ESG, ethical and renewable energy investing explained
ESG investing is an approach that considers environmental, social and governance factors alongside financial returns when making investment decisions. This guide explains what ESG means, how it works in practice, the different ways to invest, and what to watch out for.
What is ESG investing?
ESG stands for environmental, social and governance. These are three broad categories of non-financial factors that investors use to assess how a company manages risk, behaves towards its stakeholders, and positions itself for the long term. Rather than looking only at revenue and profits, ESG investors ask a wider set of questions:
ESG Pillar |
What it covers |
Example considerations |
Environmental |
How a company interacts with the natural world |
Carbon emissions, energy use, waste management, water usage, deforestation |
Social |
How a company manages relationships with employees, suppliers and communities |
Labour standards, diversity and inclusion, supply chain ethics, data privacy, community impact |
Governance |
How a company is led and controlled |
Board composition, executive pay, shareholder rights, anti-corruption policies, transparency |
ESG is distinct from purely financial analysis but is increasingly viewed as complementary to it. Poor governance, for example, has historically preceded major corporate scandals, while companies with strong environmental practices may face lower regulatory risk as climate-related rules tighten. The CFA Institute notes that ESG criteria help investors identify material risks and uncover growth opportunities not captured in traditional financial metrics.
These are arguably subjective judgements. For example, a copper mine which might be necessary for the green transition could be considered either environmentally damaging or friendly, depending on one’s perspective.
ESG investing: the numbers
$3.7tn Total global ESG fund assets at end of Q3 2025.*
20% Share of the European fund universe accounted for by ESG funds.*
$40tn Forecast global ESG assets under management by 2030.+
Sustainable investing, responsible investing and ethical investing: what is the difference?
These terms are often used interchangeably, but they can carry different emphases depending on context:
Term |
Primary focus |
Typical approach |
ESG investing |
Risk and opportunity assessment using ESG data |
Integration of ESG scores into portfolio analysis; does not necessarily exclude sectors |
Sustainable investing |
Long-term sustainability of returns and the companies generating them |
Often overlaps with ESG integration; emphasis on climate transition and resource efficiency |
Responsible investing |
Broader term encompassing ESG integration, stewardship and engagement |
May include shareholder voting and active engagement with company management |
Ethical investing |
Alignment with specific moral or values-based principles |
Often involves exclusions, such as avoiding tobacco, weapons or fossil fuels |
Impact investing |
Generating measurable positive social or environmental outcomes alongside returns |
Targeted at specific outcomes; common in private markets and green bonds |
In practice, many funds blend these approaches. An ESG fund might exclude certain sectors while also scoring companies on their governance quality. Different ESG funds will have different criteria, and understanding which approach a fund uses (by reading the fund fact sheet) is important before investing.
Quick fact
Europe remains the world's largest market for ESG funds by a significant margin. ESG funds account for around 20% of the total European fund universe, compared with just 1% in the US.
How does ESG investing work?
There are several methods by which ESG factors are incorporated into investment decisions:
- ESG integration: ESG scores and data are incorporated alongside traditional financial analysis. The investor does not necessarily exclude any sector but uses ESG factors to inform valuations and risk assessments.
- Negative screening (exclusions):specific sectors or companies are excluded from the portfolio based on ethical or values criteria. Common exclusions include tobacco, weapons, gambling, fossil fuels and adult content.
- Positive screening (best-in-class): the investor selects the highest ESG-scoring companies within each sector, rather than excluding the sector entirely. This allows exposure to all industries while favouring leaders on sustainability metrics.
- Thematic investing: capital is directed toward specific sustainability themes, such as clean energy, water scarcity or the circular economy. For example, investors interested in the energy transition may look at wind energy and nuclear energy as part of a low-carbon portfolio.
- Shareholder engagement and stewardship: investors use their voting rights and dialogue with company management to push for improvements in ESG practices, rather than simply divesting from laggards.
- Impact investing: capital is allocated with the explicit goal of generating measurable positive outcomes alongside financial returns. More common in private markets and green bond markets.
Quick fact
SIPP contributions (as well as taxpayer funded childcare / child benefit payments) also reduce your adjusted net income, which is the figure HMRC uses to calculate certain thresholds. For those earning between £100,000 and £125,140, contributions can help restore the personal allowance that would otherwise be lost, in effect delivering up to 60% relief on those earnings.
Ways to invest in ESG
There are several routes for UK investors looking to build an ESG-oriented portfolio:
ESG funds and ETFs
The most accessible route for most retail investors is through ESG-screened funds or ETFs, which apply ESG criteria across a basket of holdings. These range from broad global ESG equity trackers to more focused thematic funds targeting specific sectors. The green energy stocks space, for example, has attracted significant inflows as investors seek exposure to the energy transition. Actively management funds track the ESG component for you, which is tricky for an individual investor to do with multiple companies. However, this does come with a higher expense fee.
