What Environmental, Social, and Governance Stocks Are and How They Work
ES stocks focus on companies that meet standards for environmental care, social responsibility, and governance practices
ES stocks — often called ESG stocks — are shares in companies that score well on environmental, social, and governance measures. An environmental measure might be carbon emissions or water use. A social measure might be labor practices or community impact. A governance measure might be board diversity or executive pay structure. You buy and sell ES stocks the same way you buy and sell any other stock, but you are choosing companies based on how they operate, not just on whether you think the stock price will rise.
ES stocks exist because some investors want their money to support companies they believe are run responsibly or that address problems they care about. There is no single official list of what counts as an ES stock — different rating systems use different standards, and a company might score high on one system and low on another. This matters because it means you need to understand what standards a fund or advisor is actually using before you assume a stock or fund is truly aligned with your values.
Key Takeaways
- ES stocks are ordinary shares in companies that meet certain environmental, social, or governance standards, but there is no single official definition of what those standards are.
- You can buy ES stocks individually through a brokerage account, or buy them as part of an ES-focused mutual fund or ETF, which spreads your money across many companies at once.
- Different rating systems score companies differently, so an ES fund from one provider may hold very different stocks than an ES fund from another provider.
- ES stocks do not automatically perform better or worse than other stocks — their returns depend on the companies inside them, not on their ES label.
How ES ratings actually work
A rating company — MSCI, Sustainalytics, and S&P Global are the largest — scores each company on dozens of specific measures. For environment, they might measure greenhouse gas emissions, waste management, or supply chain practices. For social, they might measure employee turnover, workplace safety, or product safety records. For governance, they might measure board independence, executive compensation, or shareholder rights. Each company gets a score, usually a letter grade or a number.
Fund managers and individual investors then use these scores to decide which stocks to buy. A fund labeled "ES" or "ESG" will typically hold only stocks that score above a certain threshold, or will weight its holdings toward higher-scoring companies. The problem is that different rating companies weight these measures differently, and they do not always agree. A company might score A from one rater and C from another. This means two ES funds can look completely different even though they both claim to focus on ES stocks.
There is no regulatory body that enforces ES standards the way the SEC enforces securities laws. ES ratings are voluntary, and companies are not required to disclose all the information raters use. This creates room for what is sometimes called "greenwashing" — when a company appears more responsible than it actually is because it discloses the good data and hides the bad.
Buying ES stocks individually versus through a fund
You can buy ES stocks one at a time through a brokerage account, just as you would buy any other stock. You research the company, check its ES scores from one or more rating systems, and decide whether you want to own it. This approach gives you complete control over which companies you own, but it requires you to do the research yourself and to build a diversified portfolio across many stocks.
Most individual investors buy ES stocks through an ES-focused mutual fund or ETF instead. These funds hold dozens or hundreds of ES stocks, so you own a piece of many companies with a single purchase. The fund manager does the research and decides which stocks meet the fund's ES criteria. You pay a fee — usually between 0.1% and 0.5% of your investment per year for an ETF, or 0.5% to 1.5% for an actively managed mutual fund — and the fund handles the rest.
The trade-off is that you are trusting the fund manager's definition of ES. If you care deeply about a specific issue — say, carbon emissions — you need to read the fund's prospectus to see whether it actually measures and prioritizes that issue. Two ES funds with similar names can have very different holdings and very different environmental or social impact.
ES stock performance and risk
ES stocks do not automatically outperform or underperform other stocks. Their returns depend on the companies inside them, not on their ES label. Some ES stocks have beaten the market; others have lagged. Over long periods, ES-focused funds have performed roughly in line with broad market funds, though this varies by time period and by which ES criteria the fund uses.
One reason ES stocks can underperform is that they exclude certain industries or companies. A fund that screens out fossil fuel companies, for example, will not own shares in oil and gas stocks, even if those stocks are rising. If energy stocks have a strong year, an ES fund that excludes them will lag the overall market. Conversely, if those stocks fall, the ES fund may outperform.
ES stocks carry the same risks as any other stock: the company can perform poorly, the stock price can fall, and you can lose money. ES ratings do not predict stock performance. A company with an excellent ES score can still be a bad investment, and a company with a poor ES score can still make money for shareholders. If you are choosing ES stocks because you believe they will make you richer, you are making an investment decision. If you are choosing them because you want your money to support companies you believe are responsible, you are making a values decision — and those are different things.
