotte said.
Investors need to ask fund managers about their approaches to proxy voting and raising issues to company management, Cotte said. They also need to check to see if they are publishing reports that document the progress of those initiatives.
To evaluate how well an investment does, benchmarks can help evaluate the allocations, risks and rewards.
But when it comes to these strategies, traditional measures often don't work, according to Cathy Curtis, a certified financial planner and founder and CEO of Curtis Financial Planning.
To explain this to clients, Curtis said she often uses the energy sector as an example.
If you want to eliminate big oil and fossil fuels from your portfolio, the performance of your investments won't coincide with big market moves in energy, Curtis said.
More from Impact Investing:
Climate change can pose risks to real estate investments
You can use Bogle's investing strategy and keep social focus
Solutions let homeowners cut costs while helping the environment
"I have the tools to really show that, that yes, there could be a difference and this is what it will be," Curtis said. "There have been years where ESG has underperformed.
"We don't know what's going to happen in the future."
Curtis' clients who are invested in these portfolios really want to be in them, she said, and therefore are willing to accept the differences from traditional benchmarking.
Other investors should be aware of these potential discrepancies before they put money in this space.
When investing with special strategies, there are often extra expenses. And that also goes for ESG, SRI or impact investments.
"It will cost more to invest in these sorts of strategies, because you need to pay for somebody to do the research on the underlying companies," said Mitchell Kraus, partner and wealth manager at Capital Intelligence Associates.
An index strategy ESG fund will almost always be cheaper than an actively managed ESG fund, Kraus noted. But that ESG index fund will cost more than the typical index fund that does not include ESG ratings, he said.
"The prices used to be much bigger than they were, and the costs for ESG ratings have come way down," Kraus said. "But they are still an added component."
The good news for investors who are interested in putting their money where their values are: It doesn't necessarily mean you will see less upside.
"It's an old idea, a bit of an antiquated idea or a myth that if you invest in SRI or impact funds that you necessarily have to give up some performance," Cotte said.
Like all fund managers, there are those that outperform and those that don't in these categories, Cotte said.
More than 60% of sustainable funds were in the top half of their respective categories at the end of 2018, according to Morningstar.
How much you invest in ESG, SRI or impact investments should come down to two goals: diversifying your portfolio and thinking long-term, according to Kraus.
Ask yourself whether you're able to sacrifice returns and if you're willing to differentiate your risks, he said.