Sustainable Investing for Beginners: What ESG Actually Means for Your Money

By GreenFi Editorial Team

You’ve probably heard the term “ESG investing” by now. Maybe you’ve seen it in a headline, on a brokerage app, or in a retirement plan brochure. But if you’re like most people, you’re still not entirely sure what it means or whether it’s right for you.

Here’s the short version: ESG stands for Environmental, Social, and Governance. It’s a way of evaluating companies based on how they treat the planet, their people, and their shareholders. And it’s not fringe. Global sustainable fund assets hit a record $4.13 trillion by the end of 2025.^¹

The longer version? That’s what this guide is for.

What E, S, and G actually stand for

ESG isn’t one single score or rating. It’s a framework with three pillars, and each one looks at a different part of how a company operates:

Environmental looks at a company’s impact on the natural world. Think carbon emissions, energy use, waste management, water consumption, and whether they’re contributing to or fighting climate change.

Social looks at how a company treats people. This includes employees (fair wages, workplace safety, diversity), customers (data privacy, product safety), and communities (supply chain labor practices, human rights).

Governance looks at how a company is run. Board diversity, executive pay, transparency, shareholder rights, and whether leadership makes ethical decisions. Good governance is often the foundation that makes strong environmental and social performance possible.

A company might score well on one pillar and poorly on another. That’s why ESG is a framework for evaluation, not a pass/fail test.

Three ways to invest sustainably (and how they differ)

One of the most confusing parts of sustainable investing is that there are multiple approaches, and they work very differently. Here are the three most common:

1. Negative screening (excluding the bad). This is the oldest and simplest approach. You decide which industries or companies you don’t want to invest in and remove them from your portfolio. Common exclusions include fossil fuels, tobacco, weapons, and gambling.^² It’s straightforward and easy to align with your personal values. The tradeoff is that it can reduce diversification, which may slightly affect returns in some market conditions.^³

2. Positive screening (picking the best). Also called “best-in-class” investing, this approach selects companies that score highest on ESG criteria within each sector. Instead of avoiding entire industries, you’re choosing the leaders. For example, you might still invest in energy companies, but only the ones with the strongest climate transition plans.^² This approach keeps your portfolio diversified while tilting it toward better performers.

3. Impact investing (funding solutions). Impact investing goes a step further. It targets companies, funds, or projects that are specifically designed to produce a measurable positive environmental or social outcome alongside financial returns. Think renewable energy infrastructure, affordable housing, or sustainable agriculture. The bar here is higher: you’re not just avoiding harm, you’re actively funding solutions.^²

Many sustainable investors use a combination of all three.

Does sustainable investing actually perform?

This is the question everyone asks, and the data is encouraging. Morgan Stanley’s Institute for Sustainable Investing has been tracking sustainable fund performance since 2019. Their findings:

From December 2018 through mid-2025, sustainable funds delivered total returns of 54%, compared to 45% for traditional funds.^⁴ In the first half of 2025, sustainable funds outperformed traditional funds by more than 3 percentage points (12.5% vs. 9.2%), the strongest period of outperformance since tracking began.^⁵

There are caveats. Sustainable funds tend to have more exposure to European and global markets, which means they can underperform when U.S. markets are especially strong. In the second half of 2024, for example, sustainable funds lagged traditional peers.^⁶ But over longer time horizons, the data consistently shows competitive, and often superior, performance.

Sustainable funds have also shown lower downside risk. In turbulent markets, they tend to hold up better. Nearly 90% of sustainable funds recorded positive returns in the second half of 2025, compared to 84% of traditional funds.^¹

How to spot greenwashing in funds

Just like with consumer products, not every fund labeled “sustainable” lives up to the name. Here are a few things to check:

Read the fund’s methodology. A credible sustainable fund will publish its screening criteria, benchmark comparisons, and emissions data. If the fund’s sustainability claim is based on marketing language rather than a clear, documented process, that’s a red flag.

Check the top holdings. Look at what the fund actually owns. If a fund calls itself “green” but its top holdings include major fossil fuel companies, the label doesn’t match reality.

Look for third-party ratings. Morningstar’s ESG Risk Rating (the “Globes” system) and MSCI’s ESG ratings are widely used. They’re not perfect, but they’re a good starting point for comparing funds objectively.

Watch the expense ratio. Sustainable funds used to charge significantly more than traditional index funds. That gap has narrowed. Large ESG index funds now charge between 0.08% and 0.15% annually.^⁷ You don’t need to pay a premium to invest sustainably.

A practical starting point

If you’re new to sustainable investing, you don’t need to overhaul your entire portfolio overnight. A simple place to start:

Start with one fund. A broadly diversified ESG index fund gives you exposure to hundreds of companies that meet sustainability criteria, without concentrating your risk in a single theme or sector.