Common ES screening approaches
Negative screening means excluding certain industries or companies. A fund might exclude tobacco companies, weapons manufacturers, or fossil fuel producers. This is the most straightforward approach: if you do not want to own a certain type of company, you do not buy it.
Positive screening means actively choosing companies that score well on ES measures. A fund might hold only companies in the top quartile of their industry for environmental practices, or only companies with diverse boards. This approach requires more judgment about what counts as "good" performance.
Best-in-class screening means holding the highest-scoring companies within each industry, rather than excluding entire industries. A fund might own oil and gas companies that score highest on environmental measures, alongside renewable energy companies. This approach assumes that improvement within industries matters more than excluding industries entirely.
Impact investing means choosing companies specifically because they solve a problem — renewable energy companies, water treatment companies, or affordable housing developers. The goal is not just to avoid harm but to actively fund solutions.
What to look for in an ES fund
Read the fund's prospectus or fact sheet to see exactly what ES criteria it uses. Does it screen out entire industries, or does it use best-in-class selection? Does it measure environmental impact, social impact, governance, or all three? Which specific measures does it use — carbon emissions, board diversity, labor practices, something else? How does it weight these measures against each other?
Check the fund's holdings to see which companies it actually owns. If the fund claims to focus on environmental responsibility but holds mostly financial services companies, that is a sign that "environmental" is not the main driver of its selections. Look at the fund's top 10 holdings and ask yourself whether they match what the fund claims to do.
Compare the fund's expense ratio — the annual fee — to similar ES funds. ES funds vary widely in cost, and a cheaper fund is not necessarily worse. Look at the fund's track record over at least three years, though remember that past performance does not predict future results. Finally, consider whether the fund's approach matches your own values. If you care most about climate, choose a fund that prioritizes environmental measures. If you care most about labor practices, choose one that prioritizes social measures.
ES stocks and your overall portfolio
ES stocks can be part of a diversified portfolio, but they should not be your entire portfolio unless you have a specific reason to believe that ES-focused companies will outperform the broader market. Most financial advisors recommend owning a mix of stocks and bonds, spread across different industries and company sizes. You can build that mix using ES funds, regular funds, or individual stocks — the diversification matters more than the ES label.
If you want to own ES stocks, decide first whether you are doing it because you believe they will perform better, or because you want your money to support companies you believe are responsible. If it is the former, treat ES stocks as an investment bet and size your position accordingly. If it is the latter, decide how much of your portfolio you want to dedicate to values-based investing, and accept that this choice might cost you some returns. Both are valid reasons to own ES stocks, but they lead to different decisions about how much to own and which funds to choose.
Frequently Asked Questions
Are ES stocks only for people who care about the environment or social causes?
No. Some investors choose ES stocks because they believe companies with strong governance, low environmental risk, or good labor practices are better long-term investments. Others choose them because they want their money to support responsible companies. Both reasons are common, and they lead to different choices about which ES funds to buy.
Do all ES funds exclude the same companies?
No. One ES fund might exclude all fossil fuel companies, while another holds the highest-scoring oil and gas companies. One might prioritize environmental measures, while another prioritizes social or governance measures. Always read the fund's prospectus to see what it actually excludes and includes.
Can I lose money in an ES stock or ES fund?
Yes. ES stocks are still stocks, and stock prices can fall. A company with an excellent ES score can still perform poorly, and the stock price can drop. ES ratings do not protect you from investment losses.
How do I know if an ES fund is actually doing what it claims?
Read the fund's prospectus, check its actual holdings, and look at which companies make up the largest positions. If the fund claims to focus on environmental responsibility but holds mostly financial services companies, that is a sign the ES criteria are not the main driver of its selections. You can also check the fund's ES scores from independent raters like MSCI or Sustainalytics.
Are ES stocks more expensive than regular stocks?
Not necessarily. ES ETFs often have low expense ratios, similar to regular index ETFs. Actively managed ES mutual funds can be more expensive, but so can actively managed regular mutual funds. Compare the expense ratio of the specific fund you are considering to similar funds, whether ES or not.