Green bonds
Green bonds are fixed income instruments where the proceeds are earmarked for environmentally beneficial projects, such as renewable energy infrastructure or sustainable building development. They are issued by both governments and corporations and offer a way to combine income-seeking with environmental intent. Issuance of green bonds has grown rapidly in recent years as part of the broader sustainable finance market, according to the CFA Institute.
Stewardship and engagement
Some investors prefer to hold shares in companies with mixed ESG records and use their shareholder voting rights to push for change from within, rather than excluding those companies entirely. This approach, sometimes called active ownership, is favoured by a number of institutional investors as a way to drive real-world impact.
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What is greenwashing and how can you spot it?
Greenwashing refers to the practice of overstating or misrepresenting the environmental or sustainability credentials of an investment product or company. It is a significant concern in ESG investing because inconsistent labelling and vague claims have historically made it difficult for investors to compare products on a like-for-like basis. The FCA's anti-greenwashing rule introduced in May 2024, requires all FCA-authorised firms to ensure sustainability claims are accurate and not misleading.
When evaluating ESG funds or companies, the following warning signs are worth considering:
- Vague or unsubstantiated language such as 'eco-friendly' or 'green' without specific supporting data
- A fund name that implies strong sustainability credentials but whose holdings include significant fossil fuel or other excluded-sector exposure
- No clear disclosure of the methodology used to construct the ESG score or screening criteria
- Significant divergence between the fund's stated ESG objective and its actual portfolio composition
- ESG claims that focus on one positive attribute while ignoring material negative ones elsewhere in the business
The UK's Sustainability Disclosure Requirements (SDR) framework, overseen by the FCA, requires funds using sustainability-related terms in their name or marketing to meet defined criteria and provide structured disclosures. Entity-level reporting began in December 2025 for larger UK asset managers.
Source: FCA SDR framework.
Key Takeaway
2025 was the first year on record to see modest net outflows from global ESG-focused open-end funds and ETFs, according to Morningstar, partly reflecting the impact of anti-ESG political pressure in the US. Despite this, total ESG fund assets remained at $3.7 trillion globally at end of Q3 2025.*
*Source: Morningstar, December 2025
Advantages and risks of ESG investing
Advantages |
Risks |
Alignment of portfolio with personal values and long-term sustainability goals |
ESG ratings are not standardised and can vary significantly between providers for the same company |
ESG factors can identify material risks not captured in traditional financial analysis |
Greenwashing risk, as some funds do not deliver the ESG credentials their marketing implies |
Growing regulatory tailwinds in the UK and Europe may favour well-governed, lower-carbon companies |
Exclusions can reduce diversification, particularly in energy-heavy indices |
Broad choice of vehicles, from individual stocks to diversified ESG ETFs |
ESG performance relative to conventional benchmarks varies across time periods and market cycles |
Stewardship approaches can drive real-world corporate change without requiring divestment |
Thematic ESG funds can carry concentration risk if focused on a narrow set of sectors or themes |
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ESG investing FAQs
What does ESG stand for?
ESG stands for environmental, social and governance. These three pillars are used to assess a company's management of sustainability-related risks and opportunities alongside its financial performance.
What is the difference between ESG investing and ethical investing?
Ethical investing typically involves excluding companies or sectors that conflict with specific moral principles, such as tobacco or weapons manufacturers. ESG investing is broader and may or may not involve exclusions. It focuses on using ESG data to assess risk and opportunity, rather than primarily applying values-based filters. In practice, many funds combine both approaches.
What is sustainable investing?
Sustainable investing is a broad term for investment approaches that consider long-term sustainability factors, including but not limited to ESG criteria. It encompasses strategies ranging from ESG integration to impact investing and green bond allocation, with the common thread being a concern for long-term value creation and systemic risk management.
What is responsible investing?
Responsible investing is an umbrella term that covers a range of approaches to incorporating ESG factors into investment decisions, including integration, exclusion, stewardship and engagement. It is often used interchangeably with sustainable investing, though it can also emphasise the fiduciary responsibility of investors to consider long-term and systemic risks. The CFA Institute provides a detailed overview of the different approaches within the responsible investing framework.
Is ESG investing profitable?
The evidence on ESG performance relative to conventional investing is mixed and varies across time periods, geographies and sectors. Some research suggests that strong ESG practices correlate with lower risk and more resilient long-term returns, particularly through reduced exposure to regulatory and reputational risk. However, performance is not guaranteed, and ESG funds can underperform in market environments that favour excluded sectors, such as when fossil fuel prices are high.
What is greenwashing?
Greenwashing is the practice of overstating or misrepresenting the environmental or sustainability credentials of a product, company or fund. The FCA's anti-greenwashing rule, in force since May 2024, requires all FCA-authorised firms to ensure sustainability claims are fair, clear and not misleading.
How can I invest in ESG with IG?
Through IG's share dealing and ISA accounts, you can invest in individual ESG-screened companies, ETFs, and funds across global markets. This includes exposure to sectors such as renewable energy, wind energy, nuclear energy and green energy stocks more broadly. Capital is at risk.
Important to know
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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