Use your retirement account. Many 401(k) and IRA plans now offer ESG options. If yours does, that’s the easiest way to start since the money is already being invested.

Don’t forget your bank account. Investing is important, but it’s not the only financial choice that matters for the climate. Where you keep your everyday money, your checking and savings, also has a major impact. Banks that keep your deposits out of fossil fuels are effectively a form of negative screening applied to your cash.

The bottom line

Sustainable investing isn’t about sacrificing returns to feel good. It’s about recognizing that how a company treats the planet, its people, and its shareholders is relevant to its long-term financial performance. The data backs this up. And getting started is easier than ever.

Whether you begin with an ESG fund in your retirement account or by moving your checking account to a fossil-fuel-free bank, every financial choice is a chance to align your money with your values.

Want to see sustainable investing in action? GreenFi’s Redwood Fund (REDWX)^† is a U.S. all-cap equity fund focused on industry leaders driving sustainability, with a lower carbon footprint per dollar invested than the S&P 500⁹ and a 5 out of 5 Globes ESG Risk Rating from Morningstar⁸.

Frequently Asked Questions

What does ESG stand for?

ESG stands for Environmental, Social, and Governance. It’s a framework for evaluating companies based on how they impact the environment, treat people, and run their business.

Is sustainable investing the same as ESG investing?

ESG investing is one type of sustainable investing. The broader category also includes socially responsible investing (SRI), impact investing, and thematic investing (like clean energy funds). ESG has become the most widely used umbrella term.^²

Do sustainable funds perform as well as traditional funds?

Over the long term, yes. Morgan Stanley’s research shows sustainable funds delivered 54% total returns from December 2018 through mid-2025, compared to 45% for traditional funds.^⁴ They’ve also shown lower downside risk during volatile markets.^¹

What is negative screening in investing?

Negative screening excludes specific industries or companies from your portfolio based on your values. For example, you might exclude all fossil fuel companies, tobacco manufacturers, or weapons producers.^²

What is the difference between ESG integration and impact investing?

ESG integration evaluates environmental, social, and governance factors alongside traditional financial analysis to make better investment decisions. Impact investing goes a step further by targeting investments that produce a measurable positive outcome, like funding renewable energy or affordable housing, alongside financial returns.^²

How do I know if an ESG fund is legitimate?

Check the fund’s methodology, read its prospectus, review its top holdings, and look for third-party ratings from organizations like Morningstar or MSCI. If the fund can’t clearly explain its screening process, be cautious.

Sources

¹ Morgan Stanley Institute for Sustainable Investing. Global Sustainable Fund Performance: H2 2025. (Mar 2026). https://www.morganstanley.com/insights/articles/sustainable-fund-performance-second-half-2025

² Harvard Business School Online. 7 ESG Investment Strategies to Consider. (2022). https://online.hbs.edu/blog/post/esg-investment-strategies

³ Derwall, J., Koedijk, K. and Ter Horst, J. (2011). A Tale of Values-Driven and Profit-Seeking Social Investors. Journal of Banking and Finance. Referenced in Tandfonline, Positive vs Negative ESG Portfolio Screening. https://www.tandfonline.com/doi/full/10.1080/1351847X.2025.2585967

⁴ ESG Dive. Sustainable Funds Outearned Traditional Investments in 1st Half of 2025: Morgan Stanley. (Sep 2025). https://www.esgdive.com/news/sustainable-funds-outearned-traditional-investments-in-1st-half-of-2025-morgan-stanley/760867/

⁵ Morgan Stanley Institute for Sustainable Investing. Sustainable Investing Funds Beating Traditional Funds in 2025. https://www.morganstanley.com/insights/articles/sustainable-funds-outperform-traditional-first-half-2025

⁶ Morgan Stanley Institute for Sustainable Investing. Sustainable Investment Funds Performance: H2 2024. https://www.morganstanley.com/insights/articles/sustainable-funds-performance-second-half-2024

⁷ Morningstar. Best ESG Funds 2024. (July 2024). https://www.morningstar.com/business/insights/blog/esg/esg-fund-fees

⁸ Morningstar GreenFi Redwood Fund. 

https://www.morningstar.com/funds/xnas/redwx/quote

⁹ UBS Asset Management (Americas) Inc. Internal Communication / Personal Correspondence. (December 2025).

Disclosures

† The Redwood Fund (REDWX) is advised by Mission Investment Advisors and sub-advised by UBS Asset Management (Americas) Inc. Past performance is not indicative of future results. Investment returns and principal value will fluctuate. Investors should consider the investment objectives, risks, charges, and expenses carefully before investing.